For Costco, $1.50 Hot Dog Combos and $4.99 Chickens Aren't Enough

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Earns Costco Wholesale (A Costco warehouse customers wait in a long line during lunchtime for hot dogs, pizza, salads, ice cream
AP, Paul Sakuma
It's a rite of passage for many Costco (COST) shoppers -- ducking out from the cart-stocking experience to line up at the warehouse club's food court and ordering the $1.50 hot dog combo.
It's not just you. It happens a lot throughout the day. Costco customers went through 109 million of these combos last year.

It may not be enough.

Costco's weak quarterly results on Wednesday surprised the market. The membership-based retailer has routinely exceeded analyst expectations, but it fell short this time. Revenue inched 1 percent higher to $32.5 billion, shy of the $32.8 billion that Wall Street was forecasting. Earnings climbed 1 percent to $1.40 a share, well off the mark from the $1.46 a share that the market was modeling.

The quarter wasn't terrible. Stateside comps still rose a respectable 5 percent during the 16-week period. However, it's still important to note that Costco did miss Wall Street's expectations on both ends of the income statement.

Clearly, the allure of cheap hot dog combos isn't what it used to be.

Hot Diggity Dog

Costco introduced a hot dog cart offering the combo at $1.50 in 1985. It has stuck to the price, 28 years later.

The product has changed. A few years ago Costco switched from Hebrew National franks to its proprietary Kirkland Signature brand. There were some rumblings of disappointment. Then Costco switched its fountain drinks provider from Coca-Cola (KO) to PepsiCo (PEP). Going from Coke to Pepsi likely disappointed and pleased more than a few members.

One value improvement in the combo is that the 12-ounce servings were replaced with 20-ounce cups and unlimited refills.

No one's arguing that $1.50 for a meal isn't a great deal. However, Costco needs a new value item to grab headlines. And the warehouse club pioneer may already have one in the form of roasted poultry.

Playing Chicken

"If you haven't tried our rotisserie chicken, that's the new hot dog," Costco said in its fiscal third quarter earnings call three months ago.

Costco's been sticking to the same strategy of holding firm on a great deal in prepared meals. Costco sells its whole rotisserie chickens for $4.99 apiece, and they've been a big winner. The retailer's selling more than 60 million of them a year, making this a better than $300 million contributor to Costco's annual sales.

%VIRTUAL-article-sponsoredlinks%Costco pointed that out during Wednesday morning's earnings call, but it wasn't necessarily a bragging point. Volatile poultry prices result in lumpy margins when you're committed to a certain selling price point.

Restaurants that rely on chicken as a primary protein have the flexibility to tweak prices. But Costco wants to hang on to its $4.99 per chicken price tag. Unlike the hot dog combo where soda syrup sales are steady and frankfurters are cheap, Costco's new customer bait comes with greater uncertainty of how much it will earn.

Meet the Press

Whether or not Costco dreams up a new bargain it should continue to milk media attention by offering dirt-cheap prices on food in this uncertain economy.

"We certainly are getting our share of free press out there, whether it's the late night talk shows or the morning business shows," Costco observed in its July earnings call, referring to the buzz generated by the value of its roasted chicken.

Then again, the appetite for media attention may also require a new value. The $1.50 hot dog combo and $4.99 rotisserie chicken may be played out. Just ask McDonald's (MCD). It had a few solid years of milking its Dollar Menu to attract penny pinchers, but sales have tailed off over the past year.

One can argue that framing itself as a value haven may be hypocritical given the very nature of being a warehouse club. One has to pay $55 a year to be a member. However, customers will argue that the memberships pay for themselves in just a few grocery treks. The cheap rotisserie chicken and hot dog combos are just door prizes.

Wednesday proved to be a rare disappointment for Costco shareholders. It just better make sure that it never gets around to disappointing its shoppers.

