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'We hate raising prices': How Costco aims to address supply chain, inflation woes this holiday season

If you "go and visit our locations on a random basis, they're full."

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Costco is ready for Christmas: That was one of the main takeaways from the warehouse retailer's fourth-quarter earnings call with investors Thursday afternoon. In addition to announcing Costco's better-than-expected revenues — $62.68 billion for the quarter — chief financial officer Richard Galanti stressed that his company is doing everything in its power to keep shelves stocked and prices low, despite the increasing cost of materials and shipping.

If you "go and visit our locations on a random basis, they're full," Galanti said. "They look good compared to some of the pictures we see from others."

That hasn't been easy to do in this environment, especially when everything, from gasoline to cardboard to the resin that makes plastic products like garbage bags and disposable plates, is two-, three-, or even four-times as expensive as it was before the pandemic.

Overall, Costco estimates that inflation is running between 3.5% and 4.5%, a full percentage point higher than what its estimate was in early May, Galanti said. Despite those increases in the cost of doing business, he was adamant that the company will do everything in its power to not raise prices for members.

"We hate raising prices," Galanti said. "We want to be the last to raise it and the first to lower it. It's in our DNA."

Solving pandemic problems by leaning into logistics

A big part of Costco's strategy to win the holiday season is to lean into logistics. The company has chartered three ships, each capable of carrying 800 to 1,000 containers, to allay concerns about getting products from Asia, Galanti said. That's in addition to a $340 million distribution facility that Costco purchased earlier this year.

Retailers learned very hard lessons last holiday season when many of their supply chains broke down, says Brendan Witcher, principal analyst at Forrester Research.

"Companies are out there trying to find new and interesting ways of being able to eliminate single points of failure in their supply chain so that they don't get caught off guard again this year," Witcher says. "It's not just Costco. Many retailers are doing similar sorts of things, maybe not buying ships, but they certainly are trying to find different sorts of safety measures."

It's not just Costco. Many retailers are doing similar sorts of things, maybe not buying ships, but they certainly are trying to find different sorts of safety measures.
Brendan Witcher
Principal analyst, Forrester Research

The fact that so much of the call was spent talking about shipping and logistics shows how much the retail landscape has changed in the last 18 months, and how imperative it is for retailers to assure customers and investors that they'll have the goods to get through the holiday season.

"Prior to the pandemic, this was not a sexy thing to talk about on earnings calls," Witcher says. "But because it was such a point of failure last year, what Costco is trying to do is instill confidence in the market that they're not going to miss out on opportunities this year."

Costco knows that shoppers have spending money burning a hole in their wallets, and it wants to reserve as many of those dollars as it can. By chartering its own ships and having a large distribution facility to store merchandise, the company can order merchandise earlier and keep it stored longer than it otherwise would, with fewer worries about supply chain points breaking along the way.

Delays and shortages are still likely

Even though Costco is taking some of its logistics into its own hands, members are still likely to face shortages and long wait times. Furniture manufactured in Asia, for example, used to take 8 to 12 weeks to arrive in the U.S.; it's now taking 16 to 18 weeks, Galanti told investors.

Despite those delays (or maybe because of them) merchandise is flying off the shelves. "In some ways we think that's an advantage," Galanti said. "We're selling out, generally, merchandise received within two weeks on most items, and we've ordered more and earlier. Same thing with toys and seasonal, [we're] bringing in some of the items early."

To that end, the company is also beginning to put purchase limits on certain types of items, like toilet paper, paper towels, bottled water, and certain cleaning supplies, Galanti said.

Planning your grocery list before you head to the store can help you avoid panic shopping. You can also call ahead to find out what's in stock and what items might have purchase limits on them.

However, if you're in the warehouse and see something you like, you may want to buy it on the spot: If you wait, you may not find it when you go back.

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