Costco, Target, and Trader Joe's all use this secret weapon for keeping prices so low. Here's how they do it.

costco wine 6Elaine Thompson / AP Images

  • Costco, Target, and Trader Joe's are loved by shoppers for their high-quality, inexpensive products.
  • To keep prices so low, these retailers sell private-label brands that help cut costs for the company. The savings can then be passed along to shoppers.
  • Private-label brands also help retailers win over younger shoppers that are more cost-conscious, according to The Wall Street Journal. Here's how brands make the most out of private labels.

Costco, Target, and Trader Joe's are loved by shoppers for their high-quality, inexpensive products.

But the products may not be from the most familiar brands - Costco, Target, and Trader Joe's all have their own labels, manufactured exclusively for them. Private-label brands help stores boost profit margins while still offering customers affordable prices. The brands also help drive traffic to stores and tend to lead to customers buying more because they are so cheap.

Retailers are now "more willing to invest in 'store brands'" because the stigma of "generic" goods has lifted, Barclays analysts wrote in a 2017 note.

Costco's well-known brand Kirkland Signature pops up everywhere in the store. Walking through Costco, you can find Kirkland Signature snacks, men's shirts, paper towels, and everything in between.

Trader Joe's also manufactures many of its own products. About 80% of the products Trader Joe's carries are private label, which allows the brand to buy goods directly from the supplier, cutting out the middlemen that can drive up costs in the supply chain.

Target has ramped up its private-label game recently, launching 20 new brands in the past few years. Those private labels include Smartly, Heyday, Wild Fable, and Prologue.

Many private-label brands are heavily geared towards millennial and Gen Z shoppers, because this younger generation of shoppers is generally less loyal to well-known brands. Instead, they focus more on cost and whether a product is healthy and good for the environment, David Garfield, head of the consumer products practice at consulting firm AlixPartners, told The Wall Street Journal in October.

This growing apathy to brands is creating what the Barclays analysts called a "sphere of despair" for food brands like Mondelez and Nestle and consumer conglomerates like Unilever and Procter and Gamble.

Private brands give retailers a better handle on margins, and their unique offerings provide a hedge against big competitors like Amazon.

Here's how stores use private labels to keep costs low and win over shoppers:

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Costco is home to one of the most well-known private-label products: Kirkland Signature.

Costco is home to one of the most well-known private-label products: Kirkland Signature.

The brand was created by Costco in 1995, and according to The Wall Street Journal, about a quarter of the brand's $118.7 billion in annual sales comes from Kirkland Signature products.

The brand was created by Costco in 1995, and according to The Wall Street Journal, about a quarter of the brand's $118.7 billion in annual sales comes from Kirkland Signature products.

Source: The Wall Street Journal

Kirkland Signature products can be found all over Costco. The Journal reported that Costco tries to make its products slightly different from the branded versions, and it often gives brand-name suppliers the chance to make the Kirkland version, too.

Kirkland Signature products can be found all over Costco. The Journal reported that Costco tries to make its products slightly different from the branded versions, and it often gives brand-name suppliers the chance to make the Kirkland version, too.

Source: The Wall Street Journal

Name brands and Kirkland products often are able to coexist in stores, though the Kirkland products are generally less expensive. For example, Kirkland sells a snack very similar to Kind bars for about 30% less, but the items are both still on shelves.

Name brands and Kirkland products often are able to coexist in stores, though the Kirkland products are generally less expensive. For example, Kirkland sells a snack very similar to Kind bars for about 30% less, but the items are both still on shelves.

Source: The Wall Street Journal

Private-label products are almost always less expensive than name brands because the retailer is buying goods directly from the supplier, cutting out the middlemen that can drive up costs in the supply chain.

Private-label products are almost always less expensive than name brands because the retailer is buying goods directly from the supplier, cutting out the middlemen that can drive up costs in the supply chain.

Source: Business Insider

In turn, stores can pass along these savings to the shopper.

In turn, stores can pass along these savings to the shopper.

Source: Business Insider

At Trader Joe's, nearly 80% of the products sold in stores are from the store's private label.

At Trader Joe's, nearly 80% of the products sold in stores are from the store's private label.

Source: Business Insider

To be more competitive with online retailers like Amazon, Target has been rapidly growing the number of privately owned brands it carries.

To be more competitive with online retailers like Amazon, Target has been rapidly growing the number of privately owned brands it carries.

In fact, it has added more than 20 private-label brands to its roster over the past few years. Some of the brands include electronics from Heyday and women's apparel from Wild Fable and Prologue.

In fact, it has added more than 20 private-label brands to its roster over the past few years. Some of the brands include electronics from Heyday and women's apparel from Wild Fable and Prologue.

Source: Business Insider

Its most recent addition is the brand Smartly, a basics brand that competes with dollar stores and sells for about 70% less than traditional brands, according to The Wall Street Journal.

Its most recent addition is the brand Smartly, a basics brand that competes with dollar stores and sells for about 70% less than traditional brands, according to The Wall Street Journal.

Source: The Wall Street Journal

Target and other retailers often try to appeal to millennials and Gen Z shoppers with private labels because younger shoppers are generally less loyal to well-known brands.

Target and other retailers often try to appeal to millennials and Gen Z shoppers with private labels because younger shoppers are generally less loyal to well-known brands.

Source: The Wall Street Journal

Instead, younger shoppers focus more on cost and whether a product is healthy and good for the environment, David Garfield, head of the consumer products practice at consulting firm AlixPartners, told The Wall Street Journal in October.

Instead, younger shoppers focus more on cost and whether a product is healthy and good for the environment, David Garfield, head of the consumer products practice at consulting firm AlixPartners, told The Wall Street Journal in October.

Source: The Wall Street Journal

By using private-label products, brands are able to cut out middlemen in the supply chain and cut costs. The savings can be passed along to shoppers, keeping costs low.

By using private-label products, brands are able to cut out middlemen in the supply chain and cut costs. The savings can be passed along to shoppers, keeping costs low.

Sometimes the private-label products are repackaged name-brand products, and other times they're made individually for the store, like at Costco.

Sometimes the private-label products are repackaged name-brand products, and other times they're made individually for the store, like at Costco.

The low-cost, private-label products help win over younger shoppers, and ultimately, help stores keep costs low.

The low-cost, private-label products help win over younger shoppers, and ultimately, help stores keep costs low.
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