At Costco, the hot dog and soda combo still costs $1.50 — exactly the same as in 1985 — before the housing crisis, spikes in inflation, and the pandemic. Why does the chain sustain such losses, and how are they covered?

Costco produces over 100 million hot dogs annually and loses money on them. Indeed, just prior to the pandemic, according to data from The Bureau of Labor Statistics, the cost of products, services, real estate, etc., rose by at least 20%. Yet, the price of the hot dog remains unchanged since the last century. If Costco were to sell its combo, factoring in inflation, it would cost no less than $4.50.

However, it’s worth noting that the $1.50 combo is a strategic decision, a successful marketing move known as a “loss-leader.” Costco is willing to incur losses on hot dog sales at this price because it helps attract more visitors, who may also purchase other profitable items.

Covering the losses arising from Americans’ love for cheap hot dogs is achieved through various means. For instance, The company found ways to reduce costs in its cafes, switching to cheaper options like larger soda sizes instead of 12-ounce cans. Additionally, their Kirkland Signature brand for hot dogs allows them to control production costs and provide lower prices for consumers, among other factors.

But the primary source of such opportunities is the membership-based business model. Costco earns most of its profits from membership fees rather than product sales. Costco membership provides access to a wide range of goods at reduced wholesale prices, as well as various services and bonuses, such as access to cafes, pharmacies, opticians, etc. Costco memberships have several tiers, including basic and premium memberships with different conditions and privileges. This allows them to even sell items at their warehouse stores almost at cost or even lower, as membership fees cover all of this.

Richard Galanti, Costco’s longtime finance chief who retired last month, said in a recent interview that the $1.50 price for the hot dog will be safe for the business for some time to come. So, some stability in the changing and bustling world will still delight us.

Leave a Reply