Game of Chicken? Costco Prepares for Amazon Competition with Rotisserie Strategy

Looming ahead for virtually every merchant is the specter of Amazon and its relentless juggernaut of price and service.

Walmart is opening warehouses dedicated to digital commerce. China is giving its retail sector time to prepare by throwing bureacratic obstacles in the way of potential foreign competitors. Even luxury brands like LVMH are contemplating their options.

Costco, the most resilient of price-club competitors is preparing as well. But it is using Amazon's own example as its guide. Instead of cutting costs in a vain attempt to curry favor with securities analysts, Costco is reinvesting profits to build market share and service and supply chain strength, the factors it believes will optimize the advantages it already possesses.

Like Amazon, it has chosen to ignore Wall Street's strident calls for immediately improved margins in favor of positioning itself for the future. While this entails some financial sacrifices in the short term, the company is staying true to its goal of being a good place to work and to buy. This means paying employees more and providing them with better benefits. It also means ignoring the short term orientation of contemporary financial markets in favor satisfying a blend of customers, investors, suppliers and employees, a strategy, like Amazon's that benefits its entire business ecosystem, not just one piece of it.

The rotisserie chickens Costco sells for $4.99 a piece, despite rising costs, symbolize its strategy. The point is not to undersell the competition or to provide loss leaders around which it can sell other merchandise, but to remind its loyal customers that it understands their concerns. Given its strengths, Costco is comfortable competing with anyone using any medium, platform or channel. The future of retail entails convergence along multiple lines. What Costco's strategy suggests is that success in that environment will require playing 'chicken' not just with competitors but with the financial services industry's short-sided outlook as well. JL

Kyle Stock reports in Businessweek:

Could Costco raise prices? Certainly. But the company has garnered a lot of positive press from its chickens—the birds even have a Facebook (FB) page)

Costco Wholesale (COST) posted disappointing financial results, with just 1 percent growth in sales and similarly slim gains in profit as the chain of almost 650 warehouse stores felt the pinch of higher costs, currency-exchange swings, and lower gas prices.

But when analysts started piling on Costco in a conference call, Chief Financial Officer Richard Galanti served up a bit of barnyard wisdom: He urged Wall Street to think of our “incredible, giant” rotisserie chickens.
The company sells 60 million of those birds every year, keeping the price at $4.99 despite surging costs for both poultry itself and chicken feed. “That’s us,” Galanti said of the stubbornly low prices. “That’s what we do.” In other words: Don’t freak out about this quarter—Costco sees itself playing the long game.margins will likely improve in coming months when commodity prices are expected to come down. Sure, cheap chicken and other heavy discounts for which Costco is known makes for some lean results, but a retail giant can go a little hungry once in a while—and certainly for much longer than smaller rivals. “I think we do better when we’re reducing prices and driving business,” Galanti said. “And overall, that’s good for us—better than for others.”The folksy metaphor might have even been persuasive. Costco shares slumped about 2 percent in early trading, but as Galanti started spinning his chicken stories around 10 a.m., the stock climbed all the way back.