Tag Archives: distribution

Costco and Chicken

Pricing can be a confusing topic – and not just for marketers. Consumers can also be confused, but one thing they always recognize is when they get a good deal on a product. Such is the case for Costco’s $4.99 rotisserie chickens. At that price the product is less than poultry from competing grocers. So, how does Costco make a profit on the chickens? Well, the short answer is that the company does not make a profit on this item – in fact, it loses money every time one is sold.

The Kirkland Signature rotisserie chicken is probably one of the most popular items the company sells; last year Costco sold more than 90 million of the item. And, yes, it lost money on each and every bird. Estimates are that the loss amounts to between $30 million and $40 million each year. This is known in the industry as a “loss leader.” The reason for a loss leader product is to get consumers in the store in order to sell additional products at which the retailer does make a profit. The chickens are at the very back of the warehouses, meaning if consumers want the bird they have to navigate a tempting array of other low-cost foods and products. It’s tough to leave Costco with only a single item!

Costco is trying to get its costs lower by opening a $450 million poultry complex in Nebraska. In this case, the company will control the supply chain, starting from the grain the chickens eat to grow out and slaughter, eventually to the Costco’s kitchen, and finally to consumers’ homes. The new poultry complex will provide Costco with roughly 40% of the chickens it needs and reduce its purchasing costs. It will also provide a more standard-sized chicken of around six pounds to fit on its rotisserie line.

How much will Costco save with the new complex? Estimates are that savings will be around 35 cents per chicken. Not a lot in a single bird, but multiple it by 90 million and the savings will add up.

What’s for dinner?

Group Activities and Discussion Questions:

  1. Discuss the six steps for pricing (determining objectives, estimating demand, determining cost/profit relationships, select price level, set list price, and make adjustments).
  2. Discuss the various pricing models in class: demand-oriented, cost-oriented, profit-oriented, and competition-oriented.
  3. Discuss when companies should use loss-leader pricing.
  4. Show a video about Costco chicken: https://youtu.be/MSvCK_xH84s
  5. What strategy is Costco using to price its rotisserie chickens?
  6. For Costco chicken, divide students into groups and have each group work on any/all of the six steps.
  7. When setting the price level, assign each team a different model to use (demand-oriented, cost- oriented, etc.).
  8. Debrief the exercise. Compare the various pricing models and discuss advantages/disadvantages of each.

Source: Meyersohn, N. (11 October 2019). It’s only $4.99. but Costco’s rotisserie chicken comes at a huge price. CNN Business.

 

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UPS Drones Take to the Sky

Are drones finally ready for prime time? Can they deliver the goods? And how does this change delivery services around the globe?

We’re about to find out the answers to some of those questions as UPS recently announced that its drone airline, UPS Flight Forward, has received FAA certification to operate a drone airline. The service will initially support medical packages at hospital campuses around the country. The UPS drone has been in test mode for the past year at the WakeMed campus in Raleigh, N.C., where is has been delivering packages such as tissues and blood samples to different buildings on the campus.

UPS is not the first company to use drones to deliver medical supplies. Other companies outside of the U.S. have been using drones to deliver medical supplies such as vaccines in difficult to reach areas. Healthcare operations (and patients) directly benefit from shorter in-transit times. The FAA certification allows UPS to fly an unlimited number of drones with remote operators in command. The certification also allows for cargo to exceed 55 pounds and fly at night.

Let’s fly!

Group Activities and Discussion Questions:

  1. Review key aspects of developing a product positioning map, including determining the axis labels for positioning.
  2. Review UPS drone service.
  3. Show UPS drone video: https://youtu.be/xx9_6OyjJrQ
  4. The detailed business news announcement is available at: https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=PressReleases&id=1569933965476-404
  5. Who are UPS’s competitors? What are their strengths and weaknesses?
  6. Divide students into teams and have each team develop a positioning map for UPS’s new Flight Forward drone service.
  7. Have each team draw their map on the board.
  8. Debrief exercise.

Sources: Wall Street Journal, New York Times, The Verge, Forbes, other news sources

 

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Subscription model for Nike kids’ shoes

Subscription services can be a great business model. It gives businesses a monthly recurring revenue stream that is steady and predictable – at least until the consumer ends it. Many subscription services have had initial success, only to lose subscribers as time goes on and subscribers no longer see the value of the service.

The meal subscriptions have been particularly hard hit as customers try various plans, only to eventually stop. There are also a great number of clothing subscription services, including subscriptions for fashion clothing, business apparel, and athletic wear. Now, Nike is launching a new subscription service aimed directly at the kids’ shoes market. It’s an important market space and is valued at roughly $10 billion annually.

Nike will offer three levels of subscriptions: $20, $30, or $50. At $20/month, customers get four new pairs of shoes and play activities; $30/month gets 6 pairs; $50/month gets 12 pairs. Named ‘Nike Adventure Club’, the service is aimed at 2-10 year olds and supplies Nike and Converse shoes. Is it money saving for consumers? Perhaps. It depends on the level of shoe selected. The main goal of the service is to build relationships and maintain brand loyalty for Nike and Converse.

As for correct shoe sizing, Nike includes a sizing chart to help parents measure their child’s feet. In a pilot program run with 10,000 members, only a small percentage of parents had the wrong size. The service includes free shipping and returns along with free size and style exchanges.

Ready to play?

Group Activities and Discussion Questions:

  1. Discuss the advantages and disadvantages of subscription-based services.
  2. Pricing is usually a complex topic. Discuss the six steps for pricing (determining objectives, estimating demand, determining cost/profit relationships, select price level, set list price, and make adjustments).
  3. Discuss the various pricing models in class: demand-oriented, cost-oriented, profit-oriented, and competition-oriented.
  4. For Nike Adventure Club, divide students into groups and have each group work on any/all of the six steps.
  5. When setting the price level, assign each team a different model to use (demand-oriented, cost- oriented, etc.).
  6. Is the Nike program correctly priced for the target market?

Source: TechCrunch, CNN, USA Today, Reuters, other news sources

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