Costco CEO explains how the chain kept prices low as tariffs and egg costs hit retailers hard

Business Insider

5 days ago

Shoppers have faced higher prices due to tariffs and bird flu this year.
Costco, meanwhile, has worked to avoid price hikes on many items thanks to a multi-pronged approach, executives said during the retailer's third-quarter earnings call on Thursday.
As the threat of tariffs became real during the quarter, which included President Donald Trump's " Liberation Day," Costco brought in some merchandise for summer earlier than usual and purchased more US-made inventory, CEO Ron Vachris said during the call.
The chain also rerouted some goods it had already purchased for its US stores to its locations abroad in order to avoid paying the tariffs.
Costco's buyers have looked at specific items to figure out whether it can source US-made alternatives to suddenly more-expensive imports, Vachris said.
"Is it something that we can replace with something domestically here, or is it something that we need to go ahead and move on quickly and bring in prior to any future tariff increases?" he said.
Higher costs for some grocery staples, namely butter and eggs, also provided a challenge for Costco over the last few months. Besides being common purchases for Costco customers, those two items have a large "halo effect" on the costs of other goods that require them as ingredients, Vachris said.
Costco's buyers talk to vendors regularly about lowering costs, the CEO said.
"We're watching pricing daily, and if not hourly, on every key commodity," Vachris said.
That doesn't mean that Costco is raising prices for those items, though. In fact, the chain's profit margins on specific products have taken a hit.
Often, when the price that a retailer pays for an item goes up, stores raise the price that consumers pay in part or in full to protect their profit. That's exactly what many retailers did earlier this year when the cost of eggs skyrocketed as bird flu killed many egg-laying chickens and drove supply down.
Costco said it avoided raising prices on eggs and butter as its costs for those things went up — leading some customers to line up early. The wholesale warehouse chain cut egg prices by 10% and butter prices by about 7% during its third quarter, CFO Gary Millerchip said on an earnings call Thursday.
The retailer also held back on price increases on items that use those ingredients, Millerchip said.
One example: The croissants in Costco's in-store bakeries.
The company "held prices lower when butter costs were elevated," he said. As butter prices have fallen, Costco's profit margin on that item has expanded, Millerchip said.
"In general, we feel margin pressure during times of inflation on these types of ingredients as we keep prices low for our members," Millerchip said. "And the opposite is often true when prices fall, as we feel the margin relief faster while also being able to lower prices more quickly than our competitors."