When Costco president W. Craig Jelinek complained to Jim Sinegal, Costco co-founder and former CEO, that their mammoth warehouse operation was losing money on their famously cheap $1.50 hot dog and soda bundle, Sinegal listened, agreed, and then did his best to make his point absolutely clear.
“If you raise [the price of] the effing hot dog, I will kill you,” Sinegal said. “Figure it out.”
Taking Sinegal’s advice to heart, Jelinek, who succeeded Sinegal in 2012, has never hiked the price of Costco’s hot dog. Since the shopping club initially introduced the dogs to clients in 1984, it has sold for the same $1.50. The quarter-pound all-beef tube and 20-ounce Coke combination appears to be inflation-proof and impervious to food wholesaler whims. How does Costco manage to do it?
Simple. When it comes to hot dogs, Costco does not price them based on market demand. They set their prices based on their own costs as well as the value the hot dogs can afford.
People would spend $1.75, or more, for the bargain, according to Jelinek. Is that extra 25 cents worth more than the goodwill and foot traffic produced by a combo that hasn’t changed its price in nearly 35 years? Most likely not. Customers that visit Costco are entertained, satiated, and energised by the hot dog lunch. If they get it right before leaving the store, they’ll remember how well they were handled. That’s more valuable than keeping up with inflation.
That means Costco must keep the food court mainstay in stock while maintaining a consistent price. When supplier costs began to rise in 2009, the company made a momentous decision: they stopped utilising Hebrew National, the manufacturer of the all-kosher dog they had been using since 1984, and chose to bring hot dog production in-house. In Los Angeles, a Kirkland’s Signature hot dog plant was built. They developed a second plant in Chicago when they needed to ramp up manufacturing.
Costco now sells more than 100 million hot dogs per year, more than every MLB stadium combined. And they continue to surprise us with their ability to add even a single cent to the bargain. When the state of California passed a soft drink tax that would have increased consumer costs, Costco outlets across the state changed the combo to include Diet Pepsi. (Diet drinks are not subject to the law.) The company’s “effing hot dog” will remain a bargain for the foreseeable future.
They’ve also had to keep soft drink costs under control. Costco chose Pepsi over Coca-Cola when their arrangement with the latter was about to expire, assuring that their iconic $1.50 price sticker would be preserved.