Retail Pulse Report: The Tariff Challenge is Just Beginning

Tariff volatility is almost worse than ridiculously high rates.

Source: Adobe Stock’s AI interpretation of “retail tariff volatility”

After a month of he will, he won’t, he’ll deal, he’ll delay, who knows what will happen next, it’s time to talk tariffs. You may think it’s too late – all the ink has been spilled on this topic already – but I would argue that no, the pain is just beginning. And there is no easy, right solution, especially for fashion retailers.

And, for the record, I’ve seen that one supposed way of telling if someone is using GenAI is the catchphrase “let’s dive in”, which I’m bummed that this has happened, because I liked that transition. But now I feel like I have to find something else to use because I 100% do NOT use GenAI for any part of this article besides the SEO recommendations. So, sigh, I guess let’s take a look? Dive in? Jump in? Whatever.

How Tariffs Normally Flow Through Retail

We can have a conversation about how long it has to be abnormal times before “abnormal” is the new normal (we’re already well past that), but let’s pretend we can remember what normal was like.

When tariffs are steady and predictable and retailers and manufacturers can easily factor them into their supply chain, they come into product accounting as part of landed cost. It’s basically like a shipping charge. If you’re bringing in 1,000 units of product and it costs $750 plus $150 in shipping and $100 in tariffs, that’s a landed cost of $1,000 or $1 per unit.

Assuming the product costs the same (which is not a good assumption if currency effects are involved but I’m seriously only going to do so much math), if one shipment has a shipping fee of $150 and the next shipment has a shipping fee of $250, then your total landed costs for the second 1,000 units is $1,100 and for the 2,000 units is $2,100. Now you have to decide, are you going to eat the $100 or pass it on to consumers?

If your markup is 100%, your original expected price was $2 on $1 per unit cost. In the new cost profile, either you let the old price flow through the system and put in a new price of $2.20, or you reprice everything. You can reprice based on the new average landed cost per unit, which is now $1.05 (new price $2.10) or you can be a little aggressive and reprice the whole lot – whatever is left of the $2 unit price and the new lot – at $2.20. And whatever you decide, that’s all great – until the next shipment arrives and you have to do it all over again.

Your decision depends on how fast the goods move, how many more shipments you expect to get in, how volatile any of these price components are (even the goods themselves could be volatile, see: chocolate), and one more really important factor that nobody has been talking about: how much it costs to reprice everything.

Companies used to dealing with volatility will factor in forecasts of expected costs and then set a price that has a tolerance band – if you stay within the band, no reprice is needed, and if you exceed the band then a new decision has to be made, and it will depend on how much old inventory is left in the system, how much you think consumers will tolerate the price increase, and the labor required to find and reprice every item.

In grocery, that’s become much easier, thanks to the proliferation of digital shelf labels. In fashion, it’s a lot harder, but also fashion has some different tools to protect margin that they can apply in a different way than grocery can. Let’s break that down.

Abnormal Times: Tariffs and Landed Costs

When tariffs become a “spin the wheel and find out your rate this week”, forecasting landed cost becomes a nightmare, especially when it could run anywhere from 10% to 145% and could literally be applied this week but not next week. If you have several containers of the same product and they vary that much in the tariff applied, you’re going to be all over the place in your tolerance band and have serious questions about when and how to pass those costs on to customers.

Let’s also not forget that there has also been a surcharge on Chinese-made cargo ships docking at US ports. That also has been on-again / off-again to the point that I’ve lost track, but that surcharge also makes shipping fees more expensive as freight companies pass that along to purchasers. So it’s not just tariff costs that have become unpredictable, it’s shipping costs too (the vast majority of cargo ships are Chinese-made, even if they don’t sail under a Chinese flag).

And now we have a weird bullwhip effect that has to make its way through the supply chain – April saw a huge drop-off of import volume, and May will be worse. June could pick back up again, now that there is a 90-day reprieve on the Chinese 145% tariff, but that could result in a stampede of trying to bring in goods before the 90 days expires because who knows what will happen next? Manufacturing and shipping capacity does not flex so easily as all that. Which means high demand will push prices up, and retailers and brands will have to incorporate those rates into their landed costs.

So when economists felt the need to jump in and say that high tariffs didn’t automatically mean inflation, that’s only because there is the lag between when the first high tariff hits until it works its way into the supply chain and shows up at the shelf. But high tariffs definitely will mean higher prices. The only question is how sticky those price increases will end up being. So let’s look at that next.

Abnormal Times: Tariffs and Prices

Let’s take grocery and set that aside. Yes, packaged goods might have some differences, but basically we’re talking commodity goods, and the cost gets translated directly to the shelf pretty quickly. Commodity goods can often already have a lot of volatility, so the cost and price management is already more sophisticated there than for other categories. The goods turn over quickly, and so old prices sell through quickly.

Can retailers arbitrage a little on raising prices a little faster than they need to and holding them higher longer than they need to? Definitely, and some companies did some analysis to imply that this was very much the case during the pandemic, from manufacturers through to the grocers themselves (though the results were inconclusive).

Fashion, though, is much more difficult (and fashion-like goods with a short lifecycle and limited to no ability to replenish). Fashion is most often priced at the source of manufacture. The goods coming in are already tagged, individually, with a price that was already forecasted and anticipated. So if tariffs go haywire, not only do they have to figure out what it means from a cost perspective, if they do decide to change prices, it gets very labor intensive very quickly. You have to decide if you’re going to just reprice the new lot – and deal with mixed prices in the field, which is a poor customer experience – or hunt down every last stray piece of inventory out there to raise the price across the board.

