During the 2024 campaign, President Donald Trump talked about imposing a tariff of at least 10% on all imported goods, with products from China facing levies of up to 60% and a 25% tariff on all goods from Mexico and Canada. Though no one knows what a second Trump administration will bring, the potential changes could have a broad impact on retailers across various sectors.
The first Trump administration offers some lessons. Rewinding the clock to the tariffs introduced in 2018 and 2019, we can evaluate the impact of multiple waves of tariffs that hit a variety of categories of imported goods. Food products, particularly produce, were fairly immune to tariffs in the past. However, depending on new tariffs, retailers may struggle to maintain the out-of-season availability and volume that consumers expect, necessitating new strategies to engage shoppers.
Despite the uncertainty, retailers of all types can take steps to minimize the havoc, customer disruption, and impact on their bottom line. Retailers should begin planning for the possibility of new tariffs, including tracking both finished goods and their underlying inputs. The steps below offer a guide.
Targeted pricing strategies avoid crossing key price point thresholds
Tariffs might result in relatively small cost changes for some products given their mix of input materials. But small percentage increases —raising a price 5% from $0.99 to $1.04 — can have an outsized impact on customer perception and willingness to buy. For example, a specialty retailer raised prices on a broad set of tens of thousands of stock-keeping units (SKUs) in reaction to an increase in tariffs on goods from China before the COVID-19 pandemic. Although the increase was below 5% of existing prices, the retailer crossed price thresholds and negatively impacted their customer’s perception. A few months later, they reversed many price increases to address customer backlash. While units rebounded, sales did not.
After the retailer became an Oliver Wyman client, we worked with them to drive better financial performance while not alienating customers. Using an elasticity-driven approach, the retailer made larger price moves (15% on average) than it previously did, but on a highly targeted set of 4,000 SKUs. We also identified 200 SKUs where price investment was required. As a result of this targeted pricing action, the retailer achieved significant margin increases of 9% while growing sales by 5%.
How to handle price increases amid tariff changes
Passing along higher costs only on the items impacted by tariffs might not be the best approach for consumers. Instead, retailers should consider taking an elasticity-based approach to determine which products across their assortment can better withstand an increase.
Retailers should also account for the likelihood of consumers switching to viable substitutes if they apply price increases unevenly within categories. Whether applying price increases disproportionately to certain items or spreading across the entire assortment, retailers should seek to keep category architectures intact, making sure post-tariff prices are aligned with consumer expectations to encourage the right trade-up and trade-down behavior.
The initial elasticity measurement in response to tariffs may need to change over time, and retailers should be willing to revisit and adjust pricing as needed. For example, a trade war could be more disruptive to the economies of certain geographies, changing the relative elasticity of stores in those regions. Considering these changes, retailers should also revisit their typical price-increase guidelines. It may be better to maintain penny-profit rather than margin rate or even to take a profit investment on more products.
Evaluate competitor actions to inform retail pricing
Retailers should track the moves their competitors make on comparable items and evaluate strategic actions in response. For example, are competitors leading or following on price changes? Are they taking a concentrated approach or spreading increases across many items? Retailers should determine how they want to be positioned relative to the moves their competitors are making. In particular, high-low retailers should be deliberate about whether their competitors are protecting margin rate or penny profit. Retailers who need to maintain a base pricing margin may find the price gap to value players widen while those value players protect margins.
Learn from European retailers on managing vendor relationships
Retailers should equip themselves with insights about the input costs of their products so they can validate the proposed cost increases that their suppliers will inevitably pass on because of tariffs. Retailers should pay attention to the evolution of all-in costs from suppliers, including list costs and various sources of trade funding. Promotions will be an increasingly important lever to pull to signal value to customers as base prices rise, so retailers should try to maintain vendor accruals where they can. Beware, however, of shifting too much volume into promotions.
European retailers offer some inspiration. It was common to see retailers use signage to communicate to customers which vendors were or were not willing to be more collaborative during the recent inflationary period. Retailers may consider similar tactics in response to tariff-related price increases that lack transparency and collaboration from their vendors.
Establish robust pricing governance and long-term supply strategies
Retailers tend to increase prices in direct reaction to rising costs. However, many retailers use a moving average cost in their internal reporting, which initially shows positive margin performance but gradually declinesas costs rise to post-tariff levels. Retailers establish robust pricing governance and reporting to monitor these impacts.
Over the longer term, retailers —and their supplier partners — can consider shifting sources of supply where feasible, forward-buying goods or inputs where future tariffs are certain, and focusing on private brands where they can have more control over the specifications and inputs to to design for value.
Adjusting to tariffs in the Trump 2.0 era
Tariffs can be sticky once put in place. We did not see the previous Trump administration’s tariffs reversed under the Biden administration. Resultingly, retailers will be locked into higher cost of goods sold for the foreseeable future. To compensate, retailers should look to reduce other costs in the business, including goods not for resale and overhead costs. To remain competitive amid the consumer shift to value, retailers will need to find ways to reinvest in their value propositions. Personalization will be a key part of the solution, as retailers can then deliver value in a targeted way where it matters most and drive demand.
During the first Trump administration, there was a lot of uncertainty about when new tariffs would be sanctioned. With the potential expansion of tariffs beyond China to Canada and Mexico this time, it is particularly difficult to make predictions. Retailers that embrace this uncertainty and put processes in place to respond with agility stand the best chance of success as circumstances change.