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Home / Business / It's only $ 4.99. But Costco's rotisserie chicken comes at a huge price.

It's only $ 4.99. But Costco's rotisserie chicken comes at a huge price.

(CNN) – On the back of Costco's stores, past the TVs, jewelry, jumbo-sized ketchup jugs and mixed nut tubs, is one of the retailer's most prized items: The Rotary Chicken, which costs only $ 4.99. [19659002] Cheap Kirkland Signature rotisserie chickens are not just a quick way for families to have dinner on the table. For Costco, the chickens are a lure, drawing customers into the stores and making them browse the hallways, sometimes putting items worth a hundred dollars into the shopping baskets before they fetch that bird.

The chickens have become almost a cool point. 91 million were sold last year, twice as many as a decade earlier. They have their own Facebook page with almost 1


So Costco is willing to go to the extreme to keep the chickens at $ 4.99. Over the past few years, farmers have been recruited for this moment: the official opening of a scattered, $ 450 million poultry complex of their own in Nebraska.

It is a very unusual move for one of the world's largest dealers. Costco will control the production process from farm to store, and make important decisions down to how the chickens are eaten and the type of eggs that hatch. Costco has even put its socially conscious corporate reputation on the line, averting local critics who have threatened the Nebraska operation.

This is a great experiment not only for Costco, but also for the wider industry. Dealers will look closely at Costco's plan. It is one of the biggest tests of the store's ability to become its own meat supplier. And there is no guarantee that it will work.

The "Inexorable Rise of Chicken"

Costco is so determined to keep the rotisserie chickens at $ 4.99 that it has been willing to lose money on selling them earlier. Even as competitors increased their rotisserie chickens to $ 5.99 in recent years, Costco kept the price steady.

"When the prices changed dramatically and we saw the competition raising the price, it was a hot price," said Costco's CFO Richard Galanti. in 2014.

Costco was willing to sacrifice "$ 30 million, $ 40 million per year in gross margin by keeping it at $ 4.99," Galanti said the following year. "That's what we do for a living."

Jeff Lyons, senior vice president of fresh foods at Costco, which joined the company in 1990 as its first meat buyer, declined to say whether Costco is still losing money on selling them. But rotisserie chickens have been a "very, very good business and very steady growth for a long time," he said. "We have about 100 million right now."

But in recent years it has become even more difficult for Costco to keep its rotisserie chicken prices down. Americans are eating more chicken than ever before, and the company is facing supply challenges and cost pressures in the highly concentrated poultry industry.

A small number of massive producers dominate America's chicken supply: Tyson, Pilgrims Pride, Sanderson Farms, Perdue and Koch foods. Together, these companies control more than 60% of the US $ 65 billion poultry market, according to Watt Poultry, a meat industry publication.

"A more consolidated industry has more bargaining power against customers," said Timothy Ramey, a longtime poultry industry analyst.

Costco wants to reduce its dependence on major manufacturers.

Traditional chicken suppliers also produce fewer birds to be sold as rotisserie chickens.

An estimated 15% of chickens today are sold as whole birds, down from around 50% of all poultry in the 1980s, according to the Ministry of Agriculture. Instead, they are chopped up in the chest, legs, thighs, chicken nuggets and wings to feed Americans' insatiable appetite for chicken in grocery stores and fast-food restaurants.

"Make no mistake: Consumers want cheap Walmart chicken," Ramey said. "It explains the inexorable rise of chicken."

As the number of full-sized birds in production declines, bird weights are rising to keep up with demand. Companies like Tyson Foods can make higher profits by cutting and peeling heavier chickens and selling portions of them.

The bird weights are expected to continue to increase, which presents a problem for Costco. Costco needs birds around six kilos to cook in stores.

"We had trouble getting the size of the bird we wanted on a regular basis," said Lyons of Costco. "We couldn't take a seven-kilo bird or an eight-kilo bird and make it work. They're too big. They wouldn't even fit our rotisserie line."

Chicken operations in Nebraska

It's Costco is taking control of its chicken supply chain, and Costco believes it can cut costs by bringing production in house and saving up to 35 cents per bird.

It has already done the same with sausages.

Costco sold kosher sausages on food courts until 2009, but suppliers started So it brought production in-house and switched to its own Kirkland Signature-branded dogs. Costco now produces 285 million sausages at a plant in California.

Costco picked Nebraska for poultry plant because the area had grain, water and manpower available, which are the three biggest costs associated with chicken production.

