Costco Not Ready to Cut Prices as Shipping, Commodities Costs Fall

Shipping and commodities prices have seen steady declines recently, but

Costco

Wholesale Corp. isn’t yet in a position to pass savings on to customers, the CFO said.

Pricing at the retailer’s 839 global warehouse stores hasn’t decreased, according to Chief Financial Officer

Richard Galanti,

despite the lower prices for shipping goods and for things like gasoline and steel. Costco in some cases locked in prices it pays to suppliers months ago and inflationary pressures from rising labor costs persist, which means the drops in shipping and commodities prices aren’t necessarily benefiting the company’s balance sheet yet.

Richard Galanti, Costco Wholesale CFO



Photo:

Costco Wholesale Corp.

“It takes time for changes to come through,” Mr. Galanti said.

Trans-Pacific shipping rates have plummeted in recent months as the global economic outlook has weakened. The daily freight rate to move a container across the Pacific is now $2,265, compared with $13,706 at the beginning of the year and $20,586 in September of last year, according to the Freightos Baltic Index, an international freight rate reading. At the same time, certain commodities prices have been on the decline—for instance, the global benchmark for oil was down more than 20% in the third quarter—offering some relief for Costco.

A company’s freight costs vary depending on whether they are fixed by contract for a period of time or based on spot-market rates that can change more quickly. Issaquah, Wash.-based Costco, which is known for selling discounted bulk goods to paying members, uses contract rates for more than 80% of its total freight, Mr. Galanti estimated to analysts in December. The length of contracts as well as the company’s ability to renegotiate the terms of its agreements also affect the retailer’s freight costs, he said. Mr. Galanti declined to comment Tuesday on whether Costco is working to renegotiate its freight contracts.

The company last year chartered three ships to transport goods between Asia and North America in an effort to gain control over the timing of deliveries as global supply-chain delays snarled the flow of products. To a lesser extent, the move was about controlling costs, Mr. Galanti said Tuesday, adding that Costco has since chartered a few more ships, each capable of carrying somewhere between 900 and 1,300 containers.

It can take anywhere from six months to a year before lower shipping costs translate into falling prices for consumers, said

Chuck Grom,

a managing director at Gordon Haskett Research Advisors. Higher costs in other business areas can delay price drops even longer.

Hourly employees, which account for about 90% of Costco’s workers, earn more than $25 an hour on average in the U.S., according to Mr. Galanti, following a string of pay increases over the past 18 months. The company looks to attract and retain workers in competitive job markets, such as Seattle, said Mr. Galanti. These cost pressures will persist, as wages don’t tend to come down once they have gone up, Mr. Galanti said. Costco had around 285,000 employees at the end of June.

Changes in commodity prices also affect the company, Mr. Galanti said. Prices for lumber, corn, gas, steel and beef have fallen this year, dragged down by fears of a recession. Yet what Costco pays doesn’t automatically drop in line with market prices because some suppliers locked in prices for months to come, the CFO told analysts in September.

Still, there is some relief on inflationary pressures, Mr. Galanti said. “Hopefully, that will mean that we will be able to bring down prices,” he said. “Inflation continues to be a factor. We will have to wait and see.” Costco reported absorbing price inflation of around 8% in the quarter ended Aug. 28, up from 7%-plus in the previous quarter and a range of 3.5% to 4.5% a year earlier.

Costco continues to stick to fixed prices for certain items, for example, its hot dog and soda combo for $1.50 and its rotisserie chicken at $4.99. The company aims to mitigate the impact on consumers when its own prices increase, in part by working with suppliers to find savings, Mr. Galanti said.

“You’re still not in that environment where they’re going to start lowering prices,” said

Rupesh Parikh,

a senior analyst at investment banking firm Oppenheimer & Co., noting recent price increases for croissants and bottled water sold at Costco. Price increases have also hit food court items such as individual sodas and whole pizzas because of rising costs, Mr. Galanti said earlier this year.

Gordon Haskett’s Mr. Grom said Costco shoppers are getting a better deal compared with other retailers, as the company’s markup on goods is at most 14% to 15% on average, among the lowest in its industry.

Costco’s margin on its core business, which excludes its gas sales, was down 26 basis points in the most recent quarter, compared with margins that were lower by 39 basis points in the prior quarter and 40 basis points a year ago. The retailer’s margin has been falling in recent quarters due to inflationary pressures and as margin gains realized during the first year of Covid-19 have stabilized, said Mr. Parikh.

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Revenue rose 15% to around $72 billion during the quarter ended Aug. 28, compared with the prior-year period. Net income increased to $1.87 billion from $1.67 billion a year earlier. Comparable sales, or those from stores and digital channels operating for at least 12 months, rose nearly 14% in the quarter compared with the same period last year. E-commerce increased 7.1% over the same period.

Costco has a loyal consumer base—global membership renewal rates at the end of August were around 90%, the company said—and strong bargaining power with suppliers because of the volumes of product it orders, according to Mr. Parikh. This means that despite the inflationary backdrop, Costco is “extremely well positioned for this environment.”

Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com

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