Costco (NYSE: COST) recently made the news because of something the company didn't do. The wholesaler refused to raise the price of hot dogs sold at its food court:
Costco CFO Richard Galanti revealed last Thursday that its famous hot dog-and-soda combo deal of $1.50 will remain in place despite record-high inflation.
At an earnings call, Galanti said the profit margins the company is seeing in the gas and travel sectors allow Costco to make up for losses at the food court.
That's not necessarily news. Back in 2018, Costco's CEO Craig Jelinek approached company founder Jim Sinegal about raising the price of the company's hot dog and soda combo above the $1.50 price it has been held at since 1985. Here's what happened next:
“I came to (Jim Sinegal) once and I said, ‘Jim, we can’t sell this hot dog for a buck fifty. We are losing our rear ends.’ And he said, ‘If you raise the effing hot dog, I will kill you. Figure it out.’ That’s all I really needed. By the way, if you raised (the price) to $1.75, it would not be that big of a deal. 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).
“What we figured out we could do is build our own hot dog-manufacturing plant (in Los Angeles) and make our own Kirkland Signature hot dogs. Now we are doing so much hot dog business that we’ve opened up another plant in Chicago.
“By having the discipline to say, ‘You are not going to be able to raise your price. You have to figure it out,’ we took it over and started manufacturing our hot dogs. We keep it at $1.50 and make enough money to get a fair return.”
It's amazing what a CEO can do when properly motivated!...
But we wondered how other items on Costco's food court's menu have fared during the last several years, which includes both 2020's coronavirus pandemic that forced the company to shut down its food courts before being allowed to reopen them in 2021 when they were impacted by President Biden's inflation. To find out, we tracked down the following photo of a Costco food court menu with prices, which we think is from 2018 because it still shows the option of a Polish sausage along with the hot dog - they were eliminated from the menu in 2018:
Here's a more recent version of Costco's food court menu with prices from 17 October 2022:
We quickly find that prices for the twisted churros, mocha freezes, smoothies, ice cream, sodas, and chicken bakes have all increased. But if you look closer at the two menus, you'll find other changes as well.
In 2018, for example, you could get four different kinds of pizzas at Costco's food court: cheese, pepperoni, sausage, or a combo (featuring pepperoni, sausage, onions, and green peppers). In 2022, the available options have dwindled to just cheese and pepperoni.
You could also get a Chicken Caesar Salad in 2018. That choice is gone in 2022.
Let's take a closer look at Costco's hot dogs. In 2018, you weren't limited to ordering a hot dog - you could substitute a Polish sausage. You can't do that in 2022. Also notice the condiment selection shown on the 2018 menu photo - you could add pickle relish, onions, ketchup, mustard, or deli mustard to your order. The 2022 menu photo shows no condiments, but we can verify you can still put ketchup or mustard (but not deli mustard, pickle relish, or onions) on your Costco hot dog.
But wait, there's more! Several reports suggest the quality of Costco's continuing food court menu items have also declined over the last several years.
So let's review what Costco's CEO has figured out for the wholesaler's food court menu between 2018 and 2022:
- To keep hot dog prices the same, Costco built two factories to make its own hot dogs. [Side note: the company used a similar strategy to hold down the cost for its popular rotisserie chickens.]
- Costco raised prices for six other food and drink items it sells at its food court. Most of those price increases have taken place since 2020.
- Costco has eliminated options it previously offered for pizzas and condiments.
- Costco has degraded the customer-perceived quality of the food items it sells at its food courts. This can be considered a type of "shrinkflation".
Sounds like the CEO needs to figure it out some more.