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Reader Maura O. from Carrboro, North Carolina asks:

My grandfather always told me there are "loss leaders" at the grocery store — things like the $1.50 Costco hot dog. How do stores decide which products should be loss leaders?

Even as food prices rise, there are some items that consistently remain cheap. Think rotisserie chickens, milk and bread. 

In the world of retail, these products are known as loss leaders. “These are items that are sold at or below cost in order to be able to draw customers and drive sales of other more profitable items,” said David Ortega, a food economist at Michigan State University. 

There are a variety of criteria that grocery stores consider when selecting loss leaders. One important factor is whether the product has high enough demand, like bread and dairy, Ortega said. 

These products are also considered known-value items, which means people have a rough idea of how much they cost. If their prices spike, that negatively affects their perception of other items in the store, so stores will try to keep their prices as low as possible, Ortega said. 

“Try” being the operative word here. Eggs are considered a loss leader, even though bouts of the bird flu have sent the average price soaring in recent years. A dozen eggs cost $6.23 this March, up from $1.53 back in March 2020.  Grocery stores faced “enormous cost pressure” to keep retail prices down as the price of wholesale eggs rose, said Ricky Volpe, an associate professor of agribusiness at California Polytechnic State.

Some loss leaders, like fresh bananas, are placed at the front of the store because retailers want you to see an “impressive eye-grabbing price” as soon as you walk in, said Volpe in a 2023 Marketplace interview. On average, bananas are about 64 cents a pound.

Loss leaders also need to drive cross-selling, which means they need to fuel the sale of complementary items, Ortega said. Milk, for example, can help drive cereal sales, he noted. 

And rotisserie chickens can encourage people to buy sides to go with that item, Ortega said. Rotisserie chickens can range between $4 and $10. 

Those prepared sides, like mashed potatoes or mac and cheese, bring in “great margins” for grocery stores, said Annie Gasparro, a Wall Street Journal editor, in a 2018 Marketplace interview.  

In the 1990s, grocery stores began selling rotisserie chickens after losing competition to restaurant chains like Boston Market, Gasparro said. Grocery stores try to keep costs on rotisserie chickens down because customers are familiar with the price point, she explained.

“They’re very sensitive to it and they compare with other grocery stores. So, you know, if Costco doesn’t want to lose shoppers to Kroger, they have to have a really competitive price and vice versa,” Gasparro explained.

Back in 2015, Costco’s then-chief financial officer Richard Galanti said Costco is open to losing “$30 million, $40 million a year on gross margin” by keeping the price of a rotisserie chicken at $4.99, CNN reported. 

 After adding a Costco rotisserie chicken to your cart, you can then head to the retailer’s food court for a $1.50 hot dog combo, another product that some consider a loss leader. The Costco hot dog debuted in 1985 and has remained the same price since then, even though it should now cost almost $4.50 if you adjusted it for inflation. 

Some Costco executives have tried raising the price, like W. Craig Jelinek, who joined Costco in 1984 and took over as CEO from Jim Sinegal in 2012 (Jelinek remained CEO until the end of 2023).

In a story that’s now become part of Costco lore, Jelinek told attendees at a 2018 luncheon that he once tried to convince Sinegal that they should raise the price of the hot dog combo. 

Sinegal reportedly said, ‘If you raise the effing hot dog, I will kill you. Figure it out.”  

So they did. When people think of Costco, they think of that cheap $1.50 hot dog deal, Jelinek said at the luncheon.

Costco still doesn’t have any plans to raise the price, according to a 2022 Wall Street Journal interview with Richard Galanti, who’s now retired. 

Galanti did not directly confirm whether food court items are loss leaders, but he said the company isn’t “making a lot or any” money from them, the Wall Street Journal reported. 

Perishable food items are popular loss leaders because grocery stores know customers won’t stockpile them, Ortega said. 

“People aren't gonna stock up on a whole bunch of rotisserie chickens. Some might, but it's very unlikely,” Ortega said. 

Grocery stores will also price some items at or below cost depending on the time of year. You might find turkeys, another poultry option, for 99 cents a pound around Thanksgiving, Ortega said. 

“If that grocery store can get you to come get the turkey that's on sale … you're gonna go buy the sweet potatoes, the pies, the stuffing, the other things,” Ortega said. 

Not every discounted product is necessarily a loss leader, though, and the term can be a bit of a misnomer, said Kirthi Kalyanam, executive director of the Retail Management Institute at the Santa Clara Leavey School of Business. Retailers might slash prices on goods for a few weeks because they’re getting discounts from the manufacturers themselves and want to pass along those savings, Kalyanam said. So that doesn’t mean they’re selling them below cost. 

Loss leader strategies are crucial as shoppers struggle to afford groceries, which could become even more expensive due to President Donald’ Trump’s tariffs. Canned goods like tuna, soda and beer are packaged in steel and aluminum, which now face 50% duties.

A majority of Americans say they’re very concerned about the price of food and consumer goods, according to an April survey from the Pew Research Center. 

“Grocery stores are using loss leader pricing strategies, among other strategies, in order to be able to attract customers given the impact high food prices have had on households,” Ortega said.