Costco’s secret weapon: Food courts and $1.50 hot dogs
By Nathaniel Meyersohn, CNN Business
Updated 10:22 AM EDT, Thu October 4, 2018
(CNN Business) — $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.
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.
’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.