Costco Still Betting on Low-Priced Food Despite Softening Sales

Costco continues to lean on low-priced food options to attract shoppers even as performance lags.

The bulk discount retailer shared on a call with analysts Thursday (Dec. 8) discussing the company’s latest earnings report that its fresh food sales have taken a hit after a period of strength in the category, even as the company keeps prices well below what quick-service restaurants (QSRs) are charging in a bid to draw consumers to stores.

“Fresh foods was down. As you know, for the last couple of years, it’s been particularly strong, and it’s come down a little bit,” CFO Richard Galanti said. “In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories.”

The most famous example of this price-holding is the retailer’s ongoing insistence on maintaining its $1.50 hot dog deal, offering a 20-ounce soda alongside the item.

The news of the decline in Coscto’s fresh food business is surprising, considering the continually rising prices of foods and consumers’ resultant efforts to cut back on their food spending. Indeed, comparable business supplementing their retail offerings with low-cost prepared food offerings have been noticing strength in the category.

For instance, Casey’s General Stores, the nation’s third-largest convenience retailer and fifth-largest pizza chain, said on a call with analysts Wednesday (Dec. 7) discussing its most recent earnings report that same-store prepared food and dispensed beverage sales grew 10.5% year over year and 15% relative to 2019.

Indeed, consumers are doing what they can to cut back. Research from PYMNTS’ “Consumer Inflation Sentiment: Consumers Buckle Down On Belt-Tightening,” which draws from a survey of more than 2,600 U.S. consumers in September, finds that 58% are reducing their nonessential grocery spending.

Get the study: Consumer Inflation Sentiment: Consumers Buckle Down On Belt-Tightening,

Additionally, research from the August edition of the study revealed that, in response to inflation, 78% of consumers are eating at home more, and 38% reported they are opting more for lower-priced restaurants.

Read the report: Consumer Inflation Sentiment: Inflation Slowly Ebbs, but Consumer Outlook Remains Gloomy

These shifts come as prices skyrocket and as consumers perceive those increases to be even higher than they are. For instance, research from the latest edition of the study finds that consumers perceive the prices of fresh meat and vegetables to have risen 23%. Yet, U.S. Bureau of Labor Statistics (BLS) data find that these prices have only increased by 8% to 9%.

For Costco, despite the prepared foods’ sales downtick and the margin costs of keeping prices low, the company is continuing ahead with its strategy.

“We’re always trying to push more into lowering the prices or keeping the price increases going not as high as they could have been,” Galanti said. “I think fresh foods is a good example of that of late, where, again, we’ve held the price points on certain items despite inflated costs.”