Although Nebraska is not known for chicken production, corn prices one fell in recent years, which led to interest from farmers looking for new opportunities. The US trade war with China has also taken a plethora of farmers.

"We had to have farmers willing to grow for us, and we found overwhelming support," Walt Shafer, a veteran of the Pilgrim's Pride who oversees Costco's operations in Nebraska, said in a recent interview. "These grain farmers out here want to diversify."

The dealer is building a poultry complex in Fremont, Nebraska, a farming town near the Iowa border. The complex includes a processing plant, set fish plant and feed mill.

The nearly 400,000-square-foot Fremont plant will employ 950 workers. The plant will take 45 weeks to ramp up to full production. When at full speed, the facility will process around 100 million chickens a year, or 40% of Costco's annual chicken needs. Costco will treat about two million birds a week in Nebraska to deliver to stores on the West Coast.

Costco collaborates with Nebraska farmers to raise breeding hens to lay eggs. These eggs will then go into the set fish farm, and the chickens will be delivered to Nebraska growers. The chickens will grow for about 42 days in hundreds of specialized barns in the area until they grow to six kilos of broilers – chickens bred specifically for the meat. Then they are on their way to the processing plant.

There are few examples of retailers integrating vertically into the agricultural industry like this, experts say. Walmart takes control of parts of the Angus meat supply chain, and both Walmart and Kroger have integrated the milk supply. But no one is as sweeping as Costco's business in Nebraska.

"Costco's poultry complex is more than just a multi-million dollar experiment from a retailer known to do things differently," said Will Sawyer, an animal protein economist at CoBank, a leading agricultural lender. "If the Costco plant is successful, other major food retailers are likely to make a business case to bring animal protein needs in-house."

Contract Considerations

$ 4.99 Slaughter Chicken comes at a price beyond Costco's bottom line.

Costco has billed itself as a socially responsible and worker-friendly company, even earning praise and store visits from then-President Barack Obama to raise the minimum wage in 2014.

But by entering the chicken business, it is wading into a controversial industry with many skeptics, including some coming from Costco's customer base. The ambitions of poultry farming have impacted environmentalists and farmers' advocates in the Fremont area.

Opponents of the Fremont plant such as Randy Ruppert, a local activist, worry about the environmental impact of the plant and poultry farms, such as water pollution from runoff, chicken stool ammonia and other health risks. In neighboring Iowa, poultry operations have been linked to high levels of nitrates in tap water.

"They bring degenerative farming to Nebraska, nothing else," said Ruppert, who formed a nonprofit group, Nebraska Communities United, which has led opposition to the company. Critics packed local town halls to address concerns and set up anti-costco signs in the area.

The poultry industry has also been under close scrutiny for offering unfair contracts to chicken farmers. Around 90% of the broilers in the US are farmed under contracts with farmers. Under the contract system, farmers build barns and invest in maintenance, while larger companies supply them with chickens and feed.

Nebraska grain farmers, who previously farmed corn and soybeans, invest $ 350 million dollars altogether and build barns to raise chickens. Most of the farmers had not previously raised chickens, so Costco is responsible for educating and leading the farmers.

Costco claims that they set a "new and improved standard" for nutrition contracts. "We believe our contract has one of the best pay levels in the industry," Shafer said in the interview.

Opponents, however, claim that Costco's 15-year contracts are a risky investment for farmers.

We all hoped that Costco would present the opportunity to begin building a better poultry system, "said Lynn Hayes, a lawyer at Farmers & # 39; Legal Action Group, a nonprofit group that provides legal services to farmers. [19659002] But contracts are a "letdown," she said. "It's still far from good enough to justify the kind of investment that farmers have to invest in it" because their barns cannot be reused for other uses if operations fail. [19659002] Robert Taylor, a professor of agricultural economics at Auburn University and a long-time critic of the poultry industry, broke Costco's contracts. with chicken houses. "

Taylor claimed that Costco growers' annual chicken farm income would come in at around $ 60,000 after labor costs. That's a lot less than $ 90.0 Costco says that farmers will bring their wages with them.

Costco pushed back on these charges.

Shafer, the leading poultry company in Nebraska for Costco, said "we have one of the lowest risk poultry contracts available" because Costco's poultry business is growing every year.

"I have no doubt that Costco will continue to do the right thing by our manufacturers for the next 15 years and beyond," he said.

Despite a contentious response and the high cost of pushing the poultry industry, Costco is still confident that the Nebraska experiment is the key to growth.

"We know we're going to be in the poultry. We see the future," says Costco's Lyons. "We always work five to ten years ahead."

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