Inside Costco’s Billion

Jan 27, 2024

Golden, juicy, aromatic.

FREMONT, NEBRASKA — A dozen probes sink into a chicken carcass and inject a sweet and salty marinade directly into the meat. The swift motion only takes a second, and then the chicken moves along the conveyor belt. The next one slides in to absorb the secret concoction — described to Forbes on the slaughterhouse floor as "pixie dust."

Just a few hours before, the meat was trucked in alive. After the chickens were killed, the carcasses chilled out for a few hours. Then, more of a rarity for a chicken slaughterhouse: the wings got tucked back and the legs were tied together with twine so the birds were ready to pop onto a spit. Not just for any rotisserie, but the most iconic in retail.

Costco's aromatic $4.99 roasted-in-house rotisserie chickens are mouth-watering magnets to shoppers at its 600 U.S. warehouse stores. That's why the membership-based retailer has spent an estimated $1 billion to construct this state-of-the-art plant, which ships 1 million chickens a week, and build out its own network of chicken farmers. That bill, paid over the past eight years, has helped Costco become the only retailer to own a chicken slaughterhouse. The publicly traded company is trying to shore up its own supply of rotisserie hens at a time when chicken prices have tanked, most of the industry's processors are reeling from price-fixing settlements and an unprecedented outbreak of avian flu has killed nearly 59 million birds nationwide. Through all the industry turmoil, Costco is counting on the sweet and salty perfume of the packaged birds to remain a popular draw.

"We’ve trussed, we’ve marinated it, we’ve done all that," says Walt Shafer, chief operating officer of Lincoln Premium Processing, Costco's wholly owned subsidiary, who after 45 years in the chicken industry was tasked with building the plant and its grower network from scratch. "Not only is it a super buy for the consumer, it's become the center of the store, literally, and a centerpiece for Costco. It's why we’re here. That's why we exist."

There have been plenty of obstacles. Costco picked Nebraska, a beef state with few existing chicken farmers, that's in the center of the wild bird migratory fly zone driving the deadly flu. There's also the increasing call to ban new factory farms, from the United Nations to the American Public Health Association. Tyson, the biggest poultry producer in the country, tried to build a new chicken plant around the same time, but couldn't pull it off.

Costco has shown it will do just about anything for its rotating little treasures. Under Lincoln Premium Processing, the retailer has secured around 100 million of the 400 million chickens it's estimated to sell annually. Roughly half of the plant's chicken ends up on rotisserie spits in Costco's warehouse stores while the rest is cut into pieces, packed in plastic and shipped to stores in the Midwest and West Coast.

Costco is able to make this bet because it's highly profitable and a consistent top performer among retailers like BJ's, Target and Kroger. The company's earnings for the fiscal third quarter of 2023 beat expectations. Last year's profit topped $5.8 billion — an increase of nearly 200% from 2003. Costco says it's kept consumer-price hikes below the rate of inflation. The rotisserie chickens have remained at the same price for years.

"Being able to buy a $4.99 chicken serves as a great way to drive people into the store."

While Costco executives are light on sharing details of how their chicken slaughterhouse has impacted the bottom line, analysts say there are clear benefits. "Being able to buy a $4.99 chicken serves as a great way to drive people into the store," says Jeffries analyst Corey Tarlowe, who estimates that controlling its own supply chain saves Costco 35 cents per chicken. "It's working for the company and it's working for the consumers, who clearly appreciate it. It helps Costco save money and consumers save money."

So how did Costco convince rural communities to allow factory farms to open up in their backyards at a time when public health organizations have called for a ban on all new operations? Costco's chicken slaughterhouse is the first new one in years and follows Tyson's unsuccessful attempt to do the same in Kansas. Some neighbors feared water pollution, worker discrimination and wealth getting stripped from rural communities. Lincoln Premium Processing even had to axe its first location in Nickerson, Nebraska after locals threw a fit.

Shafer and his second-in-command, longtime lobbyist Jessica Kolterman, spent two years pitching the project to neighbors at public meetings, using a playbook similar to running a political campaign. At town-wide meetings, Shafer and Kolterman focused on the community impact — not the financials or stark economic realities like Tyson did when it lost its battle to open its $320 million plant.

Costco's Fremont operation, 45 minutes northwest of Omaha, would fall into the category of factory farm, or medium-sized concentrated animal feeding operation, according to the Environmental Protection Agency's definition. After between four and 16 chicken houses get built — $2.5 million for four houses — about 42,000 chickens are raised in each house.

