Source | Lingshou ID | lingshouke The Butterfly Effect of Tariffs The butterfly effect of tariffs is causing supply chain turmoil for foreign retailers. A report from the UK's Financial Times revealed that Costco is pressuring Chinese suppliers to lower prices. Just days earlier, Walmart was thrust into the spotlight over news that it had demanded a 10% price cut from Chinese suppliers. The direct trigger for these actions is the new tariff policy of the U.S. government. Although officials have not publicly responded, this quiet game has already sent ripples through China's manufacturing heartland. The cause is simple: the Trump administration has continuously raised tariffs on Chinese goods, from 10% to 20%, leading to a significant increase in import costs. Facing pressure, Walmart and Costco are attempting to shift costs through their supply chains, passing them on to Chinese suppliers. However, this move has met strong resistance, even triggering negotiations with China's Ministry of Commerce. Several industry insiders point out that some large retailers, facing rising costs, are unwilling to raise consumer prices to avoid losing customers, so they can only "seek profits upstream," passing pressure to suppliers. Walmart and Costco can push this transfer because they have vast global procurement systems and supply chain control capabilities. For example, in 2023, Chinese companies still accounted for over 35% of Walmart's global suppliers. Although Costco has increased procurement in Southeast Asia in recent years, it still deeply relies on Chinese manufacturing for food, home appliances, daily necessities, and other categories. This deep dependence is accompanied by a concentration of bargaining power. Especially in the business model of trading volume for price, suppliers have to accept a certain degree of "price suppression" in exchange for orders and shelf space. This turmoil reveals the dilemma faced by Chinese suppliers—they are almost powerless against demands for significant price cuts. "Walmart's order volume for a single item is the largest in the world. The flip side of this scale effect is the extreme squeezing of suppliers' profit margins," a FMCG supplier told me candidly. The most profitable days of supplying goods to foreign retailers for export are long gone. He recalled that before 2016, suppliers' net profit margins remained at 15%. But after the U.S.-China trade war broke out in 2018, additional tariffs raised rates on some goods to as high as 25%, quickly compressing suppliers' net profit margins to around 5%, with small and medium suppliers even lower. A 2021 survey showed that 73% of small suppliers had net profit margins below 1%, and some even took orders at a loss just to maintain relationships with foreign retailers. "Now, if you can get a 5% profit margin, that's considered huge," the supplier said. "Below 3%, basically no one is willing to do it." Against this backdrop of razor-thin profits, Walmart and Costco's price cut demands are like "pulling the rug out from under" suppliers. Their profit margins have been squeezed to the limit, and further price cuts would only push them into losses. Once raw material prices rise or exchange rates fluctuate, companies often quickly slide from thin profits to severe losses. More critically, foreign retailers have long known the cost structures of their suppliers. Their procurement teams conduct in-depth research to precisely understand each supplier's production costs and profit margins. Most suppliers' profits are typically only 2% to 3%, such thin margins cannot meet the price cut demands of retailers. However, there are benefits to working with Walmart. The supplier noted that Walmart's payment terms are relatively short and it is more honest in payments. In contrast, some domestic retailers may have payment terms as long as six months or more, which invisibly increases suppliers' capital costs and further compresses profits. In fact, this is not the first time Walmart has launched large-scale price cut demands on suppliers. As early as 2015, to compete with Amazon, Walmart demanded a 15% price cut from Chinese suppliers. According to a 2019 supplier survey, 82% of Chinese suppliers said they face at least one mandatory price cut demand each year, with an average reduction of about 5%. Currently, Walmart has about 15,000 suppliers in China. This price cut demand appears to mainly affect kitchenware and clothing suppliers, but in reality, it impacts the entire industrial chain. From production to logistics to the final consumer market, every link may be affected, creating a chain reaction. The 'Dilemma' for Foreign Retailers For Walmart and Costco, they also face a dilemma. On one hand, inflationary pressures in North America have not been eliminated, and price increases would directly affect sales; on the other hand, brand premium space is limited, and they cannot use a "high-end" positioning to offset costs. According to NielsenIQ data, in the first quarter of 2024, U.S. retail consumption