Costco's Nebraska Chicken Experiment Hits the Limits of Vertical Integration

The retail giant's decision to shelve a $500 million-plus expansion signals that even well-capitalized retailers face hard constraints when scaling commodity protein production. Costco's December 2025 announcement that it would not proceed with Phase 2 of its Lincoln Premium Poultry complex near Fremont, Nebraska - citing construction costs that have doubled in eight years - offers a case study in supply chain economics. The move isn't failure: Phase 1 generates over $1 billion in annual economic activity and supplies roughly 40% of Costco's western U.S. rotisserie chicken demand. Rather, the shelving reflects rational capital allocation amid shifting input costs, adequate alternative supply, and the inherent risks of concentrating production in a single geography.

Costco's entry into poultry production was driven by three structural pressures: market concentration among major integrators, the declining availability of whole birds, and the need to protect an iconic loss-leader product.

The U.S. broiler industry is dominated by an oligopoly. The top four companies - Tyson Foods, Pilgrim's Pride (JBS), Wayne-Sanderson Farms, and Perdue - control approximately 58-60% of production, up from roughly 35% in 2000. This concentration gave integrators significant pricing power over retailers.

More critically, the industry had shifted decisively away from whole-bird production. Processors moved toward larger birds optimized for deboning into breasts, thighs, nuggets, and strips - formats commanding higher margins. By 2016, whole chickens represented only about 15% of output, down from roughly 50% decades earlier. For Costco, which needs birds weighing approximately 6 pounds 4 ounces, this created chronic supply uncertainty.

The $4.99 rotisserie chicken, unchanged since 2009, had become both a traffic driver and corporate symbol. CFO Richard Galanti acknowledged in 2015 that Costco was willing to absorb $30-40 million annually in gross margin to maintain that price while competitors charged $5.99. Annual sales grew from 51 million birds in 2010 to 137 million by 2023 - an 8% compound annual growth rate, three times the industry average. Placed strategically at the rear of warehouses, the chicken functions as a pilgrimage that pulls members past high-margin prepared foods and wines.

Costco's site selection broke from poultry industry convention. Traditional broiler production clusters in the "Poultry South" - Georgia, Arkansas, Alabama - where integrators built infrastructure over generations. Nebraska had no meaningful commercial poultry presence. Yet the economics of moving birds to feed rather than feed to birds proved compelling.

The Nebraska advantage:

The $450 million complex in Fremont includes a 400,000-square-foot processing plant, a 90,000-square-foot hatchery, and a feed mill holding more than 17,500 metric tons. The plant employs approximately 1,200 workers and uses advanced technology including controlled atmosphere stunning and air chilling. LPP broke ground in June 2017 and reached its target capacity of 2 million birds per week by late 2020.

Lincoln Premium Poultry operates as a miniaturized version of a traditional poultry integrator with one crucial distinction: it has only one customer. The Fremont hub coordinates a network of approximately 100 contract grower families operating 520 barns across 17 Nebraska counties and portions of western Iowa.

Network composition:

Contract terms represent a notable departure from industry norms. Traditional integrators offer flock-to-flock or short-term contracts—USDA data shows over half of contract poultry farmers receive agreements lasting less than one year - despite requiring growers to take on 15- to 30-year loans for barn construction. LPP offers 15-year contracts with a guaranteed base payment structure that eliminates the "tournament system" prevalent in the South, where growers are ranked against peers with bottom performers having pay deducted to fund bonuses for top performers.

The capital requirements remain substantial. A typical four-barn operation requires approximately $2 million in investment, with some larger operators taking on $4-6 million in loans. The economic calculus depends heavily on LPP's longevity: chicken barns are single-use structures with minimal salvage value, and no other poultry companies operate in the region to provide an alternative buyer. This concentration risk is inherent to pioneering a new poultry geography.

