For Costco, $1.50 Hot Dog Combos and $4.99 Chickens Aren't Enough

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Earns Costco Wholesale (A Costco warehouse customers wait in a long line during lunchtime for hot dogs, pizza, salads, ice cream
AP, Paul Sakuma
It's a rite of passage for many Costco (COST) shoppers -- ducking out from the cart-stocking experience to line up at the warehouse club's food court and ordering the $1.50 hot dog combo.
It's not just you. It happens a lot throughout the day. Costco customers went through 109 million of these combos last year.

It may not be enough.

Costco's weak quarterly results on Wednesday surprised the market. The membership-based retailer has routinely exceeded analyst expectations, but it fell short this time. Revenue inched 1 percent higher to $32.5 billion, shy of the $32.8 billion that Wall Street was forecasting. Earnings climbed 1 percent to $1.40 a share, well off the mark from the $1.46 a share that the market was modeling.

The quarter wasn't terrible. Stateside comps still rose a respectable 5 percent during the 16-week period. However, it's still important to note that Costco did miss Wall Street's expectations on both ends of the income statement.

Clearly, the allure of cheap hot dog combos isn't what it used to be.

Hot Diggity Dog

Costco introduced a hot dog cart offering the combo at $1.50 in 1985. It has stuck to the price, 28 years later.

The product has changed. A few years ago Costco switched from Hebrew National franks to its proprietary Kirkland Signature brand. There were some rumblings of disappointment. Then Costco switched its fountain drinks provider from Coca-Cola (KO) to PepsiCo (PEP). Going from Coke to Pepsi likely disappointed and pleased more than a few members.

One value improvement in the combo is that the 12-ounce servings were replaced with 20-ounce cups and unlimited refills.

No one's arguing that $1.50 for a meal isn't a great deal. However, Costco needs a new value item to grab headlines. And the warehouse club pioneer may already have one in the form of roasted poultry.

Playing Chicken

"If you haven't tried our rotisserie chicken, that's the new hot dog," Costco said in its fiscal third quarter earnings call three months ago.

Costco's been sticking to the same strategy of holding firm on a great deal in prepared meals. Costco sells its whole rotisserie chickens for $4.99 apiece, and they've been a big winner. The retailer's selling more than 60 million of them a year, making this a better than $300 million contributor to Costco's annual sales.

Costco pointed that out during Wednesday morning's earnings call, but it wasn't necessarily a bragging point. Volatile poultry prices result in lumpy margins when you're committed to a certain selling price point.

Restaurants that rely on chicken as a primary protein have the flexibility to tweak prices. But Costco wants to hang on to its $4.99 per chicken price tag. Unlike the hot dog combo where soda syrup sales are steady and frankfurters are cheap, Costco's new customer bait comes with greater uncertainty of how much it will earn.

Meet the Press

Whether or not Costco dreams up a new bargain it should continue to milk media attention by offering dirt-cheap prices on food in this uncertain economy.

"We certainly are getting our share of free press out there, whether it's the late night talk shows or the morning business shows," Costco observed in its July earnings call, referring to the buzz generated by the value of its roasted chicken.

Then again, the appetite for media attention may also require a new value. The $1.50 hot dog combo and $4.99 rotisserie chicken may be played out. Just ask McDonald's (MCD). It had a few solid years of milking its Dollar Menu to attract penny pinchers, but sales have tailed off over the past year.

One can argue that framing itself as a value haven may be hypocritical given the very nature of being a warehouse club. One has to pay $55 a year to be a member. However, customers will argue that the memberships pay for themselves in just a few grocery treks. The cheap rotisserie chicken and hot dog combos are just door prizes.

Wednesday proved to be a rare disappointment for Costco shareholders. It just better make sure that it never gets around to disappointing its shoppers.



Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Costco Wholesale, McDonald's, and PepsiCo. The Motley Fool owns shares of Costco Wholesale, McDonald's, and PepsiCo. Try any of our newsletter services free for 30 days.

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26 Comments

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Andy Noble

Costco can't even be compared to Walmart in the same page. Costco is way better than Walmart in every way. I have the Executive Membership, earn "double" my membership every year. Yes, Costco can be beat on few items online like anywhere else.