America's Most Popular Stores
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For Costco, $1.50 Hot Dog Combos and $4.99 Chickens Aren't Enough
Percentage of U.S. population who visited in March: 14.2%
 Revenue: $73.3 billion
 1-year stock price change: 27.56%
 Store category: Discount & variety stores

Target (TGT) was the second most-visited discount retailer in the U.S. during March, behind only Walmart. One reason was the number of Target stores. The company has been attempting to take on Walmart by adding grocery sections to more  stores, and by offering groceries at competitive prices. This has helped Target maintain strong financial performance despite the weak economy and its additional spending on its launch in Canada. Most Americans surveyed by the American Customer Satisfaction Index rated Target well: It finished in a three-way tie for second place in the department and discount store category, behind Nordstrom.
Percentage of U.S. population who visited in March: 18.2%
 Revenue: $13.6 billion
 1-year stock price change: -3.89%
 Store category: Fast food

As recently as 2011, Taco Bell (YUM) was struggling to keep competitor Chipotle (CMG) from taking its customers, with flat or negative same-store sales growth in each quarter that year. This changed in early 2012, when Taco Bell released the Doritos Locos taco, a hard taco with the flavor of Doritos nacho chips. That item help the company increase comparable sales in every quarter of 2012, as the company sold more than 1 million of them a day. In March, Taco Bell CEO Greg Creed told The Daily Beast the company had hired 15,000 workers just to meet demand for the Doritos Locos taco in 2012. Last year, the company's sales increased by $1 billion to $11.8 billion, and net income rose by roughly $300 million to $1.6 billion.
Percentage of U.S. population who visited in March: 18.9%
 Revenue: $123.1 billion
 1-yr. stock price change: 27.56%
 Store category: Drugstore

CVS (CVS)  is the top provider of prescriptions in the country, filling or managing more than 1 billion prescriptions a year. It has operates in 45 states, and 75% of the people in the markets it serves live within three miles one of the company's 7,400 retail stores. Last year, CVS estimated it gained millions of new customers following a dispute between Walgreens (WAG) and Express Scripts (ESRX), the prescription management service. Even after the dispute was resolved, CVS was able to retain many customers who used to fill prescriptions at Walgreens. In the first quarter of 2013, the company's revenue grew 5%, as same-store sales grew 4%.

Percentage of U.S. population who visited in March: 22.7%
 Revenue: $71.6 billion
 1-year stock price change: 42.17%
 Store category: Drugstore

Despite CVS's gains, Walgreens is still the most visited drugstore in the country. According to RetailSails, the company has the most stores, at 7,890, and the largest average store, at 14,400 square feet, among all drugstore chains. The company's tenure in first place may not last, however, thanks to that now-resolved dispute with Express Scripts. The company spent nearly nine months without using Express Scripts, the largest prescription management service in the country, losing an estimated 60 million prescriptions to rivals. CVS estimates that it will retain roughly half of the Walgreen's customers it gained as a result of the squabble.
Percentage of U.S. population who visited in March: 22.8%
 Revenue: $2.5 billion
 1-Year stock price change: 11.84%
 Store category: Fast food

In 2011, Wendy's (WEN) overall sales surpassed Burger King's, making it the second-largest burger chain in the U.S. But Wendy's growth has actually been quite modest as of late, with same-store sales in North America growing just 1.6% from 2011 to 2012. (In fact, Wendy's first-quarter profit just tumbled 83%.) Wendy's is in the process of remodeling many of its restaurants with more comfortable seating arrangements and flat-screen televisions. However, not all of its stores are getting upgraded. The company announced in March it was going to shutter as many as 130 underperforming stores. Last year, the company also made significant changes in its marketing strategy and menu in order to attract customers who have been lured in by chains such as Panera, which promotes healthier food at slightly higher prices.
Percentage of U.S. population who visited in March: 23.9%
 Revenue: $13.3 billion
 1-year stock price change: 12.46%
 Store category: Coffee

