These days, consumers don’t exactly have unlimited budgets. And it’s easy to see why.
In February, the Consumer Price Index rose 2.4% on an annual basis. And households across a range of incomes are feeling the pain of persistent inflation.
A recent Harris Poll data published by the Journal of Accountancy found that 50% of Americans fear living costs increases will be an obstacle to meeting financial goals this year. They’re probably not wrong.
In response to inflation, American consumers are changing their ways. A good 59% are planning to cut back on small daily purchases in 2026, reports MarketWatch.
That means retailers have to fight harder than usual to capture consumers’ dollars. But Costco has a huge advantage in that battle.
The price war is squeezing retail margins
It’s not unusual for competing retailers to try to best each other on price. But in recent years, the price war has intensified as inflation, tariffs, and general economic uncertainty have come to a head.
Granted, inflation has cooled nicely after peaking in the post-pandemic years. But while annual inflation may be lower these days, much of the damage has already been done.
Related: Costco members hit with surprising added membership charge
Many consumers are stuck in a cycle where a good number of their expenses are perpetually elevated. And the only way to compensate is to cut back on discretionary spending.
That pullback in spending, though, is coming at a time when retailers are facing higher costs due to inflation and tariffs. And while larger retailers may be better equipped to cope with that pressure, even giants like Walmart and Costco are by no means immune.
Costco, however, has a few key advantages over its competitors that allow the company to lower prices without battering margins.
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Costco’s leaning into value, and it’s paying off
Costco has long emphasized offering members value. “Our focus is really on running the business for the long term and making sure we are delivering value for members,” CFO Gary Millerchip said during the company’s most recent earnings call.
During that same earnings call, Costco said it continues to focus on price reductions wherever possible. And it has two advantages that make that possible.
First, unlike traditional retailers, Costco gets a lot of its revenue from membership fees. That’s money the company takes in without having to sell a single product.
Costco is then able to use membership fee income — which amounted to $1.36 billion during its most recent quarter — to offset the cost of procuring inventory, allowing for more price reductions.
Secondly, Costco can lean on its Kirkland Signature brand to reduce prices on essential products. The brand not only helps Costco maintain its reputation as a leader in product quality, but also helps the company undercut competitors.
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Of course, Costco, like other retailers, faces challenges in the coming quarter. Global economic uncertainty, shifting consumer habits, and potential tariff volatility could all put the pressure on.
But for now, Costco is in a strong position to lower prices and retain members without compromising on quality or risking its bottom line. Not every retailer today can say the same.
Maurie Backman owns shares of Costco.
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