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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