Tariffs: Inflation by another name — what retailers must do to adapt
The announcement of new tariffs targeting imports from Mexico and Canada has left retailers and manufacturers navigating uncertain waters.
These measures, often touted as tools for securing better trade deals, come with consequences that ripple across supply chains, businesses, and ultimately, consumers. From my vantage point in the supply chain and retail technology space, these tariffs are inflation in disguise, forcing both businesses and consumers to shoulder rising costs.
In the short term, tariffs act as an economic lever, quickly drawing countries to the negotiating table. However, their impact can be far-reaching and disruptive. For retailers, the challenge extends beyond absorbing higher costs — it demands a fundamental recalibration of their supply chains to stay competitive.
Renegotiate, Consolidate, Diversify
Tariffs inevitably lead to higher prices for imported goods, which are often passed along to consumers. In sectors like grocery and automotive, where margins are already thin, the strain is particularly acute. Products like fresh produce, meat, and dairy, which are staples of trade with Mexico and Canada, are likely to see price spikes that will further stretch household budgets, just as inflation was starting to drop to normal levels.
Retailers must make difficult decisions. They can renegotiate vendor contracts, consolidating suppliers to secure better deals, or explore alternative sourcing routes. For example, redirecting shipments through non-tariffed countries like Vietnam can offset some of the added costs, though it often increases shipping and logistics expenses. These strategies require agility and foresight but can soften the blow of rising prices.
In recent years, some companies unintentionally got out ahead of incoming tariffs by diversifying their supply chains after the COVID-induced supply chain crisis exposed the risks of relying on a single supplier. Others would do well to follow their lead. By developing a robust network of alternative suppliers and transportation routes, businesses can create a buffer against sudden policy changes, war or broader geopolitical tensions.
Managing Inventory: A Balancing Act
One critical question for businesses is how to manage inventory during periods of uncertainty. Retailers with robust forecasting capabilities may preemptively stockpile inventory before tariffs take effect. However, this approach carries risks. Overestimating demand can lead to excess inventory, while underestimating it leaves shelves bare. The balance between short-term reactions and long-term resilience is delicate.
Shifting Consumer Demand
Ultimately, consumers risk bearing the brunt of politically driven, rather than economically motivated, tariffs. From pricier guacamole during the Super Bowl to costly vehicle replacement parts, rising prices force consumers to rethink their spending habits. Big-ticket items like refrigerators or furniture may see delayed purchases, while grocery shoppers might turn to private-label goods or cut back on discretionary spending.
It's then up to retailers to adapt to shifting consumer demand. Some may pivot toward lower-cost product mixes or invest in private-label offerings, as Walmart has successfully done. Such strategies not only help consumers but also maintain competitiveness in an increasingly price-sensitive market.
Trial By Fire
Despite the challenges tariffs pose, they have the potential to spur domestic manufacturing and reduce reliance on imports — if applied thoughtfully. Incentivizing local production could create jobs and boost long-term economic growth. By incentivizing local production, tariffs could contribute to job creation and stimulate long-term economic growth. However, this shift requires sustained policy support and significant investments in domestic infrastructure. Without these, the short-term pain of tariffs may outweigh any long-term benefits.
As businesses adjust to these new realities, the demand for flexibility and innovation in supply chain management has never been greater. Retailers must rethink how they source, store, and distribute inventory, utilizing machine learning technologies and forging strategic partnerships to navigate this complex landscape. If approached with creativity and precision, the pressures from tariffs could become a blessing in disguise — driving retailers to operate leaner, act bolder, and stay more attuned to shifting consumer demand.
Darpan Seth is CEO of Nextuple, an omnichannel order management advisory and software firm. He can be reached at Darpan.Seth@nextuple.com.