Tariff Squeeze: Retailers need a new playbook
Tariffs are returning to the forefront of global trade policy, and whether retailers acknowledge it publicly or not, they are already running the numbers behind closed doors.
As the new administration settles into office with a clear intent to level trade imbalances, the retail industry faces a familiar but heightened challenge. These tariffs will raise costs at multiple points in the supply chain, adding pressure to an already fragile ecosystem. The retailers that adapt — by rethinking sourcing, logistics and operational efficiency — will be the ones that remain competitive.
The Loopholes are Closing
Many industry leaders still view tariffs as political bargaining chips rather than long-term economic policy. But what’s clear is that new trade barriers will have a direct and immediate impact on pricing, inflation and consumer behavior.
The specifics of the upcoming tariff structure remain uncertain, but one shift is already emerging: duties may no longer be based on where a product is assembled, but where its raw materials originate. That means a retailer that once avoided tariffs by moving final production from China to Vietnam or India may no longer have that option if the fabric, semiconductors, or other key components still originate from China.
This change forces companies to rethink their sourcing strategies from the ground up. The retail sector is no stranger to supply chain disruptions — COVID-19 made sure of that — but the scale of adjustment required this time is very different. Moving an assembly line is one thing. Rebuilding an entire supply chain from raw materials onward is a multi-year challenge, one that requires foresight, capital and strategic partnerships.
Get Lean or Pass the Cost on to the Consumer
Retailers face an unenviable set of choices. They can absorb rising costs, cut into already thin margins, and hope competitors do the same. They can pass those costs on to consumers, risking a loss in demand. Or they can overhaul their supply chains, a move that carries immediate risks but could strengthen their long-term resilience.
Many companies are now running "what-if" scenarios to gauge their exposure. If tariffs hit all categories equally, apparel brands will face some of the steepest challenges, given China’s dominance in textile production. Electronics, pharmaceuticals, and consumer durables are in a similar position, with critical components still heavily reliant on Chinese supply chains. Unlike discretionary goods, where consumers can delay purchases, essentials like medication or semiconductors leave retailers with fewer levers to pull.
Seeking a Phased Approach
Some companies, particularly those that diversified their supply chains post-pandemic, have unintentionally positioned themselves well for this moment. Others will need to accelerate their efforts, looking beyond just shifting assembly locations and instead identifying new sources for raw materials.
However, this shift will not happen overnight. Establishing a textile mill outside China takes several years. Developing alternative semiconductor production hubs requires even longer timelines and significant investment.
This reality underscores why many retailers are lobbying for a phased approach — if tariffs are inevitable, companies want time to adjust. The focus is less on exemption and more on sequencing: which products will be targeted first, how strict the country-of-origin rules will be, and whether companies will be given enough time to adjust their operations.
Welcome the Challenge
If history is any guide, retailers will get creative. They may find inefficiencies in their supply chains, renegotiate contracts, and invest in private-label offerings to counteract price increases. Some may look to nearshoring strategies, bringing production closer to home.
Others will shift their focus to technology-driven supply chain management, using machine learning and predictive analytics to optimize inventory and mitigate costs. While tariffs may force difficult short-term decisions, they could also be the push that companies need to become more agile, more diversified, and ultimately, more resilient.
Balika Sonthalia is a senior partner and Americas leader of management consultancy Kearney’s strategic operations practice.