A lot of things go into how retailers set prices. It's not just the cost of an item. Companies also have to factor in shipping and handling expenses and sell-through rates.
Retailers, of course, also have to decide how much profit they want to make on each item they sell. Broadly, pricing is challenging because it includes all those factors as well as each retailer factoring in what its rivals charge.
Related: Every Costco member needs to know this
If Amazon, Target and Kroger (KR) -) have lower prices than Walmart and Costco on enough items, then customers may opt for the cheaper stores. That could lead to fewer sales at the more expensive options, which could lead to unsold items, waste, and a higher cost for each item sold.
Since the covid pandemic, inflation and supply-chain-related issues have generally driven prices steadily higher. Costco (COST) -) has been very open about the impact of inflation on its prices.
During its quarterly earnings calls, Chief Financial Officer Richard Galanti has detailed exactly where the company has seen inflation and the steps it has taken to fight it.
For many months, those efforts included using its own shipping containers to cut costs and, in some cases, simply eating some of the price increases rather than passing them on to members.
In his chain's fourth-quarter-earnings call, Galanti had good news about inflation, not just for his chain's members but for Target, Walmart, Amazon, and Kroger customers as well.
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Costco sees inflation easing
Galanti has shared positive news about inflation easing over the past several quarters' earnings calls, especially during this one.
"Most recently, in Q3 '23, we had estimated that year-over-year inflation was in the 3% to 4% range. Our estimate for Q4 inflation is in the 1% to 2% range, and it's actually trended downward during the quarter. So, hopefully, these inflation trends will continue," he said.
Galanti also said he was seeing deflation on some bigger-ticket items largely because of freight "which is down year over year in a nice way, and in some cases, some of the commodity costs on steel and the like, that's come down," he added.
The CFO also said that he's encouraged by the way pricing has trended and he said something that members will like.
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"As it relates to us, we're always pushing prices as fast as we can. We want to be the first to lower them when those things happen and drive sales," he said.
Costco lowering prices pressures Walmart, Kroger, Target and other big players to do the same.
Costco will raise membership prices
During every quarterly call, one of the analysts on the call finds a clever way to ask Galanti about whether Costco plans to raise its membership price.
Since 2017, Costco's Gold Star membership has cost $60, after a $5 increase from its price in 2011. The Executive Membership costs twice that at $120.
This quarter, the question came from Morgan Stanley's Simeon Gutman, who framed it around inflation.
"Is there a point at which, you know, this membership increase is part of, I guess, a hedge against inflation? Is there a point at which the model feels more weight without it? In other words, can you go another year without it?" he asked.
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Galanti, who fends off the question with the same non-answer every quarter, modified his usual response slightly.
"Well, you know, my pat answer, of course, is it's a question of when, not if. You know, it's a little longer this time around since June of '17. So, we're six years into it. And -- but, you know, you'll see it happen at some point," he said. "We can't really tell you if it's in our plans or not. We'll let you know when we know."
Costco reported nearly $4.6 billion in revenue from membership fees last year, representing over 72% of the total annual profits of $6.3 billion. The company posted net sales of $237.7 billion.
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