The expansion Costco has shelved was ambitious: another processing plant, an additional feed mill, approximately 500 new producer barns, and a consolidation center. Had it proceeded, the project would have roughly doubled LPP's capacity and potentially created over 6,000 jobs statewide.

In a December 2025 message to growers, LPP leadership stated that Costco was "comfortable with current market supply projections" and could source chicken through "a mix of existing partners." 

The math has changed:

Meanwhile, improved processor margins and historically low feed costs have made external sourcing more attractive. Tyson's chicken segment achieved 8.4% operating margin in Q4 2024, up from 1.8% a year earlier. Corn has declined from peaks above $7/bushel in 2022-2023 to roughly $4.00-4.50 projected for 2025.

The bull case for expansion rested on continued rotisserie demand growth, Phase 1's demonstrated success, and strategic independence from Big Chicken. The bear case emphasized construction inflation, elevated financing costs, and concentration risk - a vulnerability that events of 2022 had already tested.

The HPAI outbreak that began sweeping through U.S. poultry in early 2022 did not spare Lincoln Premium Poultry. In March 2022, authorities confirmed HPAI at two LPP contract broiler farms in Butler County, immediately adjacent to Dodge County where the Fremont plant operates. These outbreaks resulted in the depopulation of approximately 987,000 broilers.

Nebraska as a whole has lost over 7 million birds to HPAI since February 2022. The geographic distribution of cases reads like a map of LPP's grower network: Butler, Dixon, Dodge, Saunders, Colfax, and Merrick counties - all territories where LPP growers operate. A 6.2-mile control zone around infected farms restricted movement from other LPP operations within the quarantine perimeter.

Nationally, HPAI has affected 170+ million birds since February 2022, with federal response costs exceeding $1.4 billion. The CDC now considers HPAI endemic in wild bird populations, meaning seasonal exposure risk will persist indefinitely. New USDA rules effective December 2024 require previously infected farms to pass biosecurity audits before restocking.

While HPAI wasn't cited in Costco's official explanation for shelving Phase 2, the biosecurity implications are unavoidable. Concentrating an additional 500 barns within the same geography would compound the production concentration that 2022 demonstrated as a liability.

LPP's arrival in eastern Nebraska represented a significant change for communities unaccustomed to industrial-scale poultry operations. The project navigated the typical challenges that accompany large agricultural facilities - site selection discussions, zoning considerations, and environmental reviews across multiple counties.

Some proposed farm sites generated local debate, as residents weighed economic benefits against quality-of-life considerations common to concentrated animal agriculture. These dynamics are not unique to Nebraska; they accompany virtually every large-scale poultry development nationwide. LPP ultimately assembled its grower network across 17 counties, working with approximately 100 farm families who saw opportunity in the contracts.

The operation has also attracted interest from agricultural investors seeking to participate in the grower network - a development that has prompted discussions about the balance between family farm operations and outside capital in Nebraska agriculture.

The shelving of Phase 2 should not be interpreted as a verdict against Costco's vertical integration experiment. Lincoln Premium Poultry produces over 10 million pounds of ready-to-cook chicken weekly and generates demonstrated economic impact exceeding $1 billion annually while supporting approximately 3,000 Nebraska jobs. The operation supplies roughly 40% of Costco's rotisserie chicken needs for western markets and provides complete control over bird specifications, welfare standards, and supply continuity.

The decision reflects instead the limits of scaling capital-intensive commodity production when macroeconomic conditions shift unfavorably. External sourcing, which once threatened supply uncertainty and price volatility, now offers acceptable economics as traditional integrators have improved margins and feed costs have declined.

What the Costco-LPP case illustrates:

For the approximately 100 farm families currently under contract, the status quo represents stability: guaranteed income under 15-year agreements from an operation that has proven durable through pandemic disruptions and disease outbreaks. Nebraska's improbable chicken complex will continue producing millions of rotisserie chickens annually - but at a scale that economics, rather than ambition, has determined.