Think about the last time you walked through a Costco. That smell of roasted poultry hits you before you even reach the back of the warehouse. There sits a display of golden brown chickens, each one cooked to perfection, waiting in their warming cases for just under five dollars. It feels almost unreal when you compare it to what other grocery stores charge. How does a massive retailer like Costco pull this off when inflation has sent the price of nearly everything else through the roof?
The answer lies in a combination of bold business strategy, intentional financial sacrifice, and supply chain innovation. Experts have repeatedly pointed to Costco’s rotisserie chicken as one of the most fascinating case studies in modern retail economics. It’s not just about selling chicken. It’s about what that chicken represents and what it makes customers do once they step inside the store.
The Classic Loss Leader Strategy
Let’s be real, no one really expects Costco to lose money on purpose. Yet that’s exactly what happens with the rotisserie chicken. Costco is employing a popular grocery store marketing tactic called a “loss leader.” In simple terms, they sell the chicken below what it actually costs to produce. Why would any company do that?
The logic is surprisingly straightforward. The classic definition as a loss leader is when a business prices a product at a below-market rate – sometimes even below what it costs to produce – in order to attract new or existing customers who will hopefully purchase additional, more profitable products. Honestly, it works like magic. You walk in thinking you’ll grab a quick dinner option, and before you know it, your cart is loaded with paper towels, wine, electronics, and maybe that giant jar of cashews you didn’t plan on buying.
Costco’s rotisserie chickens – sold under the store’s in-house Kirkland brand name – are located toward the rear of the stores. That’s not by accident. Planners are hoping that en route to grabbing dinner, you’ll get sidetracked and wind up purchasing a new television, engagement ring, or that above-ground swimming pool you’ve been considering. The placement alone is a masterclass in retail psychology. By the time you reach those chickens, you’ve walked past aisle after aisle of temptation.
Experts like John Longo, a professor at Rutgers Business School, emphasize that very few people leave Costco with just a chicken. They probably shop for other items that provide higher profit margins. Costco maximizes the chances of this happening by placing the rotisserie chickens at the back of the store, next to its wines (14% margin) and side dishes. It’s a trap, really. The kind of trap you don’t mind falling into when you’re hungry and everything looks appealing.
Accepting Tens of Millions in Annual Losses
Here’s the thing that blows my mind. Costco’s former Chief Financial Officer Richard Galanti openly admitted the company was willing to absorb massive losses to keep chicken prices steady. In 2015, Richard A. Galanti, the company’s former CFO, noted that Costco was more than eager to give up “$30 million, $40 million a year on gross margin” to keep the product at its current price point. That was nearly a decade ago. With inflation and rising costs since then, the actual loss figure is likely much higher now.
Let me repeat that: Costco willingly sacrifices tens of millions of dollars every year just to keep rotisserie chicken at the same price. Most businesses would balk at the idea of intentionally losing money, yet Costco treats it as an investment. Costco Chief Financial Officer Richard Galanti said in 2023 that the warehouse club kept its rotisserie chicken priced at $4.99 as “an investment in low prices to drive membership, to drive sales in a big way.” When you look at it that way, the chicken becomes less of a product and more of a marketing expense.
The numbers tell a fascinating story. In 2023 alone, the members-only wholesale club sold 137 million of the bagged birds. Think about that for a second. That’s more chickens than there are people in Japan or Mexico. That marked an increase of 20 million rotisserie chickens sold compared with the 2022 fiscal year. Demand keeps growing, and Costco has no intention of raising the price.
The Price That Refuses to Budge
Inflation has changed nearly every price tag in America over the past two decades. Gas prices soar, rent climbs, groceries get more expensive by the month. Yet the Costco rotisserie chicken sits stubbornly at the same price it’s held for over twenty years. Unlike so many other items that have been subject to rampant inflation in the years following the COVID-19 pandemic, Costco’s ready-to-eat rotisserie chicken has retained its $4.99 price tag since the product was introduced approximately 30 years ago.
Though there was a brief $1 price hike in 2008 amidst the Great Recession, the price was quickly ratcheted back to $4.99. Even during the financial crisis, Costco couldn’t resist bringing it back down. According to some estimates, if Costco had kept pace with inflation, those chickens would cost somewhere around nine dollars today. Instead, they remain locked at that iconic price point.
There’s something almost defiant about it. While competitors adjust their prices quarterly or even monthly, Costco refuses to budge. It sends a message to customers: we’re on your side. That kind of brand loyalty is worth more than any individual sale could ever generate. These chickens serve other important purposes for Costco that go beyond immediate profit: Value signaling: They reinforce the idea that the Costco brand is a good deal, potentially leading to more membership sign-ups ($60-$120/yr).
Building an Entire Chicken Empire in Nebraska
Costco didn’t just accept rising chicken costs from suppliers. They decided to take matters into their own hands by doing something nearly unprecedented in the retail world. In 2019, Costco even built a chicken processing facility in Fremont, Nebraska, to keep production costs down. This wasn’t a small investment. Reports suggest Costco poured roughly one billion dollars into this operation.
