Higher tariffs likely — retailers should prepare

As retail companies look to a new Trump administration, higher tariffs are most likely on the way.

There are several ways that retailers and consumer products companies can mitigate cost increases caused by higher tariffs.

Pull forward purchases: Businesses should bolster inventory of goods that they believe may be subject to future tariffs. The frontloading of imports may cause a cash crunch for some businesses. Companies will need to balance the payment terms they offer customers with the need for cash now. Additionally, businesses can increase cash flows by discounting products not expected to be affected by future tariffs. Companies can also borrow additional warehouse space, or temporarily store inventory in countries with more favorable trade agreements.

Plan for potential disruptions in the supply chain: Consumer goods companies should lock in long-term ocean rate contracts to mitigate future rate increases and provide predictability in a volatile market. U.S. imports are already increasing as sellers prepare for potential tariff increases.

Retailers had already increased imports ahead of the port strike in October: 2.29 million 20-foot equivalent units were handled in September, an increase of 12.8% year-over-year. Now, retailers are continuing to increase imports and shift them to the West Coast to avoid another potential strike at East Coast ports in January, according to the National Retail Federation. Some retailers have even switched to air freight to ensure products are available for the holiday season.

Negotiate contracts: Large retailers may negotiate with foreign suppliers to reduce their prices and take on some of the overall cost increases caused by tariffs and freight fees, especially if the alternative is switching to a different supplier. When comparing the cost of sourcing products domestically versus from foreign countries, companies should consider the intangible social and political implications in addition to the raw numbers.

Improve efficiency: In a period of higher financing costs, businesses must increasingly focus on operational efficiency, including maximizing revenue and controlling operating costs. Businesses should use software to ensure accurate qualifying of products for free trade agreements and duty savings programs, resulting in reduced costs while optimizing their supply chain strategy.

Raise prices: Increased costs, such as tariffs and shipping fees, could result in companies needing to raise their prices. If customers do not accept higher prices, increased costs may result in reduced profit margins and lower stock prices. For consumer products companies that sell a diverse mix of products, they should consider spreading price increases across other products where they do not have the same level of competition, rather than risk losing market share by raising prices only on the product that experiences direct cost increases.

The Takeaway

Unless the higher costs created by tariffs can be passed on to the customers, consumer products companies will need to mitigate these changes or see their margins decrease. Among many factors, the cooling of price increases over the past 12 months, despite increased costs suggests consumer products companies may not have the power to raise prices to the same degree as they have in the past. Companies should act now to adjust their supply chain strategy for the likelihood of higher tariffs over the next few years.