Warren Buffett explains how Costco is dominating in one crucial area

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Warren Buffett says Costco is dominating retail.

  • Warren Buffett sees Costco as a dangerous competitor in the retail space, due in large part to its explosive private-label brand Kirkland.
  • In an interview with CNBC, Buffett cited Kraft Heinz's 2018 sales of $26.3 billion, compared to sales by Costco's Kirkland brand, which reached $39 billion.
  • "Here [Kraft Heinz] are, 100 years plus, tons of advertising, built into people's habits and everything else," Buffett said. "And now, Kirkland, a private label brand, comes along and with only 250 or so outlets, does 50% more business than all the Kraft Heinz brands."

Costco's Kirkland brand is dominating the packaged-goods space, according to Warren Buffett.

"The packaged-goods brands [are] losing some ground against the retailers," Buffett said in an interview with CNBC.

According to Buffett, the plethora of packaged-food icons in Kraft Heinz's portfolio are struggling to compete with private-label brands at retailers such as Walmart and Costco. These private-label brands have been winning over customers with lower prices as the stigma surrounding generic brands has lifted in recent years.

"When you're going toe to toe with a Walmart or a Costco or maybe an Amazon pretty soon ... you've got the weaker bargaining hand than you did 10 years ago," Buffett said.

Costco's Kirkland brand, in particular, is proving to be a dangerous competitor. While Kraft Heinz has spent billions of dollars on advertising over the last century, the company's sales totaled $26.3 billion last year. Sales of Costco's Kirkland brand grew to $39 billion in 2018.

"Here [Kraft Heinz] are, 100 years plus, tons of advertising, built into people's habits and everything else," Buffett said. "And now, Kirkland, a private label brand, comes along and with only 250 or so outlets, does 50% more business than all the Kraft Heinz brands."

Kraft Heinz shares plummeted nearly 27% on Friday following a disappointing earnings report, with Buffett's Berkshire Hathaway taking a hit of more than $3 billion.

Read more: Warren Buffett's Berkshire Hathaway is taking a nearly $4 billion hit as Kraft Heinz craters to a record low

Costco's Kirkland Signature private-label brand grew to $39 billion in 2018, up from $35 billion in 2017, the company reported in December. Last year, Kirkland accounted for nearly a third of all of Costco's sales.

"Customers see the brand as a blend of quality and value, and it gives shoppers a unique reason to go to Costco that other retailers can't match - online or off," Business Insider's Dennis Green reports.

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