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By keeping prices low and providing a compelling value proposition by offering products in bulk, Costco (COST) has created a strong competitive advantage that has underpinned consistent market share gains in the retail space. With the implementation of tariffs, particularly on China, Mexico, and Canada, COST's ability to keep prices low has become far more challenging. As such, CEO Ron Vachris is reaching out to the company's mainland China suppliers in an effort to persuade them to cut prices rather than raise prices, according to Financial Times.

• Although lowering prices in the face of tariffs might seem counterintuitive, this strategy has some advantages that could help COST's suppliers offset the impact of higher cost of goods due to tariffs. For example, lower prices tend to lead to greater sales volume, which produces economies of scale and steady profit margins. Additionally, keeping prices low while competitors raise prices should enable COST to gain more market share -- a long-term positive for its suppliers. 
• With approximately 20-30% of its products originating from China, across several product categories such as electronics, furniture, apparel, and some private-label Kirkland Signature products, the concern is that higher cost of goods resulting from tariffs will trickle down to lower margins for COST. The company's gross margin has remained stable over the past four quarters in the 12-13% range. 
• Relative to other big box retailers like Walmart (WMT) and Target (TGT), COST has far less exposure to China. It's estimated that approximately 70-80% of WMT's merchandise is sourced from Chinese suppliers, while approximately 35% of TGT's products are imported from China. It's also worth noting that COST's customer base is generally more affluent and better equipped to handle an upswing in prices.
• COST's low-margin, high-volume business also allows it to keep prices lower than most competitors, and its membership model provides another substantial revenue stream to insulate the company from inflationary pressures. Importantly, COST already implemented its price increase last September, so the company will avoid trying to push that through during this next wave of inflation. During inflationary periods, COST's membership renewal rates have remained very healthy, above the 90% rate.
• It's also worth noting that COST's stock has performed quite well during periods of high inflation. During the supply chain-induced inflation surge in 2021-2022, COST gained 21%, compared to losses of 2% and 14% for WMT and TGT, respectively.

COST's strategy to ask its Chinese suppliers to lower prices to mitigate the impact of tariffs could help it to maintain its low-price/value reputation, driving incremental share gains. However, the move could also strain relationships with suppliers operating on thin margins, potentially leading to some supply chain issues.