How upcoming tariff increases may impact retail budgets
As the U.S. waits for the new administration's inauguration, uncertainty looms over the fate of tariffs and their potential impact on retailers and consumers.
While specific details about changes to tariff policies remain unclear, speculation suggests China tariffs could rise from the current 25% rate to as much as 60% or higher. However, some experts anticipate that some adjustments may be more modest initially.
Understanding that a tariff increase does not necessarily translate into a direct rise in sales prices is important. This could have varying effects for retailers depending on whether the products are for resale or used in-store (such as fixtures or displays).
Here’s a closer look at how tariffs may affect retail budgets from a fixture rather than a retail perspective, and strategies retailers can employ to mitigate their impact.
Mechanics of Tariffs and Their Ripple Effect
Tariffs are taxes imposed on imported goods, taking effect when the product clears U.S. customs. While the tariff rate is applied to the declared value of goods, its ultimate impact on retail prices is influenced by several downstream factors:
- Container Efficiency: The number of goods in a shipping container reduces overall ocean freight costs but does not affect the tariff costs. A fully packed container may reduce the per-unit freight cost, but it won’t reduce the impact of a tariff increase. However, it is important to note that freight costs themselves are not subject to tariffs. Only the cost of the goods being imported are impacted, meaning that a tariff increase won’t be a one-to-one hike in prices.
- Domestic Assembly: Products requiring final assembly in the U.S. are not be subject to higher tariffs on the assembled portion of the product, which can complicate estimating the final effects of the tariffs.
- U.S. Handling Costs: Tariffs apply solely to the cost of the imported goods, not to additional domestic expenses such as unpacking, inspection, loading pallets, transportation, or in-store assembly. However, as tariffs rise, retailers may need to rethink how much they plan in advance, adjust inventory levels or expedite deliveries, potentially driving up overall logistics costs.
When factoring in these variables, the real-world impact of tariffs on retail pricing are typically lower than expected. For instance, an increase to 60% tariff on displays might result in only a 10%-12% rise in retail prices, while a 10% tariff increase might lead to a modest 1%-2% price bump depending on the proportion of the selling price attributed to the cost of goods from China versus other expenses not subject to tariffs.
Budget Implications for Retailers
When tariffs rise, retailers face a challenging balancing act. While price adjustments are often inevitable, the key question is how much of the additional cost can be absorbed internally rather than passed on to consumers. Budget considerations include inventory planning, where retailers may increase inventory levels ahead of anticipated tariff changes, creating a short-term strain on cash flow.
Higher tariffs may require reevaluating logistics, assembly processes, and supply chain efficiencies to minimize cost increases. Retailers must decide whether to absorb some tariff costs themselves to maintain competitiveness, particularly in price-sensitive markets.
To navigate rising tariffs, retailers and their suppliers can explore various strategies to reduce exposure and manage costs effectively. The first consideration is diversifying supply chains and shifting production to countries with lower tariff rates, such as Vietnam or India. However, building new supplier relationships and infrastructure requires significant investment and time.
Waiting Game Until Late January
Ultimately, the scope and scale of tariff changes will only become clear after the new administration is inaugurated. Retailers must remain agile, preparing for multiple scenarios and adjusting strategies accordingly. Tariffs are expected to take effect on a case-by-case basis as shipments arrive at customs, adding another layer of complexity to forecasting and budgeting.
While the prospect of higher tariffs presents significant challenges, their direct impact on retail prices will likely be less severe than headline figures suggest. In addition, many retailers have likely mitigated their risk by bringing in extra inventory in advance of inauguration, so the short-term implications of the tariffs may be even less.
Beyond that, retailers may look to move supply chains, but there are significant challenges to that strategy that will push most benefits out well beyond 2025 leaving the most significant impact of the tariffs for the medium term back half of 2025 and into early 2026.
Tom Vogt is corporate president of Agility Retail, a leading retail services company offering comprehensive solutions in design, fabrication, sourcing, installation, and program management for physical store environments.