How should retailers raise prices to offset tariffs?

Discussion
Photo: RetailWire
May 21, 2019
Tom Ryan

Walmart and Macy’s last week admitted they will have to raise prices to offset the new and potential tariffs arising from the U.S.-China trade war.

“We’re going to continue to do everything we can to keep prices low. That’s who we are. However, increased tariffs will lead to increased prices, we believe, for our customers,” Walmart’s CFO Brett Biggs told reporters on a conference call following the release of first-quarter results.

Macy’s CEO Jeff Gennette told analysts it would be hard for Macy’s to “find a path” to avoid increasing prices on consumers.

With a 25 percent tariff hitting apparel items, apparel sellers would have to raise prices on average by 2.3 percent to maintain gross margins, according to a Bank of America note attained by The Wall Street Journal. If they can’t raise prices, Bank of America estimated the tariffs could reduce earnings of department stores and apparel off-pricers by 39 percent this year.

An article from the blog of Bob Phibbs, CEO of The Retail Doctor and a RetailWire BrainTrust panelist, from several years ago that explored raising prices following the Great Recession offered a few tips that still largely apply. The suggestions are slightly adjusted:

  1. Educate employees on the impact of the tariffs. Understanding how tariffs weigh on top of their salaries and benefits, shipping and other underlying costs will help them support and explain any higher prices to customers.
  2. Do a category report. Look for the category leaders that are most likely to lift profitability.
  3. Do an item report. Look for the faster moving items that can likely absorb higher prices.
  4. Decide how much you want to raise your prices. No one would probably notice items under $10 raised by a dollar. Once prices cross from $9.99 to $10 though, people notice, so be careful with that price point — likewise, the $19.99 crossing into $20 and all the $X9 ($29, $39, etc.) crossing into the next level.
  5. Monitor your sales. Make adjustments.

 

DISCUSSION QUESTIONS: What tips do you have for retailers large and small considering raising prices to help offset the impact of higher tariffs? What are some common missteps when increasing prices? How vocal should stores be in explaining the reasons behind price changes to customers?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Look for opportunities for slight price increases without creating shock. My guess is there is room here."
"Politics aside, this is where price optimization can help. Retailers should be able to analyze the elasticity models for each of their impacted categories..."
"Face the facts; this is a global economy and we need each other more than the public realizes. Time to stop playing games for votes."

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22 Comments on "How should retailers raise prices to offset tariffs?"


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Mark Ryski
BrainTrust

The significant amount of media coverage regarding tariffs will help with communication/educating shoppers, but the inevitable price increases won’t help sales. I would advise retailers to be selective in how they apply price increases. They should try to avoid across the board price increases – maintaining prices on some items, despite the profit hit from doing so, may be the right thing to do. The fact is, these tariffs are going to be a burden for retailers and shoppers. The retailers with the deepest pockets and ability to withstand the short-term pressure of the tariffs will have the advantage.

Neil Saunders
BrainTrust

One of the interesting ways some retailers managed to push up margins during the last downturn is by adding a bit of embellishment to an apparel item. This may cost a few more cents but it improves customer perceptions and means retailers can charge a couple more dollars. The lesson is that retailers need to be creative about cost increases and they need to do it in a way that leaves consumers still feeling they’re getting great value for money. Even so, price rises are inevitable and are going to cause pain for everyone.

Cathy Hotka
BrainTrust

I’ll add another tip to Bob Phibbs’ great list: educate the public. Certain items (like appliances) are being affected dramatically, and explanations for price hikes in the department should help with sticker shock.

Jeff Sward
BrainTrust

This is not so much an exercise in math as it is an exercise in understanding the customer’s pain points. Tip #4 is critical. Where do you start to lose the sale completely and would you be better off banking a narrower margin rather than no margin at all? Basics and commodity items will have a tough time hiding price increases. Fashion and novelty are a little harder to shop on a price comparison basis.

Bob Amster
BrainTrust

Last time I looked, the objective of businesses was to make a profit. When tariffs increase a retailer’s costs, it is unavoidable to raise prices to cover the increase. There are options as to how to do so but I prefer the following: Determine by how much the cost each unit of the affected items has increased due to the tariff and only pass the increase on to the consumer, thus lowering the gross margin. Keeping the gross margins the same raises the prices to the consumer even higher.

Brandon Rael
BrainTrust

Price increases and adjustments are nothing new in the retail world. Retailers are perpetually challenged to maintain their gross margins and drive comp increases. Price adjustments are a necessity to account for all economic conditions including inflation, stagflation, recessions, and now tariff wars.

Considering how public the tariff discussions have been, customers should expect corresponding price adjustments to come out of this. This is the normal course of doing business, and retailers do not have to make any announcements around this. As always, savvy and smart shoppers have the power to choose who they shop with, and will seek the best value for their hard earned income.

Retailers should continue to provide an outstanding customer experience, find creative ways of attracting traffic to their site or physical store, and hopefully this will be a temporary blip.

Dr. Stephen Needel
BrainTrust

Pass it on to the shoppers – this is what Republicans want. If shoppers don’t like the new higher prices, vote current officeholders out. This is not a time for retailers to take the hit.

