Costco (COST, Financial) has established a strong competitive edge in retail by keeping prices low and offering bulk products. However, tariffs on imports from China, Mexico, and Canada present challenges to maintaining these low prices. CEO Ron Vachris is negotiating with Chinese suppliers to reduce prices instead of increasing them.

• Lowering prices despite tariffs can help COST's suppliers manage increased costs. This approach can boost sales volume, achieve economies of scale, and maintain steady profit margins. Keeping prices low while competitors increase theirs could help COST capture more market share, benefiting its suppliers in the long run.
• With 20-30% of its products sourced from China, including electronics and apparel, COST faces potential margin pressures from tariffs. Nevertheless, its gross margin has stayed stable at 12-13% over the past year.
• Compared to Walmart (WMT, Financial) and Target (TGT, Financial), COST has less exposure to Chinese imports. WMT sources about 70-80% of its merchandise from China, while TGT imports around 35%. COST's more affluent customer base is better positioned to absorb price increases.
• COST's low-margin, high-volume model allows for competitive pricing, and its membership model provides a stable revenue stream, buffering against inflation. COST's membership renewal rates remain robust, above 90%, even during inflationary periods.
• Historically, COST's stock has performed well during inflation. During the 2021-2022 inflation surge, COST gained 21%, while WMT and TGT saw declines of 2% and 14%, respectively.

By urging Chinese suppliers to lower prices, COST aims to uphold its low-price reputation and enhance market share. However, this strategy might strain supplier relationships and lead to supply chain challenges.