How Costco Makes Most of Its Money — Not From Its Hot Dogs

If there’s one thing you can count on, it’s the price of a hot dog at Costco (COST). As inflation hits Americans’ cost of living expenses, Costco Wholesale CEO Craig Jelinek says the big-box retailer will maintain the notoriously low price of its hot dog.

Anyone can go into a Costco and get a hot dog for $1 and hot-dog-and-soda combo for $1.50, the same price shoppers paid when Costco began selling the deal in 1985. If not by this food court staple, how does Costco make its money?

Jelinek appeared on CNBC’s “Squawk On the Street” on Monday, July 11 to reiterate his stance on raising the cost of a Costco hot dog. His simple, one-word answer? “No.”

Jelinek previously stated he once approached Costco co-founder and former chief executive Jim Sinegal over the incongruently low-cost food court item. “We are losing our rear ends,” Jelinek told Sinegal. Sinegal reportedly said, “‘If you raise (the price of the) effing hot dog, I will kill you. Figure it out.” Since then, Jelinek has stayed true to his predecessor’s wishes, maintaining the hot dog combo price for a solid 37 years.

In May 2022, Costco announced fiscal third-quarter earnings and showed a revenue boost of 18.5 percent YoY. This comes amid ongoing rising inflation that’s squeezing other retailers' bottom lines.

While some investors were hoping for stronger earnings, Costco’s steady numbers suggest it doesn’t need to attack the price of a long-standing favorite that’s more valuable through corporate symbolism than money.

Costco sells an estimated 100 million hot dogs per year, which equals between $100 million and $150 million in profits for the hot dog and combo sales. So, where does the company make the rest of its money?

Costco earns an 11-percent margin on about $192 billion of sold merchandise. The company maintains a shockingly high member retention rate of 91.3 percent or more. The average Costco shopper lives in a household making about $93,000 annually.

Membership dues account for a significant portion of Costco's revenue by far. The company increases the cost of its membership by about $10 every 5.5 years. Costco last increased its fees in June 2017, which means an increase could potentially come at the end of this year. However, Jelinek says a membership fee hike isn't on the table right now, suggesting inflation may cause a lag in that maneuver. “I don’t think it’s the right time. Our sign-ups continue to be strong,” Jelinek told CNBC.

Costco has an estimated 114.8 million members paying $60–$120 per member, or a collective $3.9 billion in membership fees annually.

Interestingly, Costco spends almost no money on advertising except for a small amount of money spent on coupons and mailers to existing and prospective members, respectively. This helps keep its costs down and increases profit without taking away the symbolism that represents Costco’s origins.