Costco’s famously low prices are the latest casualties of president Donald Trump’s trade war between the U.S. and China.
“At the end of the day, prices will go up on things,” the wholesale retailer’s chief financial officer Richard Galanti told investors, during an earnings call last week.
Costco shoppers can expect to spend more on an array of items including bikes, vacuums, furniture, and luggage—right in time for summer vacation.
“Until this month, there was a fairly modest amount of tariffs and not highly concentrated in consumer goods,” David French, the senior vice president of government relations at the National Retail Federation, tells Fortune.
At first, the president’s ire toward China’s trade imbalance with the U.S. manifested itself in his levying tariffs on imported components for assembly in the U.S., as well as technology. Then, consumer goods became engulfed in the trade war, which were recently raised to 25% from 10% on $200 billion of Chinese goods.
“We did a study on the impact of 25% tariffs on two segments, travel goods and furniture, and found that consumers would pay $6 billion more if they go into effect,” French says.
This has created uncertainty for consumers and retailers.
“A 10% extra cost can be contained within the value chain in the short term, by suppliers and retailers taking a cut on margins to maintain end prices,” Johan Gott, a principal in the consumer and retail practice of A.T. Kearney and head of its Trade Wargaming initiative, tells Fortune. “As these tariffs rose to 25% a few weeks ago, there are no margins left to play with and retailers have no choice but to pass on the cost to consumers.”
Rising Business Uncertainty
In addition to increasing product costs, which in turn could slow sales, the president’s escalating tariffs create even more uncertainty for retailers, one of the biggest headaches for any business.
“What’s interesting is it’s hard to predict what the impact is,” Galanti told investors. For example, “we’ve seen strength in patio furniture even with certain tariff price increases,” Galanti said, but those gains could reflect sales rebounding from a decline “because of the bad weather in January and February—and we get into seasons early.”
Furthermore, consumer products might become even more expensive in the coming months.
One factor, French explains to Fortune, would be if the administration decides to follow through on promises to levy tariffs on “$300 billion worth of goods from China including things like footwear, apparel, and consumer electronics. That’s where a majority of consumer spending is.”
Mounting Opposition to Trump Tariffs
The chorus of industries opposed to Trump’s tariffs continues to grow. Last week, five trade associations representing the U.S. footwear supply chain wrote the president imploring him to reconsider tariffs, which they said will “have drastic effects on patriotic American companies, some of which would face existential peril.
“For domestic manufacturers, many inputs necessary for footwear manufacturing are not available in the United States and are sourced through China,” the letter states, explaining that putting a 25% duty burden on those components would stunt production, impact workers, and “mean higher prices for hardworking American families.” The letter was sent by the American Apparel and Footwear Association, Footwear Distributors and Retailers of America, Outdoor Industries Association, Sports and Fitness Association, and the Rubber and Plastics Footwear Manufacturers Association.
And then there are Trump’s recent threats to impose a tariff on Mexican goods.
The United States gets about 70% of its vegetable imports from Mexico, particularly fresh produce, “and 40 of our fruit imports from there,” Phil Kafarakis, president of the Specialty Food Association, said in a statement sent to Fortune. “There will be a major impact on the big boxes, the Costcos, Walmarts, etc. Consumers will feel [the tariffs] immediately because these aren’t items that will sit in the supply chain for a long time.”
Costco, currently ranked 14th on the 2019 Fortune 500, isn’t the only big box store struggling over tariffs. Last month, Walmart also announced plans to raise prices because of the trade wars.
[“source=fortune”]
