Why Costco only charges $4.99 for a rotisserie chicken

  • Costco's rotisserie chickens have cost $4.99 since 2009.

  • Management claims it's happy to "eat" the cost in order to keep prices down for the consumer.

  • But there's actually a clever business strategy behind this.

Costco would rather take a hit to its profits than raise the price of its $4.99 rotisserie chicken — but it isn't actually a terrible business decision.

The rotisserie chicken boom kicked off in the 1990s and hasn't slowed down since. 625 million rotisserie chickens were bought in US supermarkets in 2017, according to market-research firm Nielsen. Costco itself sold 87 million of them in its 2017 fiscal year, compared with 51 million in fiscal year 2010.

In that time, the cost of selling rotisserie chickens has increased because of rising labor and preparation costs. But despite this, Costco hasn't budged on the price.

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"When others were raising their chicken prices from $4.99 to $5.99, we were willing to eat, if you will, $30 to $40 million a year in gross margin by keeping it at $4.99," CFO Richard Galanti said in a 2015 earnings call, referring to a hit the retailer took after a bird-flu outbreak pushed prices higher, according to the Seattle Times. "That's what we do for a living."

But this is neither a bad business decision nor a selfless act of kindness for its customers.

Costco's entire business strategy is built around buying in bulk, which isn't typically conducive to frequent store visits. To combat this, the retailer uses lower-priced products to drive foot traffic to stores. Its cheap gas and food court are other examples of this.

Once in the store, these customers are more likely to be drawn into purchasing other products that they otherwise wouldn't have. And it's not just Costco — other stores also use this tactic with rotisserie chickens.

"If they get a chicken, a salad, and maybe they pick up a bottle of wine — now we're really talking," Don Fitzgerald, vice president of merchandising at Mariano's, a Chicago grocery chain that Kroger bought in 2015, told The Wall Street Journal.

Costco has since invested in other ways to save money while preparing its chickens, including buying larger, more efficient ovens and cutting costs with containers that use less plastic, The Journal reported. It's also building its own $300 million chicken-processing plant in Nebraska, which is expected to provide two million chickens per week for Costco and will likely bring supplier costs down.

The retailer is just as stubborn with its chickens as it is with its $1.50 hot dog and soda deal, which hasn't changed in price since it was introduced in 1985.

In the 2009 edition of Costco Connection, David Fuller, the assistant vice president of publishing, explained why, writing that Costco wanted to prove that "a business can operate on a fair markup and still pay all of its bills."

He continued: "Holding a price that steady for that long sends a clear message about what is possible when you decide to operate your business model on a 'cost-plus' basis instead of a 'what the market will bear' basis."

Are you a Costco employee with a story to share? Email mhanbury@businessinsider.com

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