It’s a given that some things are never going to change. The annoyance of traffic, the perpetual grumbles about high rents, the intensity of a Philadelphia sports event, and the fact that Costco will continue to offer its renowned hot-dog-and-drink combo for $1.50, a price that has remained unchanged for almost four decades. This is irrespective of who is in charge or what else the retailer sells.
Richard Galanti, the recently retired chief financial officer of Costco, in a conversation with Fortune‘s Phil Wahba, attributes the warehouse chain’s success to the popularity of its iconic hot dog and the $5 rotisserie chicken. The legend of these food items is “foundational” to Costco’s business model.
Galanti, in a previous conversation with the Wall Street Journal, had referred to the $1.50 price tag as “sacrosanct”. He had further assured investors that the price would remain fixed “forever”. His successor, Gary Millerchip, echoed his sentiments this week, reassuring the public that the hot dog combo would continue to be priced at $1.50.
Costco’s commitment to maintaining the price of its hot dog combo is so deep-rooted that it would rather revamp its entire hot dog supply chain than consider a price hike. In 1985, when the combo was first introduced, Costco sourced its kosher beef dogs from Hebrew National. However, by 2009, the escalating costs led Costco to bring the production in-house. They set up a plant outside Los Angeles to produce the Signature Kirkland hot dogs (not kosher), and later expanded production to include a second plant in the Chicago area.
Adapting to Keep Prices Low
The soda part of the combo has also seen changes in line with Costco’s commitment to low prices. A decade ago, when Costco’s contract with Coca-Cola was due for renewal, the retailer switched to Pepsi to cut costs. To dodge San Francisco’s tax on sugary drinks, Costco decided to serve only diet sodas or unsweetened tea in its food courts.
This commitment to rock-bottom prices can be traced back to Costco’s founder, Jim Sinegal. As recounted by Sinegal’s successor and former CEO Craig Jelinek, Sinegal was vehemently against raising the price of the hot dog combo, despite it being a loss-making item. According to Jelinek, Sinegal had once told him, “If you raise the effing hot dog, I will kill you. Figure it out,”. This led to the decision to bring production in-house, eventually enabling the store to turn a profit on the popular menu item, despite its $1.50 price tag. Today, Costco sells nearly 200 million hot dogs a year from its food courts.
Why the Low Prices Matter
One may wonder why it is so crucial for Costco to hold the price at $1.50. As Galanti explained, the $5 chicken and $1.50 dog are symbols that assert Costco’s commitment to low prices. This is a message similar to that sent by Costco’s heavily discounted TVs and appliances, strategically placed near the members’ entrance. As Ron Vachris, the new CEO, told Fortune, the low prices are meant to assure customers that they can recoup their $60 membership with just one purchase.
Furthermore, these strategic low prices help foster immense loyalty among Costco’s 120 million-plus members. Retail consultant Kathy Gersch told Fortune that customers trust that Costco has done the research for them and that they are getting the best deal. This trust is one of the reasons why more than 90% of Costco’s members renew their membership every year.
“The most important item we sell is the membership card,” Vachris told Fortune. “Everything we do supports that transaction.” The $60 annual membership fee (or $120 for additional perks) makes up two-thirds of Costco’s profit in any given year. Without these membership fees, the retailer would have posted a net loss in several recent years.
The hot dog’s iconic status means its price is now part of Costco lore. The longer the price stays put, the harder it will be to raise it. As former CEO Jelinek said, “When you think of Costco, you think of the $1.50 hot dog.”
