Why Shareholders Are Suing Costco Over Its Rotisserie Chickens

In a brave new world in which inflation is at 8.6% (via Bureau of Labor Statistics), there tends to be comfort in knowing you can still pick up a Costco rotisserie chicken for $4.99 — just like you've been doing going all the way back to 2009, per The Humane League. Costco, of course, understands the value it's providing, not only to a nation plagued by food insecurity, but also to itself in the form of a significant "loss leader," which Investopedia defines as an item sold for below market price with the goal of attracting customers, who, predictably, come in for the item — in this case, the chickens, but leave with a cart full of other stuff priced at or above market — in this case, everything from groceries to technology to vitamins to furniture.

But just like there's no such thing as a free lunch, there's no such thing as a loss leader that isn't costing someone, somewhere, in some way or another. So it has come to pass that two Costco shareholders have filed a lawsuit against Costco and its executive management, alleging the cost here is to the chickens — in the form of the inhumane manner in which they're raised. In this shareholder derivative suit (one that's brought by shareholders against the company and its management but for the benefit of the company, as opposed to themselves), the plaintiffs aren't even seeking money damages. Here's what they do want and why it matters. 

The complaint alleges Costco's executives breached their fiduciary duties to Costco and its shareholders by compelling Costco to mistreat chickens via inhumane practices in violation of law and with full knowledge of their wrongdoing. But the plaintiff shareholders aren't looking for money. What they want is for Costco's executives to be permanently enjoined from continuing to compel the company to raise its chickens in the alleged unlawful manner. They're also seeking access to Costco's chicken farm(s) from time to time as the plaintiff shareholders deem necessary to ensure compliance with the law in Costco's chicken-raising practices. In addition, they want the executives to reimburse Costco for all damages and liabilities (like fines levied by governing authorities) that may arise because Costco broke the law, along with the plaintiff shareholders' court costs and legal fees.

As reasonable as all this might sound, it may nevertheless be a huge ask vis á vis Costco and its other shareholders, some of whom, presumably, invested in Costco based on its current business model, which takes into account Costco's having invested hundreds of millions in its current chicken production system, the legality of which is at issue here, via Law Street Media. A win for the plaintiffs could mean better lives for chickens, but if Costco's ability to keep charging $4.99 per chicken hinges on this system, the changes being demanded could spell losses for Costco. That said, here's why Costco's stock may be uniquely resilient among retailers.