A SOLUTION TO ONE OF COSTCO’S MOST IMPORTANT PRODUCT LINES
Costco Wholesale Corporation (the “Company” or “Costco”) had a clear goal in mind. The Company wanted to sustain the price of their massively popular rotisserie chickens, or “broilers,” at a flat $4.99 per chicken and deliver it with a reasonable operating margin. Costco has offered broilers since the chain first opened in 1985 and has not changed its price since 2009. Just how popular are these chickens? Costco sold 91 million of them in 2018. The Company supplies almost 10% of the chicken consumed in the USA.
Poultry is a $65 billion industry – more than 60% of which is supplied by Tyson, Pilgrim’s Pride, Sanderson Farms, Perdue and Koch foods. Demand by consumers for chicken has only increased during the last decade, putting these major suppliers in the driver’s seat for retail pricing. Costco had seen fluctuating chicken prices from competitors who were, understandably, seeking to achieve healthier margins to accommodate changes in supply chain and manage their own increasing input costs.
Maintaining a flat price for their poultry product has been challenging for the retail giant. Costco was becoming increasingly sensitive to changes in market prices. More importantly, rising grain prices inherent in chicken feed were causing poultry costs to increase. This was exposing the Company to commodity price risk. It was apparent that changes in grain prices, such as corn and soybean meal, were having significant impacts on the profitability of their broiler chicken product. For these reasons (and many more), Costco wanted to reduce reliance on the major poultry market suppliers, proactively reduce price risk and take control of their operating margin.
Check out the solution and full case study here: https://hedgestar.com/costcocasestudy/
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