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Costco Hot Dog Remains A Lesson In Smart Economics

Photo Courtesy Grant Beirute

Gary Millerchip, Costco’s new CFO, recently explained how the wholesale club plans to fight inflation and declines in retail consumerism. He ensured everyone on the Costco quarterly earnings call he has absolutely no plans to raise the price of the beloved hot dog combo meal. 

“To clear up some recent media speculation, I also want to confirm the $1.50 hot dog price is safe,” Millerchip said. His opening line got a few chuckles from the call members, surely. It’s been a sticking point in the young history of Costco: Prices are raised on everything except the hot dog. Even during this time of crazy inflation, this is a hill Costco’s executives are willing to die on. 

Why doesn’t Costco raise the hot dog meal deal? You’ve probably seen on social media the infamous story about how the company’s founder, Jim Sinegal, told Craig Jelinek, former CEO, “If you raise the effing hot dog, I will kill you. Figure it out.” Of course, when it makes the rounds on Twitter and Reddit, users find it amusing how a founder of one of the most successful modern businesses in the world refused to raise the price of a cheap meal. 

This effort is a masterclass in consumer economics. The $1.50 deal gets you an 8-inch hot dog with a medium soda, although it could easily pass as a large.

Even if you had a family of four, that’s $6 for four dogs and sodas and $12 if you decided to get two dogs for everyone. 

Photo Courtesy Ball Park Brand

This deal has inspired people to get a Costco membership strictly for the hot dog deal. That coupled with the fact that Kirkland Signature Vodka tastes like $80 Grey Goose, and you wouldn’t know the difference unless you read the label. It’s simple economics: you have a product with the best value deal in retail today. It keeps people coming back. 

“We have never been a company that puts the shareholders on top,” Jelinek said in a 2022 Issaquah, Washington, Chamber of Commerce luncheon presentation. “You have a responsibility to a shareholder — you do — but if you take the shareholder first, you are going to be in it for the short term. We had a difficult time (with Wall Street) with the wages that we paid (and) our refund policy, but we’ve gotten past that because [we] have been able to grow the business.” 

Motley Fool says in 2023, the combo deal brought in around $195 million in revenue. Even then, Costco still takes a loss on the hot dog deal because of the low price. It’s been suggested that this will come back to haunt Costco.

The business only lags behind Sam’s Club, which has a $1.38 hot dog deal. However, as the founder said, nobody touches the price. 

Costco also doesn’t act like the hot dog deal harms its business. The company continually loses money on the deal, but membership fees and other purchases balance the books. Motley Fool says they made $1.1 billion in membership fees. Economists say Costco doesn’t need to profit from its last-minute food deals thanks to these fees on top of the money made at the checkout line. 

Photo Courtesy Marcus Reubenstein

The hot dog deal is a lesson in customer loyalty. If you have ever shopped at Costco or Sam’s Club, the food is strategically located near the entrance/exit. You can pay for your items, grab a quick hot dog and soda, and be on your way. This plan has worked for four decades. 

The club also offers an executive membership. Customers must pay double the standard membership fee — $120 instead of $60 annually — and will receive 2% cash back on Costco purchases. You could save more money shopping at wholesale and make fewer trips to the store with the large servings. 

Not all Costco employees, former and current, share the same optimism.

Richard Galanti, former Costco CFO, suggested the hot dog price isn’t totally safe, despite Millerchip’s promises. However, he made similar promises during his stint with the company, saying the price would be safe even after his departure. 

The hot dog deal would rise to $4.50 to adjust for inflation if the company was inclined to change it. That’s still a great deal compared to some fast-food restaurants like Five Guys, which charges over $15 for a single burger. 

“By the way, if you raised (the price) to $1.75, it would not be that big of a deal,” Jelinek even stated in his 2022 presentation. “People would still buy (it). But it’s the mindset that when you think of Costco, you think of the $1.50 hot dog (and soda).” 

The deal keeps customers coming back. Costco opened a United States-based hot dog plant to save money, cutting out third-party vendors. There are two factories, one in California and one in Illinois.

As of 2018, Costco sold approximately 135 million hot dogs, more than every Major League Baseball stadium combined.   

The hot dog meal has a similar price point even in international markets. Canadians spend C$1.50 on the meal, and the AUD/MZD price is $1.99. The United Kingdom has a £1.50 deal, Mexico has a MXN$30 offer, and Japan has a ¥180 deal. These all round out to below the $2 threshold. Even international customer loyalty is important. 

Photo Courtesy NIKHIL

Costco has implemented other cost-saving measures. In 2013, it broke ties with Coca-Cola and switched to Pepsi fountain drinks to save money. They also raised the prices on other meal items like chicken bake and roast beef sandwiches.

 Other brands are starting to measure the value of items to commit to good service. Walgreens is having a Summer of Savings where it lowered prices on thousands of items. Target, Walmart, Amazon, and Michaels all followed suit. It ended more than three years of price increases because of inflation, but several people online were skeptical that they needed to do so. The big box retailers and online e-commerce giants saw declines in sales due to inflated prices.

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