The land and construction tab for the 400-acre site and 400,000-square-foot plant tops $450 million. Since opening in 2019, Lincoln Premium has shelled out tens of millions more to cover additional costs that have come up.

"Inputs are going up all the time," says Shafer. "What Costco looked at is, they want to ensure that their members always have a supply."

Starting from scratch gave the operation a leg up, says animal-welfare expert Temple Grandin, who has consulted with most meatpacking plants and major meat suppliers nationwide.

"They’re trying to do a good job," says Grandin, who visited the plant and farms that supply it last year and also went back to check again this month. "There are advantages to starting fresh. When you start from scratch, there are old ideas that you don't have to keep."

Opposition was just one snag. Last year, an avian flu outbreak started close to where some of Costco's chickens are raised, and a million birds, or half of the plant's weekly production, had to be killed. There hasn't been an outbreak for Lincoln Premium this year, but the threat remains. Lincoln Premium also set the precedent that it would compensate growers out of pocket for flu losses, which runs into the millions.

Then there was the problem of finding 800 workers. To make it a more attractive job, Lincoln Premium says it keeps line speeds at 140 birds per minute, and hasn't applied for a waiver to go higher, like competitors Tyson and Pilgrim's Pride have. Automation replaces 500 employees, cutting down on dangerous jobs like lifting heavy boxes of meat and deboning that in the past have given workers chronic injuries. As the smell of ammonia, raw chicken and soap fills the air, machines neatly rip thighs and breasts off the bone. The plant emits a loud hum, accented by sharper sounds, as dozens of machine gears go off at once.

More difficult than rounding up enough plant workers was establishing the farmers. In a state historically known for beef and corn, the company had to find farms willing to raise chickens, often for the first time. Most are grain farmers that sell their harvest on the cash markets, and see adding chicken houses as a way to diversify and boost margins after facing receding profits for decades.

"They’re trying to do a good job. When you start from scratch, there are old ideas that you don't have to keep."

From the beginning, Shafer set out to change the typical relationship between slaughterhouse and farmer to lure new producers to Lincoln Premium. Costco's contract with about 100 farmers has these key elements: It lasts for 15 years, matching the 15-year payback schedule of the loans that farmers take out to raise the chickens. There's also no tournament system, or the predominant industry pay structure where farmers who produce the most chicken with the least amount of feed are compensated the most. The farmers who do worse are paid less. Eliminating the tournament, but keeping incentives for farmers, means less risk and more support for Costco's growers.

Costco's commitment is "unprecedented," says Tom Dobbe, a representative for Farm Credit, whose Nebraska branch has supplied over $100 million in financing for Lincoln Premium's contracted growers. Dobbe says that he's "never seen this level of commitment to growers."

"The 15-year contract has set the whole industry on notice," says Dobbe.

But Issaquah, Washington-based Costco's major investment isn't without pushback, even from the group of farmers who secured 15-year contracts. Says one grower: "I feel like they’ve written a contract they don't like now. It sounds good in Seattle to say that the growers have all these rights, but I don't think their local guys who actually run it walk that walk."

While many producers are families, there's also more corporate players. At least one private equity firm, Gallus Capital, has a deal with Lincoln Premium after filing permits to build more than 130 chicken houses holding as many as 42,000 chickens in each.

If there's a hint of buyer's remorse, Costco isn't showing it.

Lincoln Premium has been operating for four years, and its roughly 500 chicken houses are up and running, with the drum of machinery ricocheting throughout the stainless steel plant. The houses supply the plant, which is running at full capacity — 2 million chickens a week.

That still leaves around two-thirds of Costco's chicken needs up to the broader markets. If Costco wanted to buy more of that from Lincoln Premium, another plant would open, more growers would sign 15-year contracts, and more houses would get built. Lincoln Premium's existing farms would probably get first dibs, since the more houses a farm has tends to make the operation more profitable, and some of the farmers already say they want to add more – especially as a way to bring family members back to their farms.

Taking on even more could make Costco overly reliant on an operation that's still proving itself. But Shafer says even without adding another plant, Costco's investment has a lot of rewards still to reap.

"My goal is to make this the best poultry complex in the U.S., to get our team ready for the future to face the challenges that the world's going to throw at us," Shafer says. "Our goal is to give Costco every benefit that we can squeeze out of here so that customers get to say, ‘This is why I’m becoming a member of Costco.’"