Why Costco's hot dog is still $1.50 when everything has gotten so expensive

ByNathaniel Meyersohn, CNNWire
Wednesday, March 27, 2024
Costco testing out new entry system to crack down on card sharing
Costco is testing a membership change, which will require shoppers to scan their cards in order to crack down on card sharing.

NEW YORK -- Inflation has touched nearly everything these last few years - even Trader Joe's 19-cent bananas. But Costco is holding the line on its hot dog-soda combo price.

Costco's hot dog deal, sold at its food courts, is still priced at $1.50 - exactly what it cost in 1985, before the Great Recession, the housing crisis, the pandemic and the latest bout of decades-high inflation.

Since the pandemic started, prices for consumers have gone up 20% overall, according to the Bureau of Labor Statistics. In many key areas, like housing and groceries, prices have increased even more.

If Costco's hot dog deal kept pace with inflation, it would be three times as expensive today - nearly $4.50. But Costco's $1.50 combo is a strategic decision, known as a loss-leader: The company is willing to lose money selling the hot dogs at that price - inflation be darned - so long as it helps Costco draw in and retain customers.

"It's branding," said Scott Mushkin, a retail analyst at R5 Capital. The $1.50 deal helps create customer loyalty, he said. "It reminds customers of who Costco is."

Costco loses money selling more than 100 million hot dogs every year, but the company offsets these losses by raising prices on other goods it sells. Costco has increased prices of pizzas and other items at its food courts.

But Costco has a unique business model that allows it to keep prices low: It makes almost all of its money on memberships, selling items on its warehouse floor very nearly at cost - and sometimes less.

Costco's longtime finance chief Richard Galanti, who retired this month, said in a recent interview that the $1.50 price was "probably safe for a while."

Falling inflation vs. falling prices

Most companies don't have the luxury of a membership model like Costco. They can't get by selling most of their items for very little profit - or taking a loss on products they sell 100 million of each year.

Inflation has slowed considerably since it peaked at 9.1% in June of 2022. In its battle to bring down that inflation, the Federal Reserve introduced 11 aggressive rate hikes meant to crush demand and discourage spending.

It's working - overall consumer prices rose by 3.2% in February, according to the latest data from the Bureau of Labor Statistics.

And while we may wish for lower prices, falling prices would actually serve as a red flag indicating that the economy is in bad shape. We're not there yet, don't worry.

Companies have been reporting surprisingly strong earnings in recent months on the back of strong consumer spending. Even though companies - including Costco - have to raise prices (even on hot dogs in some cases), Americans continue to shell out.

Consumer spending is the biggest engine powering the US economy and when people spend a lot less money employers tend to lay off workers, which can lead to even lower spending and even more layoffs. This cycle can throw the economy into a recession. Again, that's not happening yet.

"The reason prices fall is because people aren't buying. That means we'd be in a recession," said Gus Faucher, chief economist at PNC Financial Services.

'If you raise the effing hot dog, I will kill you'

Costco's hot dog defied inflation from the very start.

Costco's hot dog offering was born in the company's early days. Costco added a Hebrew National stand at its second warehouse store in Portland, Oregon, shortly after it opened in 1983.

To keep the price of the hot dog steady, Costco found ways to slash other costs at the food court, such as switching from 12-ounce soda cans to cheaper, 20-ounce fountain drinks.

Costco sold kosher hot dogs at its food courts until 2009, but suppliers started to run low on meat. Realizing the importance of the low-priced hot dog, the chain brought production in-house and switched to its own Kirkland Signature brand. Costco now produces around 388 million non-kosher hot dogs a year at its plants for both food courts and to sell in packs.

Jim Sinegal, Costco's co-founder, once told the company's former CEO Craig Jelinek, "If you raise the effing hot dog, I will kill you. Figure it out."

"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. "We're known for that hot dog. That's something you don't mess with."

Last year, Costco sold more than 130 million - around $195 million worth - of hot dog-soda combos globally.

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