The Luxury of Eating a Costco Hot Dog

If you’re a Costco member there’s a good reason for it: you want to save money! There’s no doubt wholesale shopping has its perks, and Costco customers know their food court is one of those perks.

Even non-members could enjoy the low prices of the food court, but that privilege was recently taken away. Costco is made their food court an exclusive perk to its members.

Image via Costco Deals

Who is impacted by this change? Poor people.

If you think about the Costco’s model, they’re going to make a good amount of money each years from memberships alone. By “good amount” I mean over 3 billion dollars in 2019. That’s a great profit, and that’s before we factor in the revenue from sales. Costco is doing something right, and anyone who’s ever been knows that the food court is part of the experience. It’s also an inexpensive way to get a meal before you leave. For $1.50 you can get a hot dog and soda combo or for $1 you can get a churro.

Costco also has over 53 million paid members plus over 44 million household card holders. That’s a lot of hot dogs and churros, but Costco isn’t making a lot of money from their hot dogs. In fact, they may not be making anything at all. Employees have identified the food court as a “member service,” meaning it’s really there to so members can see the benefits of their memberships. Who doesn’t like to leave the store feeling like they got a good deal? The food court is definitely home to some great deals, so great they need to have their access restricted.

Why Was the Food Court Ever Open?

It’s hard to know why some areas of Costco have unrestricted access while others require a membership. You can enter the store to take advantage of health services like their optical center, and some state laws allow people to buy alcohol. The logic behind access to the food court likely boil down to two factors.

The design of some stores makes it challenging to verify all food court purchases were made by members. In many stores, the food court is inside the warehouse, but stores in warmer climates have their food courts outside. Food court employees haven’t had to verify memberships to serve customers, and customers at outside food courts haven’t had their memberships verified when entering the store. So, people could just buy food from the food court.

An outdoor Costco food court

The other reason Costco allowed all people to purchase from the food court was to promote the brand. Getting a meal for $1.50 is a really convincing way of telling customers Costco is a home for bargains. Perhaps people would see their savings on food, and be convinced to become a Costco member. While some people may have enjoyed the occasional meal from Costco, people who need to save money may take advantage of the food court bargains more than others.

These savings are nice, but does it really have that big of an impact on Costco? Big enough that they want to monitor people buying hot dogs and slow efficiency at the food court? Are that many non-members really abusing the food court?

The Economics of Costco

Shopping at Costco has an odd stigma behind it. It seems frugal, because shoppers do save money when they buy in bulk. At the same time, customers buy in bulk, so they’re fronting more money to get their goods. In essence, you need to spend money to save money.

Not everyone has that luxury. A person who wants a lunch for a $1.50 may not be the type of person who can front $30 to buy a month’s supply of toilet paper. Plus, getting into the warehouse requires a membership and the cheapest membership option is $60/year.

Make no mistake about it, shopping at Costco is not for everyone. Someone who doesn’t have high savings or lives in a small apartment might not be able to spend the money for a Costco membership or store items in bulk. That person may be more inclined to buy items in smaller quantities. Anyone who has ever bought a single roll of Charmin knows it’s not super cheap. You’d definitely save money buying a bulk 30 pack of toilet paper versus 30 single rolls.

There’s no denying the potential to save longterm by shopping at Costco (or any warehouse store). This model of shopping also makes the saving inaccessible to those who need them most. People who live pay-check-to-pay-check don’t have the ability to buy toilet paper in bulk because they need to ration their money toward their current living expenses. They can’t buy longterm, and the $60 membership fee would be a sizable dent in their paycheck.

I would never blame some one for shopping at Costco, as the savings are very real. If you shop there enough, you can more than justify the $60 membership fee, but the perks do come at a cost. People who couldn’t afford a Costco membership enjoyed some savings via the food court. Now, those savings are gone.

Does the Decision Make Sense?

Costco made the conscious decision to restrict their food court to members only. There has to be a behind this change, despite the potential to reflect poorly on the brand. If you look at the simple gesture of restricting food court access, it doesn’t seem like it will have a huge impact. If you look at this decision as a reflection of the Costco brand, it is a reflection of their attitude toward nonmembers.

It’s hard to know how much money Costco actually loses when they serve a meal to a nonmember. The food court itself is not a huge source of income for Costco, but it does have a reputation for its quality relative to price. This makes the food course an attractive option for the occasional meal, and it enhances the Costco experience for members.

It’s also impossible to know the ratio of members to nonmembers making purchases at the food court. Remember, Costco wasn’t verifying memberships to make purchases, so it’s not like they were collecting data. I’m inclined to believe the number of nonmembers was relatively low, but Costco hasn’t released any data to confirm my suspicion.

In my mind, going to Costco is an experience. There are crowds, lines, and comotion. I suspect there’s relatively few nonmember accessing the food court by asking myself: who would want to make a special trip to Costco just to save $5 on lunch?

The action of restricting the food court doesn’t align with my assumption. Clearly someone was benefitting from their liberal food court policies, and Costco wants to stop them. Perhaps this was a loophole to get into the warehouse without having your membership verified, allowing Costco’s per-customer profits to shrink. Or they might take a bigger loss on some food court purchases than they want consumers to know.

Ultimately, Costoco’s solution is to buy a membership to get access to the food court. This seems reasonable, but I can’t ignore the people who used the food court out of necessity. These people will need to find a different way to get a $1.50 lunch, and there aren’t a lot of options. Requiring a membership to enter the food court allows savings for people who have enough money but want to save it; it hurts the people who have little money but need to save it.

Note: I began writing this article in early March, before the restriction was set to be implemented. Due to COVID-19, many stores are temporarily suspending full operation of the food court. They have not indicated whether people will still need to verify membership to access the food court, so the impact of the change may not be felt yet.

User Analytics | Digital & Brand Marketing | Productivity … hoping to explore topics that interest me and find others with similar passions

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