Dive Brief:
- Costco expects supplier wage increases to keep prices elevated even as commodity and other supply chain costs ease, EVP and CFO Richard Galanti said on a Q4 earnings call last Thursday.
- The big-box retailer has worked with suppliers to lower costs as key commodities prices decline. With suppliers passing the cost of increased wages on to their retail customers, though, higher prices could be “sticky,” Galanti said.
- “Wages are still the higher thing when we talk to our suppliers,” said Galanti, who noted that prices of gas, steel, beef and some plastics have declined. “But overall, some beginnings of some light at the end of [the] tunnel.”
Dive Insight:
Suppliers are beginning to see costs ease with a drop in commodity prices, and some companies are now reengaging their vendors to ensure that the savings are passed on. However, after many suppliers sharply increased wages to attract new workers over the past two years, prices may not return to pre-pandemic levels.
“In terms of the stickiness, wages are still the culprit,” Galanti said, adding “we’ll try to unstick them, but I’m sure some of it will stick and some of it won’t.”
Manufacturers sharply increased wages after labor constraints during the pandemic created production slowdowns and delayed deliveries. The industry recorded a 5.1% increase YoY in hourly earnings in January 2022, according to a Deloitte analysis of data from the Bureau of Labor Statistics. In comparison, pre-pandemic average wage growth per year stood at 2.4% in manufacturing for 2016-2019.
Some pressures among suppliers have begun to ease, however. An Institute of Supply Management index tracking prices paid by manufacturers dropped in July to its lowest level since June 2020, and the sector reported an improvement in deliveries in addition to a decrease in raw materials prices.
“New order rates returned to expansion levels, supplier deliveries remain at appropriate tension levels and prices softened again, reflecting movement toward supply/demand balance,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.
With higher supplier labor costs expected to persist, businesses are focusing on improving productivity to offset the inflated prices. At Costco, Galanti said the retailer was able to work with suppliers to lower costs by “changing the production line or eliminating some of the inside packaging.”
“We think we are pretty good at figuring that out with our suppliers, not only just to say, hey, the price went down on this commodity or this supply cost component, but also on figuring out how to make things more efficient,” Galanti said.
