Costco's Diaper Dilemma: How a Supply Shift Could Impact Retail Loyalty and Stock Performance

The shift in manufacturers for Costco’s iconic Kirkland Signature diapers—switching from Kimberly-Clark to First Quality in early 2025—has sparked a wave of consumer frustration. While diapers may seem a mundane product, this change underscores broader risks for Costco’s (COST) customer loyalty, supply chain management, and competitive positioning in the $30 billion U.S. diaper market. For investors, the fallout could signal vulnerabilities in the retailer’s membership-driven model and its ability to navigate supplier shifts without alienating its core demographic.

A Fractured Customer Base

Parents’ feedback on the new diapers is starkly divided. Many report diminished performance: thinner absorbency, a chemical odor, and leaks during overnight use. One parent noted, “Almost every poop has leaked out the sides,” while others described the new diapers as “half the thickness” of the original. Conversely, a minority praise the new formula for reduced rash incidents and comparable absorption. The inconsistency in feedback highlights a key challenge for Costco: diapers are a high-sensitivity product. A single bad experience can drive customers to competitors like Target (TGT) or Walmart (WMT), which dominate the private-label diaper market with their own brands.

Supply Chain Shifts and Strategic Risks

The switch stems from Kimberly-Clark’s (KMB) strategic pivot toward premium brands, leaving Costco to seek alternatives. First Quality, known for its Cuties brand, now shoulders the burden of producing 222 diapers per box at the same $44.99 price point. While the cost remains unchanged, the move risks diluting Costco’s reputation as a leader in value-driven, high-quality private-label goods.

Analysts will watch whether investor sentiment shifts if the diaper controversy translates to declining membership renewals. Costco’s $75 annual membership fee relies heavily on its ability to deliver must-have items—like diapers—at unbeatable prices. If parents defect to Target’s Up & Up diapers or Walmart’s Parent’s Choice line, Costco’s same-store sales could suffer.

The Loyalty Test

Costco’s model hinges on “addiction economics”: members stay because they can’t find certain deals elsewhere. Diapers, often purchased in bulk, are a key pillar. A recent survey by the Parenting Products Association found that 42% of U.S. parents buy diapers exclusively at Costco. If the new diapers fail to meet expectations, that loyalty could erode.

Parents are already adapting. Some are stockpiling the old Kirkland stock where available, while others are exploring alternatives. Target has capitalized on this by emphasizing its “softness and absorbency” in recent ads, a direct counter to Costco’s struggles.

Expert Insights and the Path Forward

Natalia Richer, a hygiene products expert, cautions that diaper success hinges on three factors: absorption speed, dryness, and capacity. “If the new Kirkland diapers perform well on these metrics, parents will adapt,” she says. “But if leaks and odors persist, Costco’s reputation as a trusted source for essentials could take a hit.”

First Quality’s ability to scale production without quality compromises will be critical. The company has a strong track record in hygiene products, but the sheer volume Costco demands—tens of millions of diapers annually—leaves little room for error.

Conclusion: A Crossroads for Costco

The diaper controversy is a microcosm of Costco’s broader challenges. Maintaining supplier relationships in a consolidating market while keeping prices low requires precision. If the new diapers underperform, the ripple effects could be significant:

• Membership Renewals: A 2023 survey by Morning Consult found that 60% of Costco members cited diapers as a key reason for renewing. Even a small drop in retention could impact revenue.
• Competitor Gains: Target’s Up & Up diapers already claim 18% of the U.S. private-label market, per Nielsen data. If Costco’s share slips, Target stands to gain.
• Stock Performance: Costco’s stock has underperformed the S&P 500 by 12% over the past year, partly due to concerns about rising costs and inflation. A sustained diaper backlash could amplify this trend.

Investors should monitor Costco’s Q1 2025 earnings for clues on same-store sales and membership metrics. A drop in diaper-related foot traffic or a surge in Target’s diaper sales could signal a turning point. For now, the jury is out—but the stakes are high. In a market where loyalty is built diaper by diaper, Costco’s next move could determine whether this shift becomes a footnote or a turning point.