There is a reason Starbucks (SBUX) is No. 1 in the coffee category: Sales in the U.S. grew by nearly 346% between 2001 and 2012, and the number of stores grew by 195%. The company has struggled in the U.S. in the past several years, but its stock has continued to rise as global sales have helped to pick up the slack. Worldwide, Starbucks revenue grew by 7% in 2012 compared to 2011. This included a 15% growth in the Asia/Pacific region. In its early years, the company did not place much emphasis on its food items. However, that has changed in recent years, especially following the purchase of Bay Area pastry chain La Boulangerie. However, some industry analysts remain skeptical of Starbucks' ability to compete for customers' breakfast purchases.
Percentage of U.S. population who visited in March: 24.3%
 Revenue: $2.0 billion
 1-year stock price change: N/A
 Store category: Fast food

The last decade or so has been especially tumultuous for Burger King: It was taken private in two separate instances, in 2002 and in 2010, and became a public company again last June. The company hasn't performed well in years, with an average growth rate of -0.1% between 2001 and 2013, which allowed Wendy's to take its No. 2 burger chain title. A restructuring that began after the second buyout in 2010, in which many stores were sold to franchisees, has cut deeply into the company's sales. But not all news for Burger King is bad news: Nearly one quarter of Americans visited a Burger King in March.
Percentage of U.S. population who visited in March: 37.8%
 Revenue: N/A
 1-year stock price change: N/A
 Store category: Fast food

Between 2001 and 2012, Subway's sales in the U.S. grew nearly 169%, while the number of stores grew nearly 93%. Subway is by far the largest fast food chain in the U.S., with almost 26,000 restaurants. The company has been able to fuel its large growth through both international expansion and a domestic focus on healthy eating, most notably using ads featuring Jared Fogle -- a man who lost an impressive amount of weight while regularly eating the company's sandwiches. In 2013, for the ninth year in a row, Subway received the highest score in the country in a Harris Poll EquiTrend study in the "quick service restaurants" category and was named brand of the year by that group.
Percentage of U.S. population who visited in March: 38.8%
 Revenue: $469.2 billion
 1-year  stock price change: 34.29%
 Store category: Discount & variety stores

Walmart (WMT) is by far the largest retailer in the U.S. and in many parts of the world. It was recently ranked No. 1 in the Fortune 500 after it reported more than $469 billion in worldwide revenue in 2012. While international markets are critical to growth, the U.S. market provides the majority of its revenue: U.S. sales comprise 62% of the company's sales. In the last five years, Walmart has added 450 U.S. stores, a 13% increase overall. However, according to Bloomberg, the company's U.S. workforce has dropped 1.4% in that time frame, leading customers to complain about a lack of inventory and longer check-out lines -- and to defect to rivals such as Target and Costco. In February, the American Customer Service Index ranked Walmart the lowest of all discount retailers, the sixth year in a row the chain has held or tied for the last place spot.

Percentage of U.S. population who visited in March: 49.0%
 Revenue: $27.6 billion
1-year stock price change: 6.92%
 Store category: Fast food<

Almost half of all Americans visited a McDonald's (MCD) in March, but, U.S. sales of $8.8 billion weren't even the company's largest revenue segment last year. Rather it was the company's sales in Europe of $10.8 billion. According to Technomic, McDonald's same-store sales grew at an annualized rate of nearly 5% from 2001 through 2012. However, this has slowed recently: The company's systemwide sales in the United States rose by just 0.3% from the year before in the final quarter of 2012. The company is already so large that its bottom line is deeply linked to global economic conditions, leaving it unable to raise prices for now. In order to boost sales, McDonald's CEO Bob Thompson told CNBC the company may try allowing U.S. stores to serve breakfast all day.


Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Costco Wholesale, McDonald's, and PepsiCo. The Motley Fool owns shares of Costco Wholesale, McDonald's, and PepsiCo. Try any of our newsletter services free for 30 days.
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