Tag Archives: merchandising

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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New Shopping Records: Black Friday and Cyber Monday

If you are reading this, congratulations. It means you survived the busiest shopping days of the season: Black Friday and Cyber Monday. And, busy is an understatement. Shoppers took to the stores and online in masses, scoping up deals and getting started on holiday shopping for loved ones (and their selves).

The numbers are nearly as staggering. According to Adobe Analytics:

  • Shopping dollars from Nov. 1 – 26 totaled $58.52 billion
  • Black Friday accounted for a record-making $7.9 billion, including $6.22 billion spent online
  • Top products included Fingerlings, L.O.L. Surprise, Nintendo Switch, Laptops from Dell & Apple, LG TVs, drones, and Amazon Echo
  • Sales traffic vs. revenue by device type:
    • Desktop: 42% traffic for 61% of purchases
    • Smartphones: 49% of traffic for 30% of purchases
    • Tablets: 8% of traffic for 9% of purchases
  • Buy Online, Pickup In-Store (BOPIS) increased 50% from last year
  • Cyber Monday sales reached $7.9 billion, the largest single shopping day in the U.S.
  • Sales from smartphones also hit an all-time high of $2 billion

What did you buy?

Group Activities and Discussion Questions:

  1. Poll students about shopping over the Thanksgiving weekend.
  2. What did they buy? How much did they spend? Gifts or personal purchases?
  3. Did students shop in stores, online, or both?
  4. Purchase volumes by type?
  5. Review the data and charts from Adobe site: http://exploreadobe.com/retail-shopping-insights/
  6. Additional information CNBC Article and video: https://www.cnbc.com/2018/11/24/black-friday-pulled-in-a-record-6point22-billion-in-online-sales-adobe.html
  7. Other video: https://youtu.be/DDhk6O5TSN0
  8. Given the results from holiday shopping, what are three things that retailers must do to continue to meet customer needs?

Source: Adobe Analytics, CNBC, New York Times, Wall Street Journal, other news sources

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Target Launches New Brand – “Smartly”

Not all innovation requires high-tech. Sure, shiny robots, drones, talking home pods, and self-driving cars get a lot of coverage in the innovation spot light. But there is plenty of innovation around in even the simplest of household items. The key is to make sure the innovation meets the needs of the customers.

A very simple new product line innovated and launched by Target this fall is called ‘Smartly’. Smartly is a new, low-price brand with more than 70 items priced below $2.00. That’s right. Two dollars. The products include household cleaners, razors, hand soap, paper plates, and toilet paper.

And it’s not just a low price point. Most of the products are sold as single-items, or in small multi-packs. This is ideal for space- and budget-conscious consumers, such as students and young apartment dwellers starting their first jobs.

Going along with the reduced packaging, prices are roughly 70% lower than traditional brands such as Tide, Gillette, and Charmin. And, the Smartly line even undercuts Target’s own Up & Up brand by about 50%.

Simple innovation can equal smart innovation.

Group Activities and Discussion Questions:

  1. Discuss the importance of clearly defining a target market.
  2. Explain the use of a product-market grid to determine market segments.
  3. Show Target’s new Smartly product line: https://www.target.com/c/smartly/-/N-r4rpp#?lnk=snav_rd_smartly
  4. Read Target’s announcement of the new line: https://corporate.target.com/article/2018/10/smartly
  5. Divide students into teams. Have each team build a market-product grid by identifying five market segments that shop at Target, and five categories of product groupings sold at Target.
  6. Where does Smartly fit in the product groupings? What market segment is the best one for Target to pursue with this new product line?
  7. Finally, how should the company promote the product line?

Source:  New York Times, Wall Street Journal, Target, other news sources

 

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