Lululemon Saw a Big Problem at Costco. The Solution Was Fascinating

Sometimes the best marketing doesn’t cost you a dime. Sometimes your competitor pays for it.

That’s what apparently happened, at least according to one analysis, when Lululemon filed a lawsuit against Costco in June, accusing the warehouse club of selling knockoff athletic wear that violated its patents.

The lawsuit alleged that Costco was “duping” Lululemon’s products with lower-priced “Kirkland” alternatives, and that the ambiguity around manufacturing led consumers to believe Lululemon was actually producing items for Costco.

Lululemon wanted to stop Costco. In the process, it might have created a monster.

Unintended consequences

“It’s also been one of the most fantastic advertising campaigns that Costco could hope for,” Neil Saunders, managing director at GlobalData, told CNBC. “Because it’s drawn enormous attention to the fact that Costco has all these clothing lines. They have things that may be similar to Lululemon, but that are a much lower cost.”

Before the lawsuit, many Costco shoppers probably walked past the clothing racks without much thought. Now?

The lawsuit essentially told every cost-conscious consumer in America: “Hey, you know that expensive athletic wear you’ve been buying? Costco has something similar for way less money.”

The empire you didn’t know existed

Costco has quietly become one of the world’s biggest clothing retailers.

From 2019 to 2024, Costco grew its annual apparel sales from $7 billion to $9.7 billion—a nearly 40 percent increase, according to GlobalData estimates.

That’s faster growth than at competitors BJ’s (28 percent) and Sam’s Club (21 percent).

More remarkably, Costco now sells more clothing than some dedicated apparel retailers. Abercrombie & Fitch did $4.9 billion in fiscal 2024 sales. Old Navy did $8.4 billion. Costco beat both of them.

In its most recent fiscal quarter, men’s apparel sales were up double digits.

The treasure-hunt model

If you’ve been reading my column for a while, you know I’m fascinated by Costco’s business model: the membership fees, the $4.99 rotisserie chicken that hasn’t changed price since 1985, the way they use Kirkland Signature to compete with premium brands.

The clothing business works on a similar principle, but with a twist: the “treasure hunt.”

Costco works directly with manufacturers, secures licensing deals with major brands like Columbia and Gap, and makes “opportunistic” purchases—buying overruns or excess inventory from vendors and other retailers.

“Everybody gets excited and tries to go in and buy it. And it’s only in a handful of stores,” Joe Feldman, senior managing director at Telsey Advisory Group, told CNBC.

You never quite know what you’ll find. That North Face jacket might be there today and gone tomorrow. Plus, it’s happening where you’re already buying groceries.

The ambiguity strategy

Kirkland Signature accounts for about a third of Costco’s revenue ($86 billion in 2024), which, as The Wall Street Journal points out, would make it a bigger company than Procter & Gamble and about the same size as LVMH if it were a standalone.

But as I wrote a few months ago, they allegedly do nothing to “dispel [the] ambiguity” regarding where some Kirkland products come from. Lululemon’s lawsuit claims this ambiguity led consumers to believe Lululemon was producing products for Costco.

Even if it weren’t a threat, Lululemon may have had little choice except to sue.

In intellectual property law, if you don’t aggressively defend your trademarks and patents, you risk losing the ability to enforce them later.

It’s the legal equivalent of “use it or lose it.”

But call it a ramification of the law of unintended consequences: Hundreds of media stories later, many more people know that Costco sells athletic wear that’s supposedly comparable to Lululemon’s at a fraction of the price.

What this really signals

Of course, Lululemon also wants damages for lost profits. That could be a very substantial number.

That’s why I still suspect there will be a settlement. Both sides have a lot to lose.

Still, no matter what happens, the message is now out there for millions of consumers to act on.

Word of mouth really is the best advertising. Sometimes, if you’re really lucky, your competitors are the ones spreading the word.