OT COST earnings call gem

Finally, I want to address some incorrect information floating around on social media and a few other media outlets claiming that we have increased the price of our $1.50 hot dog and soda combinations sold in our food courts. Let me just say the price when we introduced the hot dog/ soda combo in the mid-80s was $1.50. The price today is $1.50, and we have no plans to increase the price at this time.

https://seekingalpha.com/article/4514862-costco-wholesale-co…

Something you would only hear in a Costco earnings call.

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dog/ soda combo in the mid-80s was $1.50. The price today is $1.50, and we have no plans to increase the price at this time.

This is an interesting quote.
Yes, they are very strong company to be able to do that.
And I like the blunt, firm answer.

But there are ways this could be taken to be bad.
If they thought they could raise the price without pushback, would it not make sense to do so?
Keeping it fixed is only so good for reputation, and we all know it eventually must end even if it has been a loss leader for a while now.
The usual rule of thumb when inflation rears its ugly head is to get ahead of it, asap, as catch-up is almost impossible once your margins have collapsed:
It’s hard to push through a 7% increase, but REALLY hard to push through a 20% increase if you wait too long.
If they aren’t getting ahead of it, it’s worth pondering why that is the case.

In a broader sense, it says some potentially dark things about the people working in the supply chains for those hot dogs.
Those of a certain bent might speculate that their wages, like the hot dog price, have not kept up with inflation in recent decades.
I’m more of a Mr Potter than a George Bailey, so I won’t worry obsess about it.

Jim

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Makes me wonder if the hot dog “quality” has gone down to help hold down the price. :flushed:

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Seeking margin is best when it’s mutually beneficial, when the price rise reflects an increase in value, and not just passing through COGS or operating/profit margin. COST understands that.

It’s old fashioned trust-based retailing.

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The hot dog and soda is a loss leader. Loss is small and getting people into the store so they spend a couple of hundred is good business. The rotisserie chickens are loss lead too, but have gotten me into the store many times.

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Assuming fair market price, how much they will be losing in hot dog? Consider that as marketing cost. A way to bring their customers back to the store.

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Keeping it fixed is only so good for reputation, and we all know it eventually must end even if it has been a loss leader for a while now.

As a 20+ year Costco member, I doubt they will ever raise it. The goal is not to make money. It’s to attract, engage, and retain customers. Like free mints at a restaurant - or the free food samples Costco has inside its stores - it’s just one of many little perks that enhance the customer experience. They think of the hot dogs as part of the cost of doing business, like property taxes. From the company’s point of view, they could give away the hot dogs and it would still be worth it. The average customer spends more than a hundred dollars a visit, plus membership fees. Only a fraction of them buy hot dogs.

https://www.businessinsider.com/typical-costco-shopper-demog…

When I think about how much money I save at Costco, that hot dog is a big part of the equation. It’s at least $5 to $10 in savings compared to grabbing a quick lunch somewhere else. Do that once a month or so and you’ve paid for the membership cost.

Rob

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Not raising hot dog prices for years instills builds with the customer. They believe Costco is watching their back, even during times of high inflation.

Speaking of gems, Charlie in February @ DJCO meeting on Feb 19 COST traded @ $512/share:

” Question: You recently talked about bubbles and high valuations. Is Costco a part of that? Costco has never traded at a higher price-to-sales or price-to-earnings multiple. How should new investors think about Costco given its record run?

Charlie Munger: Well, that’s a very good question. I’ve always believed that nothing was worth an infinite price. Even an admirable place like Costco could get to a price where you would say that’s too high.

But I would argue that if I was investing money for some sovereign wealth fund or some pension fund with a 30,40, 50-year time horizon I buy Costco at the current price. I think it’s that strong an enterprise and that admirable place.

I can’t bring myself with my habits to pay these big prices. But I never even think about selling a share of Costco just because it’s selling at a high price.

If you stopped to think about it, I bought at Christmas time a flannel shirt, a bunch of flannel shirts at Costco. They cost $7 each, more or less. It was a soft flannel, it was better, and so forth. And then I bought pants—I think they were Orvis pants—and I paid like $7. They stretch around my waist and they’re partly water-resistant, what have you.

Costco is going to be an absolute titan on the internet from curated products that everybody trusts and huge purchasing power on an unlimited number of stocking units. I’m not saying I’m buying Costco at this price, but I’m certainly not selling any. I think it’s gonna be a big powerful company as long as far ahead as you can see. And I think it deserves that success. I think it has a good culture and a good moral ethos. So I wish everything else in America is working as well as Costco does. Think what a blessing that would be for us all.

https://junto.investments/daily-journal-2022-transcript/

That is a pretty strong endorsement from our resident curmudgeon.

COST is not cheap but exceptional companies almost never are.

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If they thought they could raise the price without pushback, would it not make sense to do so?
Keeping it fixed is only so good for reputation, and we all know it eventually must end even if it has been a loss leader for a while now.

I see the hot dogs as being part of their advertising costs. Hotdogs are available at the part of the store that is open to all, not just members. Hotdogs can bring people in off the street to grab a “meal” and get curious as to what is behind those member only areas.

The rotisserie is an insane deal that is only available to members. We buy more than one a week, deboning it to use in sandwiches or other quick meals. Delicious, easy, and crazy cheap, the rotisserie gets us into the store often. We have a Sam’s Club closer to our house than Costco, and I would never think of switching, mostly because I don’t want to leave those rotisseries behind. It’s not just to get you into the store, where you then buy the cans of tuna that are $5 more expensive than they were last year, it’s to keep you as a member. They may lose money on the actual sale of the item, but it more than comes back to them in member retention and increased use of the store.