In 2019, Costco made a first-of-its-kind move when it got into the broiler business itself. It opened its own chicken manufacturing company in Fremont, Nebraska, in partnership with Lincoln Premium Poultry. The company opened its own feed mill, hatchery, and processing plant, with plans for the new construction to supply Costco with upwards of 6 million chickens per year. That figure quickly grew.
Four years later, the plant was processing as many as 2 million chickens per week (or 104 million per year), with Costco ultimately spending $1 billion on this whole endeavor. This level of vertical integration is rare. Most retailers buy from suppliers. Costco decided to become the supplier. All of our barns in Nebraska and Iowa collectively will supply about 40 percent of Costco’s needs. That will roughly cover the western half of the United States, Alaska and Hawaii.
Controlling Every Step of the Supply Chain
What makes the Nebraska facility remarkable is how much control it gives Costco. With the plant, Costco controls the whole supply chain – hatching, feeding, shipping, and cooking. From the moment an egg is laid to the time a roasted chicken hits the warming display, Costco now oversees the entire process. It’s hard to think of another retailer that has gone this far into vertical integration for a single product.
Experts point to three main reasons for this move. We see the decision by Costco to bring its poultry supply in house as a result of three primary drivers: surety of supply, visibility up the chain and cost control. Essentially, Costco wanted to guarantee they’d always have enough chickens, know exactly where they came from, and reduce the cost per bird as much as possible.
The savings might seem modest on paper. With this new figure, the plant is processing what would amount to about a fourth of its yearly sold chickens, and possibly saving 35 cents on what it cost Costco to source each bird before. Thirty-five cents doesn’t sound like much until you multiply it by over one hundred million chickens. When it’s applied to a huge number like 52 million (the number of chickens processed at the plant that end up roasted and sold for $5, about half the total), it totals about $18 million saved. Suddenly those pennies add up.
Escaping the Chicken Oligopoly
One thing people don’t always realize is how consolidated the American chicken industry has become. Five huge producers (Tyson, Pilgrim’s Pride, Sanderson Farms, Perdue, and Koch Foods) came to control 60%+ of America’s $65B poultry market, making it harder to bargain on prices. These companies essentially control what retailers pay for chicken. Costco saw this as a problem.
By building its own processing operation, Costco could break free from dependence on these massive suppliers. To reduce dependence on the big suppliers, Costco decided to vertically integrate its chicken operation. In 2019, the company opened a $450m chicken facility in Nebraska that produces 2m chickens per week – enough to fulfill 43% of its rotisserie supply, and 33% of its raw chicken supply. This gave them leverage they didn’t have before.
The poultry giants had been raising prices, and Costco needed an alternative. Instead of accepting higher costs and passing them on to customers, they invested in infrastructure that would give them independence. It was a bold gamble, and according to experts, it paid off. Building a system to stock its own stores is a way for the company to better manage supply and costs, especially because poultry companies are trending away from raising chickens to be sold whole.
The Membership Model Makes It All Possible
There’s another piece to this puzzle that often gets overlooked. Costco doesn’t make most of its profit from selling products. They make it from membership fees. Costco had 71 million paid household members at the end of the fiscal year, up 7.9% compared with the prior year, and nearly 128 million cardholders, an increase of 7.6%. Membership renewals were at a historic high of 90.5%. Costco collected $4.7 billion in membership fees in the year.
Think about that. Nearly five billion dollars in revenue comes just from people paying for the privilege to shop there. That’s more than enough to cover the losses from rotisserie chicken and then some. Costco works on a membership model, so shoppers pay just to get in the front door. This changes the entire business calculation.
When your primary revenue stream is membership, keeping members happy becomes the top priority. These loss leaders quickly pay for themselves through increased transactions as well as member retention and satisfaction. The chicken becomes a tool to remind customers why they joined in the first place. It reinforces the value proposition. You’re not just shopping at Costco. You’re part of a club that gives you access to unbeatable deals.
Strategic Placement and Store Design
Here’s something you might not have considered: the journey to the back of a Costco store is designed to maximize your spending. That’s why the rotisserie chicken counters are strategically located at the back of the store. You have to walk through nearly everything else to get there. It’s brilliant, really.
Every aisle you pass becomes an opportunity for impulse purchases. Maybe you spot a new book, or a giant bag of your favorite snacks, or a kitchen gadget you didn’t know you needed. By the time you grab your chicken, your cart is full of other items that carry much healthier profit margins. In Costco’s case, the roughly three-pound birds are a beloved item whose ultra-low price tag alone is worth a trip to the store for many, and to get to these prized items, you’ll typically have to maneuver through pretty much the entire store. That gives Costco many opportunities to catch your eye with something you didn’t plan on buying when you entered, but suddenly can’t live without.
This isn’t accidental. Retail experts have studied this layout for decades. Grocery stores put milk in the back corner for the same reason. The longer you spend walking through the store, the more you’re likely to buy. Costco has perfected this strategy with their rotisserie chicken, turning a loss leader into a traffic driver that generates sales across every department.
