Costco refuses to raise the price of its $1.50 hot dog combo despite painful inflation. 4 experts explain the strategy, and why Charlie Munger loves it.
Costco has charged $1.50 for a hot dog and soda for 37 years, and inflation won't change that.
Costco's pricing of its hot dog combo is a testament to its business model, experts say.
Charlie Munger admires the retailer for constantly driving down prices without sacrificing quality.
Costco has stubbornly charged $1.50 for its hot dog and soda combo for nearly four decades now — and it has no plans to raise that price, even though US inflation has now surged to a 40-year high.
The big-box retailer's dedication to cutting costs without sacrificing quality, then passing on those savings to customers in the form of lower prices, has won the admiration of investors such as Charlie Munger, Warren Buffett's business partner and Berkshire Hathaway's vice-chairman.
"If once or twice in a lifetime you're associated with such a business, you're a very lucky person," Munger said about Costco in 2011.
We asked four experts to explain why Costco hasn't hiked the price of its signature meal deal, and how the $1.50 cost exemplifies what Munger loves about the company.
1. John Longo, a finance professor at Rutgers Business School:
Costco probably makes little to no money on its hot dog and soda deal, but the offer gets customers in the door and likely fuels incremental sales, Longo said.
"How many people simply buy the hot dog combo and leave?" he questioned. "Perhaps some, but not most, shoppers."
Costco makes nearly all of its profits from membership fees, allowing it to maintain rock-bottom prices for some products like the hot dog combo, Longo said.
The strategy generates free publicity, fosters goodwill towards the brand, and drives member signups, he continued. It also increases customer loyalty, especially when almost every good and service outside Costco's doors is becoming more expensive, he added.
"They are telling their customers that they know times are tough due to high inflation, and that they are not taking advantage of them while they are down," Longo said.
2. Tren Griffin, the author of "Charlie Munger: The Complete Investor"
Munger has praised Costco's fanatical commitment to driving its costs lower without compromising on quality, and the hot dog and soda combo is one product that reinforces the company's reputation to its customers, Griffin noted.
Consumers also enjoy great products like the hot dog, and with inflation squeezing their budgets, they appreciate companies that have a consistently small markup on products.
"Costco does the comparison shopping for high quality products for its customers, including for a tasty hot dog," he said.
3. Darren Pollock, the president of Cheviot Value Management, which owns Costco shares
"The $1.50 hot dog is a product of Costco's customer-centric culture," Pollock said. "It's a symbol that the company need not make money on every item that it sells. How many other retailers are known for that?"
Pollock added that cheap hot dogs make existing members happy and attract new ones, representing a win-win for Costco. The retailer's philosophy of delighting its customers with unmatched bargains appeals to some of its biggest fans, he continued.
"Charlie Munger loves the Costco culture for treating its customers well by providing them with the lowest possible prices for the goods it sells," he said.
4. Chris Bloomstran, the president of Semper Augustus Investments, a Costco shareholder
Costco members trust the retailer to offer quality products and sell everything in its warehouses at lower prices than Amazon or Walmart, Bloomstran said.
"The $1.50 hot dog and soda combo (with refills) are a testament to that," he said. "They are inseparable. The $1.50 price is a fixture — it drives trust and loyalty, which go hand in hand."
Bloomstran outlined how Costco has driven down the cost of its hot dog combo over the years. It built two manufacturing facilities to bring production in-house, swapped cans of soda for fountain cups that were cheaper even with free refills allowed, and switched out Coke for Pepsi after striking a better deal with the latter soda maker.
The fund manager added that inflation has definitely made the hot dog combo unprofitable on a standalone basis, but he dismissed the idea that Costco would consider it a "loss leader."
"The $1.50 combo is such a part of Costco's DNA that despite losing money on each of the 130 million (and growing) annual combo sales, it's good for trust and loyalty," he said.
Bloomstran finished by saying he expects Costco to maintain its $1.50 price point, and continue working to reduce the cost of offering the combo, but never at the expense of product quality.
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