From Membership Fees to $1.50 Hot Dog Combo, Costco Holds Firm on Low Prices

Since its founding in 1976, it’s always been about the prices at Costco. 

Even the retailer’s website states the reason Costco even exists is to bring its members “the best possible prices on quality brand-name merchandise.”

Today, with inflation the highest it’s been in the company’s nearly 50-year history, that mission is still intact but being tested in unprecedented ways and is arguably more important than ever to the 65 million households that pay an up-front fee for the value they receive from shopping and fueling up at the world’s largest warehouse club. 

“While we continue to mitigate the impact of price increases as best as we can, we remain comfortable in our ability to pass through higher costs while providing great value to our members,” Financial Planning and Investor Relations SVP Rob Nelson said on the company’s fiscal third-quarter earnings call.

For a quarter that was dominated by 8% inflation and record-high gasoline prices, Costco said its earnings for the period ending May 8 were underpinned by a 6% increase in memberships and shopping frequency and an average domestic transaction size that was up over 10%.

“We’re not seeing a lot of change in our throughput [foot traffic] in the buildings,” said Nelson, who was standing in for the vacationing CFO Rich Galanti. “We’re not seeing trade down really. We’re seeing a little bit of shift in where people are spending their money.”

Gasoline Up, Office Down

With gasoline prices that were sometimes more than $1 per gallon cheaper than nearby competitors, Nelson said Costco’s fuel sales were reflective of the value and the underlying price spike. Although money that goes into the gas tank can’t be spent elsewhere, Nelson acknowledged that this price gap was likely responsible for some of its new membership sign-ups.

At the same time, he said, some of the best performing categories in Q3 were candy, tires, toys, jewelry, apparel, bakery and deli, which were offset by weakness in liquor, office, sporting goods and hardware, all of which were quite strong a year ago due to a surge in home-office and home-gym building.

“Overall, I think we feel pretty good about what we’re seeing and how our members are shopping,” Nelson said, while noting that inflation pressures from higher commodity prices, wages, transportation costs and supply chain disruptions were all still in play. 

“We believe our solid sales increases and relatively consistent margins show that we have continued to strike the right balance in passing on these higher costs,” he added.

The $1.50 Hot Dog Combo

Although Costco’s $1.50 hot and soda combo is popular, it does not move the needle much on the top line of a business that did $51 billion in sales over the past three months. Even so, whether it’s hot dogs, $5 roast chickens or countless other low-priced sundries that consumers have grown to expect when they enter the store, these small items carry an outsized psychological impact on consumers’ perception of value. 

“I want to address some incorrect information floating around on social media and a few other media outlets,” Nelson told analysts. “When we introduced the hot dog/soda combo in the mid-80s it was $1.50. The price today is $1.50, and we have no plans to increase the price at this time.”

Similarly, and far more importantly, Nelson said it was premature to speculate on the timing of the next membership fee increase, which has historically happened about every 5.5 years and coincidentally, last happened in June of 2017. 

“Given the current macro environment, the historically high inflation and the burden this is having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time,” Nelson said, “But we will let you know, however, when that changes.”

Officially, Costco said its sales for the quarter rose 16% to $51.6 billion, with U.S. comp stores sales up 16.6% including gasoline, or 10.6% without the benefit of fuel.