Now I know what you are all going to say: “Yes, we know - Amazon (AMZN) is going to put margin pressure on retailers.” That may very well be true, but I want to discuss a topic that has not been factored into the equation: simple cardboard.

One of the great things about Seeking Alpha’s website is that diverse opinions and expertise (for better or worse) can shine new perspectives on topics that can directly affect a company’s performance. I currently serve as the COO of a company that exports to Sam's (WMT), Lowe's (LOW), Home Depot (HD) and other smaller retailers. We ship almost 4,000 containers per year out of the port of Cebu, Philippines. Products include outdoor garden and other home goods.

I have firsthand knowledge of production issues involved with corrugated cardboard packaging. The news isn’t good. Pricing started to trend higher last year, then exploded lately. There are three main reasons for this.

The effects have been skyrocketing prices, even here in the Philippines. China corrugators are now buying all the excess material they can from countries like the Philippines to meet the demand. Coupled with the shutdown of many factories, the raw boards used by corrugators have nearly doubled in price. I have witnessed this first hand.

For our smaller customers, solely due to cardboard, we have raised our prices by more than 15% - almost overnight. For larger customers, this simply is not possible as all pricing is negotiated upfront per season. But the resets will be higher priced. There is little margin already in the manufacturing business, and these costs will have to be pushed out onto the retailers. Other manufacturers will be forced to do the same thing – all throughout Asia.

This will affect the margins of all retailers, from Walmart (WMT), to Target (TGT), and of course, Costco (NASDAQ:COST ). One answer is for them to simply raise prices, but that is difficult to do in a real-world retail environment. There are just key price points that must be hit. $29.99 is a lot more appealing a price point than $31.07. Some of this margin loss will have to be absorbed by Costco. Costco is far more exposed due to their low priced business model.

Looking at Margins, let’s look at Costco’s last 10-K. Directly in the boilerplate risk factors, Costco acknowledges this type of risk and the inability to pass it onto consumers.

Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our operations and financial results.

Looking at margins, we can see that Costco operates on a very low markup.

That’s right – at the end of the day, Costco brought down 2.07% of sales to their bottom line. Even a 10 or 20 Basis point change (.1% to .2%) in their operating margin would have large ramifications on their bottom line and EPS. In other words, it doesn’t take much margin pressure to really move the needle on Costco’s earnings. Costco, due to its low margin pricing, is far more susceptible to margin pressure than, say, Walmart – which operates on a gross margin of 24.9%. So a small change in higher prices paid, subjects Costco to a far more negative impact than Target or Walmart.

Do I expect a 10 or 20 basis point move in margins? Well, they have had a 24 basis point move in a single year in the past (to the good). Costco is a very well-managed company and they certainly are out in front of this issue as much as possible. But over time – I could certainly see a 20 basis point (or more) move in margins against them. Fifty basis points negative over the next 24 months would not surprise me. This will create a large headwind on earnings over the next two years. I would be cautious on the shares here at $158.

This is not a well-written-about or well-known problem for the sector. Right now it's "Amazon Amazon Amazon" - but as the news spreads across retail on packaging, you can expect some headline risk to the stock. I am only aware of this issue because I live and breath packaging everyday.

As always, do your own research and make the best decisions. For followers, I will update the corrugated packaging problem on my Seeking Alpha Blog as events change.

This article was written by

Long time manufacturing industry veteran. I have built and run factories in Asia and the Philippines, along with a long entrepreneur history. I currently hold a FINRA Series 65 license (RIA Law Exam) and I try to provide an entertaining and useful view on stock opportunities. I currently assist Robert Honeywill as a contributing Author for Analysts Corner Marketplace.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.