IP

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For this interested I posted a valuation target on the COST board.

https://discussion.fool.com/2022-q3-earnings-forecast-35119794.a…

tecmo

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The rotisserie is an insane deal that is only available to members. We buy more than one a week, deboning it to use in sandwiches or other quick meals. Delicious, easy, and crazy cheap, the rotisserie gets us into the store often. We have a Sam’s Club closer to our house than Costco, and I would never think of switching, mostly because I don’t want to leave those rotisseries behind.

LOL! I was just about to make a post mentioning the rotisserie chicken. Costco has never raised the price that I can recall. It has been $4.99 forever. I think your analysis is spot on. The rotisserie chicken and the hot dog are perks members love and for me the ability to pick up a chicken can be the tipping point between going to Costco and going someplace else.

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I’ve been listening to Costco’s quarterly conference calls for the past thirty years or so. In my experience, they are unique in several ways. First, each call is a learning experience for anyone wanting to learn granular details about how management thinks and how its decisions serve the moral core of the company. Second, management is honest on the calls. Management addresses strengths and weaknesses in the business. They do not pander to analysts. They do not inflate projections. They admit when do not know the answers to questions raised on the call. Third, management is consistently on top of the details and current performance of every line of business, and they bring these details into their presentations and answers to questions. Fourth, management frequently conveys a firm commitment to balancing the interests of its stakeholders by consistently making decisions that benefit customers, employees and shareholders with a long term view of the business. For example, rather than produce a likely short term boost to the current stock price by raising membership fees at the current time, management explained how not raising fees currently would better serve the interests of all stakeholders in the long term. At the end of each conference call, I always feel more secure in my decision to continue to own shares in the company for the long term, particularly during times when the stock price is high, inflation and bottlenecks are challenging, interest rates are rising and the economic forecast is cloudy at best.

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dog/ soda combo in the mid-80s

Fourth, management frequently conveys a firm commitment to balancing the interests of its stakeholders by consistently making decisions that benefit customers, employees and shareholders with a long term view of the business

We have come a long way since the mid-80s. There now is overwhelming evidence that consuming processed meat significantly increases the risk of cancer and death. WHO has classified processed meat as a carcinogenic. I am not saying Costco should become the food police. People can eat what they want. But selling carcinogenic food at artificially low prices encourages more than normal consumption and does not benefit customers in the long run. It just seems morally wrong! Perhaps they can come up with something just a little bit healthier as their food stall loss leader?

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There Is No Safe Amount of Processed Meat

Processed meat—from hot dogs to bacon—increases the risk of colorectal cancer, cardiovascular disease, and even early death.

The World Health Organization has determined that processed meat is a major contributor to colorectal cancer, classifying it as “carcinogenic to humans.” Just one hot dog or a few strips of bacon consumed daily increases cancer risk by 18 percent. The World Cancer Research Fund (WCRF) and the American Institute for Cancer Research (AIRC) have also found that “the evidence on processed meat and cancer is clear-cut.”

“Processed meat refers to meat that has been transformed through salting, curing, fermentation, smoking, or other processes to enhance flavor or improve preservation. Most processed meats contain pork or beef, but processed meats may also contain other red meats, poultry, offal, or meat by-products such as blood. Examples of processed meat include hot dogs (frankfurters), ham, sausages, corned beef, and biltong or beef jerky as well as canned meat and meat-based preparations and sauces.” – World Health Organization

Colorectal cancer isn’t the only cancer risk that comes from consuming processed meat. Eating 50 grams of processed meat daily also increases the risk of prostate cancer, pancreatic cancer, and overall cancer mortality. And a study of more than 200,000 women found that eating about 20 grams of processed meat each day—less than half the size of a regular hot dog—increased breast cancer risk by 21 percent.

Those who consume the most processed meat also have an increased risk of death from cardiovascular disease, according to a National Institutes of Health study of more than half a million people. A study published in JAMA found that processed meat consumption was tied to 57,766 deaths from cardiometabolic diseases in 2012.

https://www.pcrm.org/good-nutrition/nutrition-information/pr…

https://www.who.int/news-room/questions-and-answers/item/can…

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“Something you would only hear in a Costco earnings call.”

Other humors aspects of Costco:

https://www.youtube.com/watch?v=7h4b6eY2BNs

As a 20+ year Costco member, I doubt they will ever raise it. The goal is not to make money. It’s to attract, engage, and retain customers. Like free mints at a restaurant - or the free food samples Costco has inside its stores - it’s just one of many little perks that enhance the customer experience. They think of the hot dogs as part of the cost of doing business, like property taxes. From the company’s point of view, they could give away the hot dogs and it would still be worth it. The average customer spends more than a hundred dollars a visit, plus membership fees. Only a fraction of them buy hot dogs…

I’m still upset about Costco’s decision a few years ago to eliminate the $1.50 ice cream bar freshly dipped in chocolate and then rolled in almonds.*

I assume they discontinued it due to the labor intensive nature of making it (you should have seen the look on the employee’s face when I went in one day and ordered 15 of them for our softball team-I think he actually said, “seriously?”)

Anyhow, if that’s my biggest complaint about Costco, they seem to be doing things right.

Wheezy

*Yes, I know when they discontinued them from the food court that they added them to the frozen food section, but they are smaller and not as fresh. A man has to draw a line somewhere.

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I’m still upset about Costco’s decision a few years ago to eliminate the $1.50 ice cream bar freshly dipped in chocolate and then rolled in almonds.

Those were an unbelievable deal and I was heartbroken when they stopped carrying them.

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