Tag Archives: supply chain

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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Amazon Raises Price for Prime Membership

Pricing is a very strategic part of marketing. And, yes, we know that price is one of the four P’s and is usually referred to as a tactic. However, when an organization is setting strategic objectives, price is a critical factor to meeting the objectives. However, it is relatively rare for companies to increase prices. Consumers tend to balk at paying more for a product or service that they have had for years. Except it appears, when the company is Amazon, then customers go along with the increase.

Beginning in May, new subscribers to Amazon Prime will pay $119 per year for shipping and entertainment membership programs; existing subscribers will pay the new fee when renewing after mid-June. This is an increase of $20 per year (20%), but it is only the second time that the company has raised the price for Prime. In 2014, Prime cost subscribers $99 per year, and in 2005 when it launched, the price was $79 per year. (What may be more surprising about the move though is that the company announced that is has more than 100 million Prime members worldwide. Amazon had never previously reported the level of members.)

Why the price increase? Prime is expensive for Amazon to fund. Since 2014, the number of products available for free two-day shipping has increased from 20 million to more than 100 million. The company has a significant investment in its logistics network and costs of shipping continue to rise. In addition, Amazon has spent lavishly to acquire, and create, an extensive library of movies and TV shows that are included in the benefits of Prime memberships. Prime delivers value to subscribers beyond the two-day free shipping option.

Is Prime still worth the price?

Group Activities and Discussion Questions:

  1. Pricing is 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).
  2. Discuss the various pricing models in class: demand-oriented, cost-oriented, profit-oriented, and competition-oriented.
  3. For Amazon Prime, divide students into groups and have each group work on any/all of the six steps.
  4. When setting the price level, assign each team a different model to use (demand-oriented, cost- oriented, etc.).
  5. Debrief the exercise. Compare the various pricing models and discuss advantages/disadvantages of each.

Source: CNN Money, Recode, Washington Post, other news sources

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