Costco Responds to Tariffs, Also Sells Diamond Ring for $220,000

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Costco Responds to Tariffs, Also Sells Diamond Ring for $220,000

By Jordan Speer - 10/04/2019

Even as Costco opened its first unit in China in late August, in Minhang, Shanghai — to such overwhelming crowds that it actually had to shut down four hours into opening day, and whose sales have been very strong since — the warehouse club, like most retailers, is facing uncertainties in the face of tariffs related to the trade war between China and the United States.

Referring to the tariff situation as “a lot of moving parts and changes and a few increases along the way” in the company’s year-end and Q4 earnings call yesterday, CFO Richard Galanti noted some of the products that are currently under tariffs of 25%, which total about $250 billion in imports from China. Those include items such as water pitchers, air fryers, bicycles, steel shelving, furniture, luggage and shredders. He also expressed a “wait-and-see” frame of mind with respect to additional tariffs that are expected to take effect on October 15th, which raise that rate to 30%, and to other scheduled tariffs for December, which will exact a 15% tariff on $155 billion worth of goods including laptops, tablets, toys, small appliances, and some apparel and footwear.

Since tariffs were enacted more than a year ago, the company has been active in managing and, where possible, mitigating the impact of them, says Galanti. It’s done this by accelerating shipments before tariffs were put into place or increased.

That is a one-time fix, however, and does not address the ongoing effect of the cost of tariffs to the company and to the end customer, which are exacting heavy tolls on retailers in general and fomenting great concern about the future. Costco, like other retailers impacted by the tariffs, is in discussions with “pretty much every supplier on every item” to figure out how to reduce costs.

In some cases, it has reduced commitments on certain items, and in others it has taken advantage of lower pricing on some U.S.-made items that have benefitted from the tariffs. It is also looking for alternative country sourcing possible and feasible, but there is limited ability to do that, he notes. China has vast, entrenched, well-formed sourcing supply chains and manufacturing expertise that is simply not available in large quantities in other countries, such as Vietnam, that are developing strong bases but have a long way to go before becoming the next China.

“As you might expect, it's all over the board, every item and every vendor is little different,” says Galanti, stating: “Overall, we think we're in a good position relative to retail overall and given our size and scale and our ability and relationships with our vendors.”

In a final note on tariffs, Galanti referenced the Oct. 2 WTO announcement that the United States can legally impose tariffs of up to $7.5 billion in EU-produced goods annually, and the U.S.T.R. list of products it plans to target. Duties of 25% are slated to go into effect October 18 on products including certain whiskeys and apparel items for the U.K. and various cheeses, olive oils, certain pork products, butter and yogurt from various European countries, he said.

In other announcements, e-commerce was up 21.9% in Q4, with particularly strong growth in majors, electronics and appliances, while total online grocery, which includes both two-day and one-day fresh Instacart delivery, although still small overall, continues to grow at a very healthy clip, he noted.

Its mobile app now allows Costco members to activate digital membership, which was added in July, and now has more than 2.5 million activations. Via the app, consumers can view current gas prices. Other perks: executive members can view their growth of the annual 2% Executive Member Reward. The app is also offering the ability to refill and manage pharmacy prescriptions and also to manage shopping lists, with the ability to receive promotional offers. Additional enhancements are in the works, he says.

Some other points of interest: Costco also expanded what it calls its “merchandise roadshows,” essentially moving its popular treasure hunts (i.e. merchandise that is not in regular rotation) online. It also sold “another” large diamond ring during the quarter for $220,000 (one sold in May for $400,000), and has upcoming e-commerce sites planned for Japan and Australia later this fiscal year.