‘Harder’ to Mitigate Tariffs on ‘Bigger-Ticket’ Items, Says Costco CFO
Costco is experiencing “a lot of moving parts” with the Section 301 tariffs on Chinese goods, including a few price increases “along the way,” said Chief Financial Officer Richard Galanti on a fiscal Q4 call on Oct. 3. Costco has tariff exposure to many of the products on “the first three lists,” and “we'll just have to wait and see” the impact if those tariffs rise to 30 percent as scheduled Oct. 15, he said.
The List 4A tariffs, which include TVs and other electronics, started at 15 percent Sept. 1, and “we'll see where that goes,” said Galanti. Costco also will play wait and see with the 15 percent List 4B tariffs on laptops, tablets and smartphones due to take effect Dec. 15, he said.
It continues to be “active” in managing the higher tariff costs, and “where possible, mitigating the impact where we can,” said Galanti. “We accelerate shipments” from China, when possible, before new tariffs are put into effect or the rates are hiked on existing duties, he said. “We are working with suppliers daily. We've gone to pretty much every supplier on every item to see what we can do to both reduce cost and figure out how to do that.”
As part of the strategy, "we have reduced “our commitments on certain items” with exceptionally high tariff exposure, said Galanti. “We look at alternative-country sourcing where possible and feasible,” but there’s “a limited amount of that ability to do that.” The Chinese yuan's recent devaluation against the dollar “has helped a little bit,” he said.
Mitigation strategies are “all over the board,” said Galanti. In some cases, we're able to hold off” on price increases, while in others, “we will continue to pursue” pushing the higher costs back to the vendors, he said. “We're in a good position relative to retail overall, given our size and scale and our ability and relationships with our vendors.”
With “smaller-ticket items,” it might be easier for the company “to eat a little bit” of the higher tariff costs, said Galanti. As an “item-driven business,” the retailer also will “try to geographically move the item or source from another supplier,” he said. “There are limits to what you can do on that.” If Costco decides “not to sell something” with high tariff exposure, “and put something else in its place,” that’s “a little easier for us relative to general merchandisers,” he said.
On “bigger-ticket” items, “it's harder” to mitigate the tariffs, said Galanti. The “bigger the ticket,” the more likely a “good portion of the tariffs impacts the price, raises the price,” he said. The CFO cited the “anecdotal” example of sales in one unnamed category Costco had forecast to be up mid-single digits year-over-year, but “instead was flat to down a couple of percent.” Tariffs sparked “some pricing increases” in the category that were to blame, he said. “When you pick an item that retails for $999 and have to get it up” to $1,240 to “beat” the higher tariff cost, the first strategy is “get it to $1,199 and then go from there,” he said.