Costco is planning to vertically integrate by owning production of 40% of its rotisserie chicken supply chain.
Vertical integration is an effort to keep the price at $4.99 to attract customers. The issue is that the main chicken suppliers are producing fewer whole birds, down from 50% of the supply in the 1980s to just around 15% of the supply today.
Bird size has also increased as the demand for chicken has increased. Most whole chickens today are too big to fit on the Costco rotisserie production equipment. Costco needs 6 pound birds and the typical whole chicken is now 7-8 pounds from suppliers.
Costco can control the size of the bird and plans to cut costs per bird by 35 cents by developing their own poultry complex.
Video Spotlight: This Is Why Costco Only Charges $5 For A Rotisserie Chicken
This post is based on the CNN article, Five things to know about Costco’s $4.99 rotisserie chickens, by Nathaniel Meyersohn, October 14, 2019, and the YouTube video, This Is Why Costco Only Charges $5 For A Rotisserie Chicken, by Mashed, February 5, 2019. Image source: Uwe Starke/Image Source
1. After reading the article, use map software such as Google Earth to examine the location of the Fremont area. Why does this location seem to work well for Costco’s needs beyond what is stated in the article?
Guidance: Make sure students note railroad and highway access to the Fremont area. Ask students to find additional information about the weather, agriculture infrastructure, workforce available, etc. that can be found with an internet search about the area. The discussion should easily demonstrate the feasibility of this location just as Costco determined.
Now, ask students to consider the risks to Costco of sourcing 40% of their chicken from this one location. What can be done to mitigate the risk should a fire or weather event stop production at this plant?
2. Describe in detail the environmental risks of operating this plant. What can be done to mitigate these risks?
Guidance: Students will need to research the environmental issues associated with a poultry plant. Water contamination, ammonia from chicken waste, etc. should be examined. This exercise is designed to familiarize students with environmental risks and discuss possible mitigation strategies.