Fashion retailers deal in seasons, though, so you don’t have a constant stream of shipments coming in over time. You buy for a season, you sell through the season and then you most likely never see that specific item on the rack ever again. So if you don’t change the price on the item hit with the haywire tariff, then it’s not like you’ll get a chance to tack it on to the next shipment – you may have to tack it on to the next season’s items.

You can potentially try to recoup the cost increases by slowing your markdown cadence – that’s one of the tools that fashion retailers can use that don’t really apply too much to grocery. That may especially be true if you don’t have a lot of goods coming in behind the ones hit with a high tariff because you froze your supply chain until you had a better idea of how tariffs are going to go. But fashion retailers depend on season to keep things fresh and new, and if consumers are done with the items that have the wonky costs before you are, it’s not going to matter what your margin objectives are. You will have no buyers for what you have to sell – unless you’re willing to mark it down.

A Pesky Thing Call Pricing Regulations

So it should not be surprising then, that retailers have wanted to apply surcharges to items, rather than reprice everything. Forget about making a political statement (though admittedly, some retailers have wanted to make a political statement), if costs are that volatile, the cheapest, easiest way to manage it is to apply a surcharge that you can easily remove when things settle down.

We all know how that went for Amazon’s Haul site. But there’s more to it than that. Whether a product is already tagged for a price or not, online you can post any price you like and it’s easy to change. In stores, it’s a lot harder – back to the whole labor costs of repricing things. But also, there are a lot more regulations governing what retailers can put on the shelf versus ring up at the register, when it comes to price.

I am not an expert by any means, but I’ve been in store operations long enough to know that there are rules about “regular price” and how long an item has to sit at regular price before you can put it on sale. There are regulations about the ratio of “on sale” and “markdown” against regular price during a product’s lifecycle. And there can be regulations about even the ratio of “on sale” – promotions or temporary price reductions – vs. markdowns, or permanent price reductions. And since we’re talking about US impact here, these can also vary state by state.

So fashion retailers are particularly stuck between a rock and a hard place. If they choose to actually change price labels to raise prices, but then find out they don’t need to raise prices by as much, depending on where they are, they may be stuck with the higher price for a couple of weeks before they can mark it down. If they choose to apply a surcharge, they’re going to have to figure out how to navigate signage requirements so that shoppers are not surprised when they get to the till – which has its own potential downfalls in terms of customer satisfaction. You thought that shirt was $20 (because that’s the price on the ticket)? Nope, it’s actually $25. That conversation is going to suck for a frontline store associate, and shoppers are already cranky enough as it is.

And then there’s the method of application of the surcharge, which was a fun 2 weeks for me. Retailers have wanted everything from line-item by line-item fees, which sub-total to its own line somewhere at the bottom of the receipt, all the way to just having an asterisk on items with a footnote on the receipt that says “This item was subject to Trump tariffs.” Well, I think it is likely the first time in the history of retail that retailers have wanted to raise prices, while also explicitly drawing consumer attention to the fact that they are raising prices.

It’s not that a POS system (a financial system of record, by the way, there to generate the contract of sale between the retailer and the customer, which everyone forgets because it’s so ubiquitous) isn’t capable of handling different ways of raising prices, it’s that each way has downstream financial implications that have to be accounted for.

Here’s just a few implications. Fees usually aren’t taxed, but if you’re adding a surcharge that is supposed to be passing on a price increase, shouldn’t that be taxed? I’m sure taxing authorities will want their share. If you use a tax to pass through a surcharge, you need to make sure you map it appropriately all the way through to the general ledger (G/L) because typically taxes are a liability (you are collecting them on behalf of a taxing authority, whom you are going to owe). But tariff surcharges are additional revenue that you now need to reconcile against the tariffs you collected as part of your landed cost.

If you used a linked non-merch item as the surcharge, is it returnable? Non-merch items are also expressed as a fixed price, not as a percent, so it’s more limiting in what you can apply. And then, just for fun, we tested a “reverse promotion” where it was an upcharge instead of a discount. It worked, until our best deal engine kicked in and immediately realized it was a terrible “deal” for customers and refused to apply it.

Oh and then there’s the whole, how much are you going to charge? I know a lot of retailers who are still just trying to figure out how much tariff an item will incur, given that its component parts are sourced in multiple countries before being assembled somewhere else. And, if you charge your actual costs – because you don’t want to overcharge customers, it’s bad enough already – now you need to worry if people will be able to reverse engineer your margin.

What Did We Learn This Week?

All of this to say, tariff talk may have seemed to settle down, but there is no certainty. Ninety-day reprieves are barely enough time to order and receive something from a Chinese manufacturer, and as we have seen, it could be 900 days or 9,000 days before a manufacturer can set up manufacturing – of comparable quality – anywhere else.

So this problem is not over by any means, and retailers face no good options for how to manage it. Forget about the politics (which, actually, you shouldn’t), retailers can’t “just raise prices” and they can’t “just put surcharges” on everything either. Which is why it’s not too surprising that consumer confidence has fallen again, even when the surveys were fielded after the reprieve. Reprieve does not equal certainty, and it’s the lack of certainty that is as much a problem as ridiculously high tariffs.

No good advice from me, this is a mess. But if you didn’t realize that the natural response to uncertainty is to hit pause on everything (though how could you not, after living through the pandemic), then hopefully you know it now.

Program Note: Next Monday is a US holiday, so expect your RPR on Tuesday May 27.

Until then,

- Nikki