growth was only 2.7%, far below the 8.1% in the same period in 2022. At the same time, Costco's financial report showed a 0.2% decline in gross margin; Walmart's net profit grew less than 3% year-on-year, mainly driven by e-commerce and Sam's Club. Under the iron rule of "low price, high quality," retailers also have to choose: squeeze suppliers or squeeze their own profits. Against this backdrop, many Chinese companies have begun to proactively seek transformation. For example, more suppliers are turning to support live-streaming e-commerce and domestic brands, expanding into the domestic market; some are also starting to develop their own brands and direct overseas sales. Additionally, Chinese manufacturing is accelerating its embrace of green, smart, and customized directions. "Winning solely on price won't secure the future," noted an industry association leader. "A truly resilient supply chain must be built on technology and brand." This price cut incident, on the surface, is an aftershock of tariff policy, but in essence, it reflects deep operational challenges for Walmart and Costco. Not long ago, Walmart announced its fiscal year 2025 revenue: total revenue of $681 billion, a year-on-year increase of 5.1%. This achievement not only set a new record for global corporate revenue but also marked the 12th consecutive year at the top of the Fortune Global 500. Apart from strong performance in China, Walmart's performance in other regions has been mediocre. On one hand, due to geopolitical factors, especially tariffs, Walmart lowered its revenue expectations for fiscal year 2026; on the other hand, there is competition from Amazon. In the fourth quarter alone, Amazon's revenue reached $187.8 billion, surpassing Walmart's $180.5 billion, achieving a historic reversal of e-commerce over traditional retail. Even for the full year, although Walmart's total revenue of $637.9 billion slightly exceeded Amazon's, the latter's growth rate of 10.99% far surpassed Walmart's 5.1%. In its global operations, Walmart found that the only market maintaining relatively high growth is China. In fiscal year 2025, Walmart China's net sales were approximately $20.3 billion, a year-on-year increase of 13%, with Sam's Club performing particularly well, growing over 25%. Especially in the fourth quarter, Walmart China's year-on-year growth surged to 27.7%, far outpacing its global revenue growth of 5.3%, making it one of the few bright spots in Walmart's global landscape. However, relying solely on China's growth is far from enough to offset Walmart's pressures in other regions. In the U.S., inflation and credit tightening have significantly reduced consumers' purchasing power. To maintain its "Everyday Low Price" image, Walmart must aggressively cut costs, or it will lose price-sensitive consumers. Moreover, "Everyday Low Price" is also Walmart's core business "secret": leveraging scale procurement to lower costs, then attracting customers with low prices, forming a "low price-scale" cycle. This model is now facing diminishing marginal returns. Although revenue growth continues, the pace is gradually slowing. In fact, Walmart is already adjusting. For example, it has closed some hypermarket stores, remodeled and opened new ones to better suit the Chinese market; Sam's Club is also accelerating its store opening pace. Taking its hypermarket format as an example, in January 2025, Walmart opened two new stores in Kunming, marking the official debut of its new-generation stores. Compared with traditional hypermarkets, the new Walmart stores are more like leisure and entertainment destinations for middle-class small families, with a focus on curated, precise, and refined product selection. From daily meals to selected daily necessities, products are presented in a way that emphasizes "quality, health, uniqueness, practicality, small packaging, and value." Shoppers are dispersed across different areas, quickly and precisely selecting what they need, with every small detail filled with convenience and comfort. At the checkout, customers use the Scan & Go feature to complete their shopping quickly, making the entire process efficient and seamless, with almost no delays. Walmart's new-generation stores represent its latest transformation—anchoring on an omnichannel portfolio tailored for middle-class small families, summarizing its own experience, and forging a new path of transformation. Walmart is also redefining Walmart, "strengthening trust, restarting growth, and reshaping the Walmart brand." Of course, this will take more time. Similarly, Costco's market performance is not optimistic. On March 6, Costco reported its second fiscal quarter with revenue of $63.7 billion, slightly above market expectations of $63.1 billion. Same-store sales grew 6.8%, also exceeding expectations of 6.4%. However, earnings per share were $4.02, below analysts' expectations of $4.09. After the earnings release, Costco's stock fell 1.4% in after-hours trading to $1,013. Additionally, Costco's performance in