Why Costco's Food Court Prices Are So Low
One of Costco's defining sales pitches is the warehouse chain's low prices, and nowhere is that seen more than at its food court. The company is famous for selling hot 'n ready meals at prices practically unheard of anymore in the food industry. At Costco, you can buy a hotdog and 20-ounce soda for as little as $1.50. The chain's food court sells an entire 18-inch pizza for less than $10.
It all begs the question of why — why are Costco food court prices so low when inflation is driving up prices elsewhere in the industry? With more than 285 million hot dogs produced annually as of 2018, the big box store could make more money by raising prices on its signature combo, but that would betray the promise that the chain has made to its consumers. Costco has built its entire image on a place where customers can get the best deal, and ultimately, the food court is an extension of that image.
It's very much a perk of paying that yearly membership fee to the chain. Having a ready supply of cheap food that shoppers can snack on is a marketing tactic to get consumers to flock to the Costco brand. However, there are other reasons Costco keeps its food prices cheap.
Costco started its own manufacturing
Costco's food court prices haven't budged since it first introduced its hot dog combo in 1985. Due to inflation, the hotdog price should fall between $3.63 and around $5 depending on which economic metric is used. So how does the grocery chain prevent losing money on its food? Over time, Costco realized if it was going to sell its food at a discount that it would need to have its own manufacturers to cut down on costs.
Initially, Costco bought and sold Hebrew National hot dogs at its food courts. However, the grocery decided to build its own hot dog factories in both California as well as Chicago. Doing so allows Costco to move high volumes of hot dogs without burning through money by manufacturing everything itself. It's a practice that Costco has since incorporated into other aspects of its production. Take the poultry industry for instance. With prices in upkeep rising from year to year, many grocery stores have raised their prices on rotisserie chickens as a result.
However, Costco chose to build a chicken farm in Nebraska. As a result, it's able to still produce roughly 100 million rotisserie chickens while keeping the price at $4.99. Ultimately, it comes down to the fact that Costco isn't trying to make a profit off of its food court menu items but keeps prices low enough to be sustainable.
Costco's co-founder is against price changes
There was a time when Costco did entertain the idea of raising its prices at the food court. CEO Craig Jelinek suggested they elevate the prices of the hot dog combo in order to cut losses. However, that went down poorly when he broached the subject to Costco's co-founder, who reacted violently to the idea. In an interview with 425 Business, Jelinek explained, "I came to [Costco co-founder Jim Sinegal] once and I said, 'Jim, we can't sell this hot dog for a buck fifty. We are losing our rear ends.' And he said, 'If you raise the effing hot dog, I will kill you. Figure it out.' That's all I really needed."
Is a hot dog really worth killing someone over? Sinegal certainly seemed to think it. The idea goes back to Costco's philosophy as a business. As Sinegal explained, it's all to do with the grocery chain's image. "I know it sounds crazy making a big deal about a hot dog, but we spend a lot of time on it," Sinegal told The Seattle Times in 2009. Because the brand's reputation is so tied up in it, Costco doesn't want to change it. So, Sinegal doesn't believe it's worth raising the price.
How Costco makes its money
If Costco is willing to lose a profit on its food court, then you're probably wondering how the business makes most of its money. Costco actually makes most of its money from its yearly membership fees. Annually, customers have to pay dues in order to shop at the chain's warehouses, and Costco is quite strict on who they let into their stores. So, you'll need a membership card if you don't want to get banned.
Memberships cost $60 a year for a Gold Star Membership and $120 for its Executive Membership. The higher membership comes with 2% rewards on certain Costco products as well as other saving discounts. While Costco is unwilling to raise the prices of its hot dogs, it is more than willing to raise its annual membership fees. Typically, they have increased every five years or so. But since, as mentioned above, the food court is part of the perks, the chain even swapped out its original 12 oz. can of soda for a 20 oz. soda in the modern-day combo.
Prices are unlikely to change any time soon. As Richard Galanti, Costco's chief financial officer, told CNN, "The last resort is to raise the price."