How Costco is managing inflation

Inflation forced Costco to raise prices on popular bakery items

With inflation continuing to hover near a 40-year high, companies and consumers alike are struggling with the pain of rising prices. 

A Costco executive addressed the issue on Thursday, providing insight into how the retailer is handling rising prices while still providing value to customers.

Costco

A Costco Wholesale retail club in Austin, Texas, on Dec. 12, 2016. (Reuters/Mohammad Khursheed / Reuters Photos)

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COST COSTCO WHOLESALE CORP. 492.65 +4.39 +0.90%

Bob Nelson, Costco’s senior vice president of finance and investor relations, noted during the retailer’s third quarter 2022 earnings call that inflation "continues," saying that "pressures from higher commodity prices, higher wages, higher transportation and supply chain disruptions" are "all still in play."

Nelson said that for the first quarter of its fiscal year, Costco estimated price inflation was around 4.5% to 5%, and in the 6% range for Q2. He said that "for Q3 and talking to our merchants, estimated price inflation was in the 7%-ish range."

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Nelson was asked how the company balances passing along some price increases – particularly with prices on some items rising much higher than the estimates he provided – while still offering value to customers.

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Cars line up for gas at a Costco gas station in Vallejo, California. (Thearon W. Henderson/Getty Images / Getty Images)

"We always want to be the best value in the marketplace," Nelson said. "And to the extent that we continue to show that, I think it's easier for us to pass on higher pricing, or higher freight costs, or raw material cost, assuming that we show that value in the marketplace."

Nelson gave an example of where the company reluctantly raised the price of its muffins and croissants by a dollar recently because the cost of various raw materials that go into them had doubled, tripled and even quadrupled. 

One area where Costco is not yet passing on price hikes is through its membership fees – for now.

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The company typically raises its membership fees every five or six years, and next month will be the five-year mark from the last increase in 2017. In the previous quarterly earnings call, another Costco executive pointed out that June would be the anniversary, sparking speculation that customers could expect an increase around this time.

But Nelson said on Thursday's call that "given the current macro environment, the historically high inflation and the burden it is having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time."

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Shoppers search for items at a Costco Wholesale store on Aug. 4, 2020, in Colchester, Vermont. (Robert Nickelsberg/Getty Images / Getty Images)

Nelson also confirmed that there are no plans right now to raise the price of the company's famous $1.50 hot dog and soda combination.

Costco has raised prices in some areas in food and sundries, he said, adding that "the balance was slightly more in nonfoods than in foods" but that the company focused more on items than categories.

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"We did see inflation in fresh foods come in slightly lower in Q3 versus Q2 a year ago as we began cycling high meat prices," Nelson said. "We believe our solid sales increases and relatively consistent margins show that we have continued to strike the right balance in passing on higher costs."