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

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

Posted: Oct 4, 2018 2:13 PM
Updated: Oct 4, 2018 2:13 PM

$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.

Companies

Costco Wholesale Corporation

Business and industry sectors

Business, economy and trade

Fast food

Food and beverage industry

Food and drink

Restaurant and food service industry

Restaurant industry

Restaurants

Retail and wholesale trade

Transportation and warehousing

Warehouse storage

Business operations

Company activities and management

Customer relations

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.

"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-inch 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 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.

"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.

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 501097

Reported Deaths: 9990
CountyCasesDeaths
Harrison34338538
DeSoto32117403
Hinds31939628
Jackson24494382
Rankin21995390
Lee15543235
Madison14581280
Jones13851242
Forrest13453251
Lauderdale11991317
Lowndes11050188
Lamar10521135
Pearl River9533237
Lafayette8550140
Hancock7732127
Washington7438158
Oktibbeha7146131
Monroe6777177
Warren6694176
Pontotoc6664102
Neshoba6637206
Panola6531131
Marshall6467134
Bolivar6317148
Union602894
Pike5820152
Alcorn5669101
Lincoln5436135
George496879
Scott472898
Tippah469281
Prentiss467281
Leflore4658144
Itawamba4636105
Tate4588111
Adams4587119
Copiah448592
Simpson4446116
Yazoo444187
Wayne439772
Covington428894
Sunflower4239105
Marion4226108
Coahoma4160105
Leake408288
Newton381779
Grenada3707108
Stone360364
Tishomingo359792
Attala331589
Jasper329965
Winston314291
Clay308076
Chickasaw300367
Clarke292494
Calhoun279446
Holmes267987
Smith264050
Yalobusha234047
Tallahatchie228051
Greene219348
Walthall218763
Lawrence212940
Perry205556
Amite205156
Webster202946
Noxubee186740
Montgomery179656
Jefferson Davis171743
Carroll169138
Tunica159839
Benton148838
Kemper141941
Choctaw133426
Claiborne132737
Humphreys129538
Franklin120228
Quitman106428
Wilkinson105139
Jefferson94534
Sharkey64120
Issaquena1937
Unassigned00

Alabama Coronavirus Cases

Cases: 819597

Reported Deaths: 15406
CountyCasesDeaths
Jefferson1147901924
Mobile725791338
Madison52306697
Shelby37597350
Baldwin37245552
Tuscaloosa35101612
Montgomery34106740
Lee23526246
Calhoun22225488
Morgan20941378
Etowah19825500
Marshall18361304
Houston17384412
St. Clair16054339
Cullman15443293
Limestone15343199
Elmore15241286
Lauderdale14302295
Talladega13836283
DeKalb12649261
Walker11202370
Blount10192176
Autauga10043148
Jackson9871184
Coffee9210191
Dale8897185
Colbert8860201
Tallapoosa7084198
Escambia6772134
Covington6712183
Chilton6641162
Russell636659
Franklin5959105
Chambers5607142
Marion5005127
Dallas4973200
Pike4795106
Clarke475584
Geneva4571127
Winston4516103
Lawrence4321117
Bibb425186
Barbour357776
Marengo338090
Monroe331464
Randolph329764
Butler326396
Pickens316284
Henry312666
Hale311388
Cherokee302860
Fayette292880
Washington251551
Cleburne247760
Crenshaw245275
Clay243368
Macon234663
Lamar224147
Conecuh186153
Coosa180240
Lowndes175164
Wilcox168839
Bullock151644
Perry138840
Sumter133038
Greene126744
Choctaw88527
Out of AL00
Unassigned00
Tupelo
Clear
80° wxIcon
Hi: 80° Lo: 60°
Feels Like: 81°
Columbus
Clear
73° wxIcon
Hi: 75° Lo: 59°
Feels Like: 73°
Oxford
Clear
79° wxIcon
Hi: 79° Lo: 59°
Feels Like: 80°
Starkville
Clear
73° wxIcon
Hi: 76° Lo: 60°
Feels Like: 73°
Clear cool and dry to begin your weekend, but both afternoons should be a little bit above what we expect for this time of year temperature wise. Rain chances begin to return late Sunday night, with at least two chances for storms over the next week, summer could be strong.
WTVA Radar
WTVA Temperatures
WTVA Severe Weather