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Tariff hike to 25% forces Costco to reevaluate supply chain

Costco Wholesale Corp. is revisiting agreements with suppliers in the wake of higher tariffs on U.S. imports from China, CFO Richard Galanti said May 30.

Speaking on a call to discuss the retailer's fiscal third-quarter results, Galanti said that the company has looked to minimize cost increases and sought alternative sources for some products as a result of the higher tariffs. The duties, which increased to 25% from 10%, took effect on goods shipped from China to the U.S. on May 10 — two days before Costco's quarter ended. Goods in the affected categories are worth about $200 billion annually.

"We've gone to every supplier on every item" to limit cost increases, the executive said. The higher tariffs have affected how the company prices items, including furniture, bicycles and luggage, Galanti said.

A potential fourth list of items worth about $300 billion annually, on which U.S. officials are seeking public comment before implementing, would be "a whole new ballgame," Galanti said. If implemented without exceptions, the list would target discretionary items, such as apparel and electronics, and could ultimately have a greater effect on the company's pricing strategy than the recent increases.

"There continue to be a lot of moving parts," Galanti said of the tariff situation. "But some of the moving parts are getting bigger."

Multiple retailers, including Macy's Inc. and Home Depot Inc., have said during recent earnings calls that they may need to raise prices as a result of higher tariffs on imports from China, particularly if the Trump administration institutes duties on items identified on the fourth list that it released earlier in May.

Costco is also expanding technology for faster purchasing and pick-up in its stores, Galanti said. The retailer is aiming to have pick-up lockers in 100 of its U.S. stores in time for the 2019 holiday shopping season, up from about 10 currently. At the same time, the company also has plans to expand self-checkout kiosks to 250 locations in the coming months, up from 125, Galanti said.

Galanti said that the lockers are still meant to serve physically small, high-value items such as jewelry and electronics. Asked by an analyst whether Costco was considering implementing a click-and-collect service similar to Walmart Inc.'s option for groceries, Galanti said: "If somebody wants something in an hour, they're probably not going to get it from us."