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Why Costco Will Raise Membership Prices Before It Charges More for Rotisserie Chicken

Costco last increased its membership price in 2017 and raising it may allow it to keep selling cheap rotisserie chicken.
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Customers love Costco's (COST) - Get Costco Wholesale Corporation Report $4.99 rotisserie chicken. Because of that, the warehouse club took the aggressive step of opening its own poultry farm back in 2019.

That facility produces about 100 million chickens per year -- about a third of what the company uses. Now, however, amidst rising prices for chicken (and meat in general) and activist concerns about how Costco treats its chickens while raising them, the company may face pressure to raise the price of its rotisserie chicken above $4.99.

The membership-based warehouse club has kept the price of its rotisserie chickens at $4.99 since 2009. That's an expensive move as it's widely believed that the company loses $30-$40 million per year selling rotisserie chicken. That's a relatively small number for the chain, but it's one that will increase if the company has to spend more to raise chickens on its farm and prices for poultry rise in general.

Why Does the Costco $4.99 Rotisserie Chicken  Matter?

Costco uses a membership-based model. Its business success requires the company to retain and add members at a steady clip. In many ways, what it sells in its stores serves as a membership retention tool since the company sells its items at very low margins compared to other retailers.

Something like a $4.99 rotisserie chicken drives members to visit the warehouse club's locations. Basically, a member may visit because he or she wants a cheap meal option for dinner that night (and cheap chicken certainly fits) and, while there the member buys a bunch of other things.

It's not the purchases that matter to Costco. Instead, each visit reinforces the value of being a member. That makes it more likely that the member will renew and that helps the company maintain its roughly 90% retention rate.

Because of that, Costco can afford to subsidize the cost of its rotisserie chickens and it will likely continue to do so. That $30-40 million loss may grow if the company addresses calls from various animal rights groups, including Mercy for Animals, to join the Better Chicken Commitment, "which sets ethical standards for poultry raising and processing," Grocery Dive reported.

But, even pricier chickens likely won't lead to a price increase on Costco's $4.99 rotisserie chicken as management has been resolute in maintaining the price. It's an optics issue where the goodwill matters more than the money (much like the company's $1.50 hot dog and soda combo).

Keeping the rotisserie chicken at $4.99, however, does not mean Costco members won't face a meaningful price increase.

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Costco May Raise Its Membership Price

Costco may hold the line on pricing in certain areas, but it has a consistent history of raising its membership price roughly every five years. The warehouse club last increased membership prices  -- by $5 for basic Gold memberships and $10 for Executive members -- in 2017. Since it's now 2022 that suggests that Costco will raise its membership price at some point this year.

Raising membership prices at the same rate it did in 2017 would bring in a lot more money than increasing the price of the rotisserie chicken by $1. Costco sells 300 million chickens and year and had 62.5 million, members at the end of its most recent quarter with 26.5 million of those members paying for pricier Executive membership.

So, here's what price increase would bring in:

  • Raise the price of rotisserie chicken by $1: $300 million
  • Increase the price of Gold membership (36 million members) by $5: $180 million
  • Increase the price of Executive membership (26.5 million members) by $10: $265 million.
  • The total value of raising prices: $445 million. 

When Costco raises its membership price it doesn't happen all at once. Instead, it happens over a 12-month period as memberships come up for renewal.

Historically, Costco members have shrugged off these increases because they only happen every five years or so. When the company last raised membership prices in 2017, it had no meaningful impact on renewals.

An increase in the price of the rotisserie chicken would have an immediate impact and it would likely lead to negative feelings among the chain's members. Raising membership later in 2022 likely would not lead to the same backlash.

Costco CFO Richard Galanti did acknowledge that his company has entered the time period where it expects questions on a price increase. He was asked about it during the chain's first-quarter earnings call.

"And our only thought is we'll probably start getting questions about now. So it's still a while away. And -- but we certainly feel good," he said. "As I've said in the past, renewal rates -- strong renewal rates and loyalty help that process -- help that thought process. And we'll see, but it's still a little bit of time to think about it."