By Ben Cohen

There's a great deal you can learn about one of America's most valuable and beloved companies from a lawsuit about pants.

Costco was recently sued by Lululemon for allegedly selling cheap knockoffs of the athleisure brand's premium clothing. One of those products is a pair of comfortable, fashionable, wildly popular Lululemon men's pants that came out a decade ago and cost $128.

A few years ago, Costco began selling a version of those pants that looked and felt awfully similar -- for $20.

And you don't exactly need a law degree to read this legal document and see why so many people are so completely obsessed with Costco.

Those pants were part of the Kirkland Signature private label, which is based on a simple but powerful idea: sell products of a high quality at a low price. With that philosophy, Kirkland has become essential to Costco's success. No less a Costco authority than co-founder Jim Sinegal describes the creation of Kirkland three decades ago as one of the crucial developments in the history of the company.

The store brand now accounts for roughly a third of Costco's revenue -- and it's growing faster than the company as a whole. Costco's total sales have almost doubled since 2017. Kirkland's have almost tripled.

At this point, it's bigger than many of the world's biggest companies. . Kirkland alone brought in $86 billion last year -- more than all of Procter & Gamble. In fact, this brand known for no-frills affordability generated roughly the same annual revenue as luxury giant LVMH.

It doesn't just drive sales. It also breeds loyalty. It gives people a reason to become members -- and members a reason to keep coming back. If the cult of Costco had a Kool-Aid, it would definitely be Kirkland Signature.

Perhaps the most important thing that Kirkland does is bring down the price of other brands.

To understand why, it helps to have a basic understanding of Costco economics. The company stocks fewer items than traditional retailers and makes up for smaller margins with absurdly large volumes. It sells branded products at no more than 14% above cost, even if that means leaving extra profit on the table. For Kirkland products only, Costco makes an exception and permits a markup of 15%.

The mere existence of a new Kirkland item can warp a product's entire category. It means less space for suppliers, more negotiating leverage for Costco's buyers -- and much greater value for its members.

That value is such a point of pride that executives often highlight specific niche Kirkland products and the savings they provide on company earnings calls. On the most recent one, they bragged about slashing the price of chocolate macadamia clusters from $17.99 to $14.69.

(Before we continue, watch this video on Kirkland's business. It's as good as Costco's rotisserie chicken.)

But even the Costco executives who dreamed up Kirkland never dreamed that it would ever be this lucrative.

It all started when Sinegal noticed something curious about his business: Even when the cost of raw materials went down, the price of brand-name products kept going up. That inefficiency became his opportunity.

Costco launched a private label in 1995 and called it Kirkland Signature, a nod to the company's headquarters in Kirkland, Wash. For obvious reasons, the name stuck even when Costco moved to nearby Issaquah.

From the very beginning, one thing has mattered more than the value of Kirkland products: their quality. When the company was just beginning to think about a house brand, Sinegal sent a handwritten memo to Costco executives and listed all the reasons it was a smart concept.

" Quality house brands," he wrote, underlining the word twice, "can not only gain acceptance but can engender intense loyalty."

To maintain that quality, the company holds Kirkland products to the same merciless standard as the other items on the shelves of Costco warehouses. They have to earn their place in retail's prime real estate. If they don't perform, they get pulled. "We can't fall in love with our own stuff," CEO Ron Vachris said on a recent earnings call.

Kirkland toothpaste was once yanked because it couldn't keep up with Colgate and Crest, according to the book "The Joy of Costco." The first two Kirkland beers fizzled out before Costco tried again last year and finally nailed a lager. The company doesn't make these products itself, partnering with manufacturers instead, but Costco only enters markets when it can meet or beat national brands on price and quality, which explains the lack of Kirkland consumer electronics.

There may not be a Kirkland Signature smartphone, but there's just about everything else: toilet paper and paper towels, wine and bottled water, fresh sushi, those famous mixed nuts and full wheels of Parmigiano Reggiano.

Also, clothes. Earlier this year, my colleagues Sarah Nassauer and Nikki Walker visited Costco HQ for a revealing conversation with Sinegal, the company's legendary former CEO. He was dressed head to toe in Kirkland: his socks, shoes, glasses -- even his underwear.

As it happens, Sinegal can thank himself for his wardrobe.

Costco is so ruthlessly selective and maniacal about standards that every single Kirkland item must be personally approved by the CEO. When he was running the company, Sinegal would initial his approval with the green pen he carried in his shirt. Which, yes, was often a Kirkland Signature.

"Stitch for stitch, button for button," he once told students, "it's as good a shirt as you're gonna find."

All of which leads us back to the remarkably similar pants being sold for radically different prices.

Lululemon's ABC pants are named for the company's proprietary "Anti-Ball-Crushing" technology. Now they are sparking claims of anti-competitive behavior.

Lululemon accused Costco of profiting from its intellectual property and "sweat equity," billing its legal action as a battle against "retailers who have chosen to copy," the complaint says, "rather than compete." Lululemon says Costco ripped off several features of its ABC pants, including their stretchy fabric and crotch gusset, arguing they are nonfunctional and protected like a Coke bottle's distinctive shape or a Christian Louboutin shoe's red sole. Costco hasn't responded to the suit and declined to comment.

It's not the first time this year that Costco has been targeted for selling "dupes." Deckers Outdoor also sued the company over Kirkland unisex shearling slippers that resemble Uggs, a case that Costco has filed a motion to dismiss.

But the Lululemon lawsuit might just turn out to be free advertising for Costco, which is the company's preferred form of advertising.

After all, press coverage of the suit is how many shoppers who would never spend $128 on pants found out their favorite company was selling a look-alike product at a fraction of the price.

And when they discovered that those allegedly infringing pants are unavailable right now, it was only because they did what they always do when they hear about a Kirkland product.

They immediately went to Costco looking for their next great deal.

Write to Ben Cohen at ben.cohen@wsj.com

(END) Dow Jones Newswires

July 11, 2025 21:00 ET (01:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.