For nearly as long as Costco has existed, there has been a hotdog and soda combo for members to munch on during their warehouse visit.
And for almost 40 years now, the price has been a tidy $1.50 — long after the amount stopped making economic sense.
As cofounder Jim Sinegal famously told former CEO Craig Jelinek, “If you raise [the price of] the effing hot dog, I will kill you.”
True to form, the company’s new CFO Gary Millerchip took care last week during the company’s earnings call to assure members that the $1.50 hot dog combo is “safe.”
The solution turned out to be a business concept known as vertical integration, which is when a company brings more processes under its direct control, rather than relying on other suppliers or vendors.
“We’ve gotten into vertical integration and sourcing as the need arises,” current CEO Ron Vachris said during the earnings call. “If you think back the infamous story about the hot dog and coke at $1.50 and how are you going to figure out how to keep that price there, well, we’re going to open our own meat plants.”
Costco now has a production operation to keep its warehouse food courts supplied with over 100 million hotdogs per year — more than are sold at all Major League Baseball stadiums combined.
But the company didn’t stop there.
“As we looked at the prices of optical lenses going up, we opened up our optical grinding plants,” Vachris said. The company now offers some of the most competitive prices for prescription and reading glasses.
Even the $5 rotisserie chicken, which is famously sold at a loss to get customers in the door and spending on other items — is the result of vertical integration.
“The chicken plant came because we saw an inflection point where supply was not going to meet demand, so we had to get involved,” Vachris said.
While hotdogs, glasses, and chicken represent three products that Costco members have developed a strong attachment to, Vachris said the company is highly selective about the areas it chooses to plant a stake in the ground against the inexorable rise of inflation. (The hotdog combo should cost about $4.40 today.)
“Let’s not try and be everything, no,” Vachris said. “We’re not going to get vertically integrated just because it’s something we can do.”
But, he added, “we continue to keep that in our back pocket should we need to.”
