The “Costco Effect” is having a domino-like impact on the world of retail, forcing giants to rethink strategies in the face of tariffs, supplier pressures, and skittish consumer loyalty.
Costco, a retail powerhouse, has consistently delivered steady sales despite shaky economic conditions. Similar to its retail rival Walmart, Costco’s appeal to wealthier shoppers – particularly value-seeking consumers – has helped it carve out a dominant position. But with U.S. tariffs on imported goods threatening profits and production, two of America’s biggest retailers are facing mounting pressure, and the clock is ticking.
“The narrative of economic resilience is not about immunity, but adaptability,” said Jerry Sheldon, vice president at IHL Group. “Costco and Walmart serve as canaries in the coal mine, signaling broader market challenges.”
According to Sheldon, smaller retailers are left more vulnerable, “like small boats navigating through increasingly choppy economic waters,” adding that “these pressures create a Darwinian selection process.”
David Warrick, former head of global supply chain at Microsoft, echoed this sentiment in an interview with Quartz, explaining that even the biggest players aren’t immune to trade uncertainty. “These giants have the leverage to negotiate but smaller brands simply don’t have the same bargaining power,” said Warrick, now EVP at software platform Overhaul.
Sheldon likens the situation to a high-stakes chess match. “Supplier negotiations are a game of chess,” he says, explaining that giants like Costco and Walmart use their market power to shift costs and will quickly pivot to new suppliers to minimize tariff impacts.
Walmart has reportedly asked Chinese suppliers to absorb up to 10% of U.S. tariffs, while Costco has followed suit, though it hasn’t clearly disclosed the exact amount suppliers will absorb. A Costco supplier told the Financial Times that larger suppliers have the “muscle” to absorb the extra costs, but smaller suppliers might be squeezed and ultimately “screwed.” Walmart previously told Quartz it would continue working with suppliers to “keep prices low,” but executives have acknowledged that price hikes would be passed onto consumers if tariffs are implemented.
While this tactic may work in the short-term, it could damage supplier relationships in the long run, potentially leading to higher prices for consumers. Target, for instance, has already indicated it will raise prices on popular items like bananas, avocados, and strawberries. Unlike its competitors, Target has reduced its reliance on Chinese manufacturing from 60% to 30%.
Sam Wise, CEO of software development platform Optimum Retailing, argues that Costco’s position is strong enough to minimize the impact of tariffs.
“Between the boost they get from its membership fees and the broad reputation for value the brand has, Costco has more options to offset the impact,” he said.
When sizing up Costco and Walmart’s operations, the scale disparity is evident. Costco’s footprint – over 600 U.S. locations – pales in comparison to Walmart’s massive 4,700-plus U.S. stores. In mainland China, Costco operates just seven warehouses, far behind Walmart’s 330 locations. Despite the size difference, Costco’s ability to weather the tariff storm may be bolstered by its membership model, which generates a steady income stream.
In 2024, Costco’s membership fees accounted for $4.8 billion in sales, rising 5%, representing a 90% renewal rate, according its annual report. Meanwhile, Walmart invested approximately $4.9 billion in 2022 for in-store upgrades and remodeling.
However, relying on membership sales to offset tariffs isn’t without risks. “Costco will either have to raise prices or pressure suppliers to absorb the costs,” Craig Zawada, chief visionary officer at PROS, a software development company, told Quartz in an interview. Costco traditionally operates on thin margins, so any tariff would significantly affect its bottom line.
Notably, Costco’s fuel empire is stronger than Walmart’s. Costco operates 700 gas stations that account for 12% of its annual revenue, while Walmart boasts just around 400 fuel locations.
When it comes to Diversity, Equity, and Inclusion (DEI), the retail rivals diverge sharply. Costco has stood firm by its DEI plans, even in the face of backlash, while Walmart has pulled back from its DEI initiatives, sparking criticism from shareholders who call the move “disheartening.”
Much like the California Effect – which saw strict regulations set by one state ripple through others – Costco and Walmart are now navigating the cascading impact of tariffs, fickle consumer loyalty, and new market pressures. As both retailers press suppliers to shoulder the tariff burden, they could be positioning themselves to weather the storm.
While deep consumer trust and memberships may provide a cushion, the “Costco Effect” may soon be put to the ultimate test. And if tariffs persist, the retailer’s ability to adapt could determine whether it sinks or swims.