Costco makes controversial move to avoid high tariff costs

Like many retailers across the nation, Costco is in a tough situation as it prepares to face the impact of tariffs, which pose a threat to future sales.

Tariffs are taxes companies pay to import goods from overseas, and the extra cost is often passed down to consumers through price increases.

On March 4, President Donald Trump increased his previous 10 percent tariff on all goods imported from China to 20 percent and imposed 25 percent tariffs on all goods imported from Mexico and Canada.

During an earnings call on Dec. 12, before tariffs were implemented, Costco Chief Financial Officer Gary Millerchip acknowledged that customers may face higher prices as a result of tariffs.

“When it rains, it rains on everybody,” said Millerchip during the call.

He also said that Costco will try to work with its vendors in order to mitigate high costs associated with tariffs, and that the company will “consider alternative sourcing locations” and may even pull back on stocking up on low-performing products in stores.

“I guess in context for us, the sort of the amount of business that’s affected, about a quarter of our business is nonfoods, and then a subset of that is imported,” said Millerchip.

Costco makes a controversial move as tariffs set in

Now that tariffs are in full effect this year, Costco is reportedly attempting to dodge paying higher costs for goods.

According to a new report from the Financial Times, the warehouse club is asking its suppliers in China to cut prices on goods, which would essentially shift the burden of tariffs onto those suppliers.

One Costco supplier told the Financial Times that tariffs will have a more significant financial impact on smaller suppliers than on larger ones.

“The big ones, they have the muscle to do it,” said the supplier. “What do you do if you’re us? You’re screwed or you’re screwed.”

The move from Costco comes after a Bloomberg report earlier this month revealed that Walmart was also asking some of its suppliers in China, including those who produce clothing and kitchenware, to cut their prices by up to 10 percent per round of tariffs.

Walmart’s request, however, received a harsh response from China. Last week, China TV broadcaster CCTV posted on its official social media account, Yuyuantantian, claiming that the retail giant’s request was “unreasonable.”

“Walmart’s demand for Chinese suppliers to bear the full tariff burden is unreasonable and disrupts fair competition and international trade order,” reads the post.

Chinese manufacturers also took to social media to claim that Chinese companies “have no room to lower prices in response to US tariffs.”

Chinese officials have since confirmed that they had recently met with Walmart executives to discuss the situation.

“Our relevant departments have reached out to Walmart to further understand the situation, and the company has provided an explanation,” said He Yongqian, a spokesperson for the Commerce Ministry, during a press briefing on March 13.

Costco flags a major change in customer behavior

Amid the looming threat of tariffs, Millerchip said during an earnings call on March 6 that Costco members have already become more cautious about their spending due to the current macroeconomic environment.

“We believe that the member is probably as much focused now on quality, value, and newness as they have been for quite some time,” said Millerchip. “But they are still showing that willingness to spend, but they’re being very choiceful where they’re spending their dollars. And we think that’s likely to continue and maybe even become more choiceful as the impact of some return of inflation and the potential impact of tariffs could flow through as well.”

Costco CEO Ron Vachris also said during the call that the company will remain “agile” about minimizing the impact tariffs will have on customers.

“Given events over the last week, it is difficult to predict the impact of tariffs, but our team remains agile and our goal will be to minimize the impact of related cost increases to our members,” said Vachris. “About a third of our sales in the U.S. are imported from other countries, and less than half of those are items coming from China, Mexico, and Canada.”