Costco keeps its prices low so customers keep returning.
- Costco's rotisserie chickens have cost $4.99 since 2009.
- Costco's management says it's happy to eat the cost to keep prices down for customers.
- But there's a clever business strategy behind the decision.
Costco would rather take a hit to its profits than raise the price of its $4.99 rotisserie chicken — but it isn't a terrible business decision.
The rotisserie-chicken boom started in the 1990s and hasn't slowed. Last year, consumers bought 625 million rotisserie chickens in US supermarkets, according to the market-research firm Nielsen. Costco sold 87 million in fiscal 2017, compared with 51 million in fiscal 2010.
In that time, selling rotisserie chickens has become more expensive because of rising costs related to labor and preparation. But Costco hasn't budged — even when a bird-flu outbreak years ago pushed prices higher.
"When others were raising their chicken prices from $4.99 to $5.99, we were willing to eat, if you will, $30 [million] to $40 million a year in gross margin by keeping it at $4.99," Richard Galanti, Costco's chief financial officer, said in a 2015 earnings call, according to The Seattle Times. "That's what we do for a living."
But this is neither a bad business decision nor a selfless act of kindness for Costco customers.
Costco's business strategy is built on buying in bulk, which isn't typically conducive to frequent store visits. To combat this, the retailer uses lower-priced products — including gas and food-court items — to drive foot traffic.
Then, once they're in the store, customers are more likely to be drawn into purchasing products they otherwise wouldn't have.
And it's not just Costco — other stores use this tactic with rotisserie chickens.
"If they get a chicken, a salad, and maybe they pick up a bottle of wine — now we're really talking," Don Fitzgerald, the vice president of merchandising at Mariano's, a Chicago grocery chain, recently told The Wall Street Journal.
Costco has since invested in other ways to save money while preparing its chickens, including buying larger, more efficient ovens and using containers with less plastic, The Journal reported.
It's also building a $300 million chicken-processing plant in Nebraska, which is expected to provide 2 million chickens a week for Costco and bring down supplier costs.
The retailer is just as stubborn with its chickens as with its $1.50 hot-dog-and-soda deal, which hasn't changed in price since its introduction in 1985.
In the 2009 edition of Costco Connection, David Fuller, the assistant vice president of publishing, explained why, writing that Costco wanted to prove that "a business can operate on a fair markup and still pay all of its bills."
He continued: "Holding a price that steady for that long sends a clear message about what is possible when you decide to operate your business model on a 'cost-plus' basis instead of a 'what the market will bear' basis."
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