October 31 2013 at 9:30 AM Report abuse rate up rate down Reply
dkelmstra

Interesting to note: COSTCO has the lowest % of minority workers than any retailer. Why doest the left mention that, whereas, WALMART has the highest % of minority workers than any retailer. Based on these facts I would think liberals would support WALMART over COSTCO.
Check it out next time you are in COSTCO as to how may blacks or hispanics they employ vs Walmart.

October 13 2013 at 11:34 AM Report abuse rate up rate down Reply
dkelmstra

Factor in rate of inflation and COSTCO revenues were DOWN! Economists estimate our current rate of inflation anywhere from 2% to 5% depending on how they calculate it. So Costco revenues were up 1% which means in reality they LOST revenues.
COSTCO is a membership store - people buy a membership to shop there then think they are saving when in reality most DO NOT SAVE when you factor in the cost of membership and the fact you can find the same items elsewhere for lower prices.
COSTCO is finding their overhead is climbing faster than their prices thus lower earnings. This is common among most retailers and fast food businesses.

October 13 2013 at 11:27 AM Report abuse rate up rate down Reply
cubfan6285

Kirkland hot dogs are terrible. Bring back Hebrew National and raise the price to Two Dollars. It still would be a great deal.

October 12 2013 at 12:10 AM Report abuse rate up rate down Reply
catbell7

Costco dogs are great and the raw onion machine - I always got them and would take a couple at home for later or the freezer -- being just me to buy an entire pack of dogs is too much-and their chickens - magnificient and I don't care for the white meat --that would go to the feral cats -- Costco please come to South MS - we need ya'll -- most people do not realize one can get rxes w/o a membership for 10% more -- and as for McDonald's value menu - their food is crap even the feral cats will not eat it - only thing I'll pick up is their dollar salad and half the time the servers forget the dressing or the croutons so check your bag! I figure if the feral cats won't eat McDonald's I won't either and if any doubt about their 'chicken' nuggets--wwww.naturenews.com will tell you what they found in them!!

October 11 2013 at 1:01 PM Report abuse rate up rate down Reply
1 reply to catbell7's comment
shadyj119

You should try watching the crap that you post. According to your own referenced site, McDonalds only uses 100% pure chicken breast with a little skin and herbs and spices in their nuggets. What you are too ignorant to comprehend is the one video that talks about pink slime.
In that video it states that that it is used in bulk nugget production. It also mentions that McDonalds does not use pink slime and only uses natural breast meat.

September 13 2014 at 9:57 PM Report abuse rate up rate down Reply
pbesmer

Bring back Hebrew National hot dogs

October 11 2013 at 10:46 AM Report abuse rate up rate down Reply
maceandemma

Oh No!.....Only reasonable profit! We must stop paying a good wage! We must stop providing healthcare!

5-6% profit growth per quarter is unsustainable. Get over it Wall Street.

October 11 2013 at 10:39 AM Report abuse +1 rate up rate down Reply
1 reply to maceandemma's comment
dkelmstra

A decline in earnings is the early signs of future trouble. NO business should see a decline in earnings. COSTCO needs to cut overhead or raise prices. If earnings continues to decline their stock will suffer and investors will bail out.

October 13 2013 at 11:28 AM Report abuse rate up rate down Reply
HEIDIFIDO

I hate Kirkland Sausage
Nathans is soooooooooooooooooooo much better

October 10 2013 at 6:57 PM Report abuse +1 rate up rate down Reply
donloncrn

hey donnab007. Costco does contribute to progressive causes. they also pay thei employees a living wage with benifits. something Walmart/Sams does not do. Get a clue! Getting women the right to vote was once a \"liberal cause\"

October 10 2013 at 5:58 PM Report abuse rate up rate down Reply
3 replies to donloncrn's comment
ARTHUR

that hot dog is better than ex-lax........... after you eat it, DON\'T leave costco too soon. you\'ll have to use their bathroom within 10 minutes after your last bite. BELIEVE ME !

October 10 2013 at 4:00 PM Report abuse rate up rate down Reply
2 replies to ARTHUR's comment
samuri.sansui

Cheaper too.

October 10 2013 at 5:23 PM Report abuse rate up rate down Reply
catbell7

never had that happen -- are you sure you're not glutin intolerant and its the bun?

October 11 2013 at 1:07 PM Report abuse +1 rate up rate down Reply