Costco won't raise the price of its $1.50 hot dog combo despite brutal inflation. Charlie Munger loves the mega-retailer for taking that approach
- Costco isn't raising the price of its hot dog and soda combo despite painful inflation.
- The big-box retailer has charged $1.50 for the meal since its debut in 1985.
Inflation has surged to a 40-year high this year, but Costco has no plans to raise the price of its hot dog and soda combo, which costs the same $1.50 today as when it launched in 1985. The mega-retailer's stubborn refusal to charge more exemplifies why Charlie Munger is such a big fan.
Costco makes money by charging its customers an annual membership fee to access its warehouses, allowing it to offer the lowest prices possible on products. Guaranteed bargains attract more members, which enables the company to strike better terms with suppliers and drive its prices even lower, enticing more members, and so on. It's an example of "scale economies shared."
The company's cofounder, Jim Sinegal, sees the hot-dog deal as emblematic of Costco's commitment to maximizing value for its members. The retailer's CEO has recalled telling Sinegal that he needed to hike the price of the hot dog, only for Sinegal to respond, "If you raise the effing hot dog, I will kill you. Figure it out."
Munger, Warren Buffett's business partner and Berkshire Hathaway's vice-chairman, has been singing Costco's praises for decades. He has sat on its board since 1997, and counts an $85 million stake in the company among his handful of personal holdings.
"Costco is a business that became the best in the world in its category, and it did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all its cost advantages as fast as it could accumulate them, and pass them onto the customers," Munger said during Berkshire's annual meeting in 2011. "That created ferocious customer loyalty."
"If once or twice in a lifetime you're associated with such a business, you're a very lucky person," he added.
The 98-year-old investor's Costco obsession is a running joke between Munger and Buffett. The Berkshire CEO once quipped that if the pair were on a hijacked plane, the hijackers gave them each a last wish, and Munger asked to give a final speech about Costco's virtues, Buffett's request would be, "Shoot me first."
Berkshire was a Costco shareholder for more than two decades before it unexpectedly exited the position in the third quarter of 2020. Munger had previously urged Buffett to buy a bigger stake in the company, and advised him not to cash out. Buffett has admitted his right-hand man was likely correct on both counts.
If Costco's signature meal combo had risen in line with inflation over the past 37 years, it would be almost triple the price today, at over $4. While $1.50 doesn't go far in the fight against inflation, it likely signals to Costco shoppers that the company has their backs, and tells Munger that all is well at his favorite retailer.