Costco just celebrated the 40th birthday of its famous hot-dog-and-soda deal. In those 40 years, the chain has never raised the $1.50 price, and it has essentially promised it never will.
The chain shared some of how it keeps that price the same in the Sept. edition of its Costco Connections magazine.
“To keep that price, Costco sources the quarter-pound-plus beef franks from two in-house meat plants. The hot dog is served on a gourmet bun sourced from regional suppliers, and six soda flavors are bought in bulk, allowing Costco to control pricing and reduce product waste,” it shared.
Costco (COST) has done the same thing with its $4.99 rotisserie chicken. It has pledged to keep that price and even bought its own chicken farm to be able to do that.
In reality, the hot dog deal and the rotisserie chicken likely serve as loss leaders. They draw people to the store, and those people buy a lot more than a cheap meal once they are there.
Of course, to get into the store, people need to pay Costco a membership, and that’s actually the biggest driver of the chain’s profitability. The chain recently raised that fee, and how members responded will play a big part in the warehouse club’s ongoing success.
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Membership fees drive Costco’s success
You can’t downplay how important membership fees are to Costco.
“Costco’s profits in fiscal 2023 amounted to $6.29 billion. As it turns out, though, $4.58 billion of that profit — 73% of the total — had nothing to do with product sales. That money came from the membership fees that customers pay just to enter Costco’s retail warehouse locations, wrote The Motley Fool’s Dan Caplinger.
A quick look at Costco’s membership price increase:
- Effective Sept. 1, 2024: First increase in seven years.
- Gold Star/Business: Increased from $60 to $65 (+8%).
- Executive: Rose from $120 to $130 (+8%).
- Executive 2% reward cap: Increased from $1,000 to $1,250
- Impact: 52M members in U.S. and Canada.
- Financial boost: +$290M to operating income.
Costco reveals how members reacted
For about two years before Costco raised its membership prices, members and media were speculating that the chain was going to make that move. The long delay from the normal cycle appears to have dulled the blow from the increase.
“I think as we shared before, we really haven’t heard a lot of member feedback. I think the fact we waited seven years to increase the fee when we typically would do it in five. And so, there was a level of understanding it may be coming,” CFO Gary Millerchip shared during Costco’s third-quarter earnings call.
He also thinks the chain built goodwill in other ways.
“And then also holding on many prices around the hot dog and the rotisserie chicken at times when inflation was higher as well. So, nothing in general, I would call out there,” he added.
He said that all signs so far have been positive.
“Overall, on membership, I’d say we’re very pleased with the metrics. We tend to look at it across renewal rates, continued sign-up activity overall and then is the membership count and the income growing. And when we look at those three metrics, we’re pleased with the overall direction that we’re seeing in all of those metrics,” he said.
Experts shared thoughts on Costco’s membership price hike
GlobalData Managing Director Neil Saunders shared his thoughts on the Costco membership increase on RetailWire.
“Costco membership fees have been frozen since 2017. If they had risen with inflation, the basic membership would now be just over $77. So, in this context, a rise to $65 isn’t too bad. That said, no one will leap for joy at the increase – but the real question is will members tolerate it? The answer, for the large majority, is yes. Why? Because Costco’s all round value proposition is very strong and loyalty is high.”
William Passodelis, another member of RetailWire’s Brain Trust, believes that the economy actually gives Costco some cover to make this move.
“As usual, Neil’s views above are RIGHT! Costco’s value proposition is such a huge driver for it that I believe members will tolerate the slight increase. Also, with EVERYTHING under the sun increasing in price, I think the members will not be surprised, and I think this is a good time for Costco to make the move,” he wrote.
Related: Costco Drops Long-Term Policy On Offering Only 1 Credit Option
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