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Costco's secret weapon: Food courts and $1.50 hot dogs

CNN logo CNN 10/4/2018 By Nathaniel Meyersohn, CNN Business
a plate with a hot dog© Bernadette Tuazon/CNN

$1.50. That's been the price of Costco's signature hot-dog-and-soda combo for more than three decades.

It sells at 750 no-frills food courts that look like throwbacks to the 1980s, with picnic tables, umbrellas and giant menu boards over the pickup windows.

And it's a hit. Costco sold 135 million combos last year.

The humble $1.50 hot dog is a secret weapon for the big-box warehouse club. It's one of the perks that helps persuade shoppers to dish out $60 or $120 for a membership every year.

Costco's $1.50 hot-and-soda combo.© Dean Pictures/Newscom Costco's $1.50 hot-and-soda combo. "I know it sounds crazy making a big deal about a hot dog, but we spend a lot of time on it," Costco co-founder Jim Sinegal told The Seattle Times in 2009. "We're known for that hot dog. That's something you don't mess with."

Hot dogs are emblematic of Costco's broader strategy to distinguish its warehouses. Costco finds ways to improve quality while holding prices down on merchandise — TVs to furniture to groceries. To stand out against the likes of Amazon, Walmart, Target and Kroger, Costco masters the basics.

Costco (COST) makes little to no profit on its $1.50 dogs, and inflation makes the price seem more dated every year. But it's unlikely to change.

"It's somewhat sacrosanct," Richard Galanti, Costco's longtime chief financial officer, said in an interview.

Food court loyalists

Costco's food courts have gained a cult-like following over the years and become ingrained in pop culture. They have been referenced on TV shows like "Baskets" and "Modern Family." Bloggers track the menu religiously, rank their top choices and write up any changes.

"Costco's food court is a distinct, beloved, earnest slice of discount, faster-than-fast food. It's basically like upscale microwave food. Like a latchkey kid somehow got hold of industrial kitchen equipment," the food and culture blog Thrillist wrote this summer.

Costco puts the food courts inside stores near the entrances. In warmer areas, like Arizona or Southern California, they are outside, near the front.

"We want to catch you either on the way in or out of your Costco shopping experience. You leave the food court satisfied," Galanti said.

The menu, like the selection on Costco warehouse racks, is limited. Big box retailers such as Walmart (WMT) often sell more than 100,000 items at a superstore, but Costco stocks an average of 3,800 high-demand national brands and its own Kirkland Signature products.

"It's a very controlled business model aimed at streamlined service," noted a 2009 story in Costco Connection, the company's magazine. "It's much like the warehouse: the most popular and best-quality items instead of a wide range of choices."

The food courts produce about $1 billion in sales for Costco, thanks to hot items like rotisserie chickens, which cost $4.99, and 18-ounce pizzas for $9.95. 

Kirkland Signature 1/4 Pound Plus beef dogs

The $1.50 hot dog was born in the company's early days. Costco put a Hebrew National stand at its second warehouse in Portland, Oregon, shortly after it opened in 1983.

To keep the price of the hot dog steady, Costco has found ways to slash other costs at the food court. It switched from 12-ounce soda cans to cheaper, 20-ounce fountain drinks and has bought ketchup, mustard, and buns for lower prices.

Costco's food courts offer a limited selection of top-selling items, such as hot dogs, pizza and rotiserrie chicken.© Bloomberg/Bloomberg/Bloomberg via Getty Images Costco's food courts offer a limited selection of top-selling items, such as hot dogs, pizza and rotiserrie chicken.

Costco sold kosher hot dogs at food courts until 2009, but suppliers started to run low on meat. So it brought production in-house and switched to its own Kirkland Signature-brand hot dogs. Costco now produces 285 million hot dogs at its plant in California.

The newer Kirkland dogs are more than a quarter pound, 10% heavier and longer than its older ones.

Costco has looked for other ways to save money on food.

Chicken feed prices skyrocketed in recent years, forcing rivals to raise the price of rotisserie chickens. Costco decided to build a chicken plant in Nebraska that will soon produce roughly 100 million rotisserie chickens a year. That will help the company keep selling rotisserie chicken for $4.99.

"The last resort is to raise the price," Galanti said.

Healthier menu choices, which carry higher profit margins, are also helping Costco maintain food court prices. It has added acai fruit bowls, organic burgers and vegan salads in recent years.

No-frills food courts are one way Costco gets shoppers to re-up on their memberships.© Callaghan O'Hare/Bloomberg/Getty Images No-frills food courts are one way Costco gets shoppers to re-up on their memberships.

"Organic and health-conscious items are not only trending but also are generally a good match already for Costco's upper income shoppers," said Timothy Campbell, a senior analyst at Kantar Retail. Costco's organic merchandise sales have been growing, surpassing Whole Foods in 2015, and now it sees an opening with food courts.

'Halo effect'

Costco and its retro food courts stand in sharp contrast to the glitz that many other retailers offer to compel shoppers to head into stores. Think personal stylists, spa services and free wine and beer.

Costco has thrived in the online shopping era and created a loyal membership base by perfecting the blocking and tackling of retail: Low markups. Popular name brands and Kirkland Signature on the shelves. Conveniently located and easy-to-navigate warehouses. And ketchup and mayonnaise jugs big enough to last customers for months.

Food courts give Costco another weapon to distinguish itself. They are part of what Costco calls its "ancillary businesses" — gas stations, pharmacies, hearing aid centers, and optical departments.

Service plays like food, tire changes, and travel booking create a "halo effect" for Costco that extends beyond selling merchandise on the shelves to fulfilling a variety of customer needs, Campbell said.

"Food courts are a part of the larger Costco ancillary and service ecosystem intended to make the club a top-of-mind solution," he said.

The services Costco offers help the club become an established part of customers' routines and lead to high renewal rates. Nine in 10 customers in a given year re-up on their memberships.

Stops at the food court also get shoppers to hang around. That extra time increases the chance that they will make an unplanned purchase after they're finished with their food.

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