Costco buttering up New Zealand consumers

Overseas, Costco uses a variety of products as loss leaders, including rotisserie chicken (see here). Right now in New Zealand, it appears to be butter. As the New Zealand Herald reported yesterday:

It was organised chaos this week at Costco when another delivery of butter arrived.

This butter is not just any butter – while the other supermarkets are selling a 500g slab for up to $10, Costco’s butter is $9.99 for a kg...

Chris Schulz, a senior investigative journalist at Consumer NZ, said it looked likely that the Costco butter was a loss leader.

“The retailer’s Facebook page is flooded with people speculating when the butter might be back on shelves, debating when to visit, and showing off when they do get it.

“With butter costing at least $17 per kilo elsewhere else, Costco’s pricing makes them look like the ‘good guys’ in contrast to our supermarket duopoly. Once they’re in store, I’m sure many people are picking up roast chickens, cheese, and giant tubs of biscuits too.”

As I note in my ECONS101 class, the ideal loss leading product is one that has a high price elasticity of demand, and lots of complementary goods. Elastic demand means that a decrease in price will increase the number of consumers by a lot. So, loss leading will get a lot more consumers in store. And complementary goods are goods where lowering the price of one good causes the consumer to buy more of the other good. Most supermarket staples that are regularly purchased will be complementary goods, because consumers tend to buy them together on the same shopping trip. So, lowering the price of one causes the consumer to buy more of the other goods on their shopping list.

In this case, by selling butter at a loss (and it must be at a loss, because there's no way that selling butter at half the price of other retailers is profitable), Costco is able to attract many more consumers, who then buy other things that Costco can profit from. The Herald article offers some examples, including this one:

Kaleb Halverson decided to start making the trip from New Plymouth to Auckland to deliver Costco’s 1kg blocks of butter at $9.99 to customers across the Taranaki region.

He only had a few orders at first, but they kept rolling in...

He brings back everything the store has to offer, but said butter is definitely top of the list. “It’s our hot item; at the moment, every order has butter.”

Other popular products are cleaning products and snacks.

Costco sells the butter at a loss, and makes up for it with greater sales of (and profits from) cleaning products and snacks.