China, especially in terms of store opening speed and scale, still lags behind Sam's Club. To date, Costco has opened 7 stores in mainland China, while Sam's Club has opened 54. In terms of localization, Sam's Club also performs better. From these perspectives, Costco faces considerable pressure as well. Impact From another angle, the market position and development potential of Walmart and Costco cannot be ignored. For example, Walmart's procurement accounts for more than 10% of China's total exports to the U.S., approximately $50 billion. This is not just a massive economic figure but also a link closely tied to over a million Chinese jobs. Considering the derivative effects of the entire industrial chain, orders could even influence 0.5% to 1% of China's employment rate. However, this economic connection does not mean Walmart's price cut demands will be easily met. The aforementioned supplier told me that unilaterally demanding price cuts without increasing order volumes clearly cannot reduce suppliers' unit production costs. Under the multiple effects of tariff policies, cost pressures, and international games, the retailer-supplier relationship is no longer simple cooperation but more like a complex power game. Theoretically, for Walmart to truly reduce procurement costs, the only feasible way is to expand order volumes, using scale effects to lower suppliers' production costs. Some speculate that Walmart may eventually have to raise retail prices to solve this problem. After all, there is no cheaper daily goods supplier than China in the international market. But the aforementioned supplier disagrees, believing this path is almost impossible. Taking the textile supply chain as an example, Walmart's procurement strategy is almost a precise "oppression model." It first asks three main suppliers to lower prices; if refused, it turns to three backup suppliers to negotiate new prices, attempting to use order transfers to negotiate with main suppliers. If backup suppliers cannot handle large-scale orders, it pressures other candidate suppliers, asking if they can produce at lower prices. In this situation, main suppliers face not only order reductions but also idle capacity issues—equipment, labor, and materials may all suffer due to reduced orders. This situation is almost a life-or-death battle for suppliers: either compromise or fight desperately for orders, possibly even being forced to set up overseas factories to reduce costs. "Walmart is well-versed in this supply chain game and can switch to new suppliers within months," the supplier said. For Walmart, replacing suppliers is a trivial matter, but for suppliers, it is a matter of survival. In the short term, Walmart will not easily make concessions on prices. Because in the global supply chain, there is never a shortage of suppliers willing to "roll up their sleeves" and compete. For suppliers, survival is the top priority. To avoid being eliminated, they will accept Walmart's demands, even if it means further profit compression. However, from a longer-term perspective, the shift of industrial chains is an inevitable trend. With cost pressures and changes in the international trade environment, consumer goods exports are gradually shifting to Southeast Asia and other regions. Walmart's aggressive price suppression, on the surface, is a cost game, but in reality, it reveals that the retailer-supplier relationship is undergoing profound changes. In contrast, domestic supermarkets use a "direct sourcing" model, purchasing directly from origins or manufacturers, bypassing distributors, significantly reducing circulation costs. Hema has established direct sourcing bases with farms, while Yonghui and Jiajiayue have eliminated backend fees, further easing pressure on suppliers. This model gives supermarkets greater pricing autonomy while easing tensions in the retailer-supplier relationship. Although direct sourcing brings cost advantages, it places higher demands on capital flow and logistics management, and only supermarkets with strong operational capabilities can handle it. Sam's Club, through membership fee income, has freed itself from dependence on supplier price differences, with membership fees becoming a key to stable profitability. Walmart, however, remains stuck in the outdated logic of "scale-based price suppression," but changes in the retailer-supplier relationship have long surpassed cost games, evolving into a profound iteration of business models. Regardless of the final outcome, this round of price suppression will become a nodal event in global retail and supply relationships. It reveals not just cost games but a redefinition of trust, equality, and sustainable cooperation. At the crossroads of global industrial chain restructuring, whether Chinese manufacturing can transform from "price taker" to "value co-creator," and whether Walmarts can shift from "bargainers" to "enablers"—perhaps what truly matters is not how many percentage points are cut this time, but how the rules will be rewritten afterward.