Bob Amster
BrainTrust

As much as I don’t believe in introducing politics into any of these or other “business” conversations, I had to snicker.

Dr. Stephen Needel
BrainTrust

Snicker away, Bob – and I agree, normally politics doesn’t belong here, but in large part this is a political and not a business issue for most industries.

Rich Kizer
BrainTrust

Bob’s post was/is spot on. It always scares me to think that staff will converse with customers on the tariff impact on the prices of merchandise. That just puts price suspicion front and center in the customer’s mind. However, in some cases staff should be ready. In many stores, there are plenty of “blind items” that secure better margins every day for the stores. My suggestion is to move margins up where possible on the blind items. At the same time, look for opportunities of slight price increases without creating shock. My guess is there is room here. To prove it, management should hold up non-basic items and ask the staff members what the selling price is. If they have a hard time being accurate on the item, there may be price expansion opportunity there.

Lee Peterson
BrainTrust

I’ve wondered for a while now, does our President know that practically all of Walmart’s merchandise is from China? And if Walmart, a place where people of moderate to lower income can afford things, has to raise prices, it’s going to be a disaster on a grand scale? Has that been thought through? Has Walmart (and many others under the NRF banner) been consulted? Guess we’ll soon find out.

In any case, the key to raising prices is to do it in small increments and not all at once. No one knows this better than Amazon and I’m sure Walmart. I just hope the whole mess and ego battle comes to an end quickly. The Chinese can wait us out. Can we say the same? Face the facts; this is a global economy and we need each other more than the public realizes. Time to stop playing games for votes.

Dick Seesel
BrainTrust

Short answer to the questions you pose in your first paragraph: No.

Peter Charness
BrainTrust

Just to double check the scale of this problem — if it’s a 25 percent charge against the cost of finished goods from China, it’s going to take a lot more than the stated 2.3 percent increase at retail to maintain gross margin, no? A 25 percent cost increase on landed costs is not going to be absorbed or disguised by retailers.

Harley Feldman
BrainTrust

Retailers should be open and honest with their customers as to why prices are being raised and how much due to tariffs. Many of the consumers will want to support the tariffs by paying a higher price. Those that do not want to pay the difference will understand the price increase is not due to the retailer wanting to raise the prices on their own. Not informing customers of the tariff increase causing the price increase will cause some heartburn with customers on the increased price.

Rob Gallo
BrainTrust

Politics aside, this is where price optimization can help. Retailers should be able to analyze the elasticity models for each of their impacted categories, forecast the impact of incremental price increases and then make decisions on whether to hold margin steady (or increase it) to yield unit profit or to relax it in order to keep unit sales afloat. They can also identify non-impacted categories for opportunities to recapture margin lost by tariffs. It won’t be perfect, but it should give them plenty of data-supported options.

Paco Underhill
BrainTrust

Cost of living for Americans is low compared to the rest of the world. That said, we need to see in our daily lives the impact of global politics — trade wars, climate warming, gun control, reproductive rights, and the cost of goods at Walmart. Merchants have to do what they have do — including raising prices.

Michael Decker
BrainTrust

This IS a political issue — through and through. The current administration is advising retailers to “take the hit” on pricing — especially for those retailers and retail brands that serve the middle class consumer. The current administration is also advising retailers and retail brands to move their supply chain outside of China (to Vietnam and Thailand) to help make the Tariff Tactics a success.

Retailers and retail brands should view their ultimate action as a vote for or against this administration. Could be a more powerful vote than what we will see in the election.

Craig Sundstrom
Guest
Curiously “billing China” and “be patient” weren’t among the options; no matter, (and from the editorial to the practical) how one reacts depends a lot on how long they think these (tariffs) will last — which of course no one really knows. The uncertainty part I mentioned last week: if only for a few weeks — maybe a month or two — then perhaps just sit tight and absorb the loss. Presumably there will be some competitive advantage. But of course if they go on for months or years, there may be little choice (unless a 40% reduction in income is acceptable). A lot will depend on how customers react, which of course you can’t be certain of until after the adjustments take place. Many people will be fine with them, accepting the rationale for the tariffs themselves — whatever it is this week — or at least that the retailer has little control over them. Unfortunately, some customers will only blame the seller “supporting” the tariffs, just so long as they don’t have to… Read more »
James Tenser
BrainTrust

One relevant lesson from the world of price optimization may be that pricing is a portfolio-based discipline. Some items are more sensitive than others and retailers need to make informed decisions about where to find margin and where to sacrifice it.

There may be good reasons to swallow some or all of a cost increase on certain known value items, while adding a few pennies on other lower-profile items to achieve an overall profit return and maintain the desired price image.
Right now tariff wars are the primary source of this pressure. In other eras, rising oil or commodity prices have been the culprit. Retailers have always made — and will always make — adjustments like this.

That said, I stand in solidarity with the position taken by the NRF in opposition to the present tariffs. Ultimately the end-user pays — for both the amount of the tariffs and the operational cost of adapting to them.

Kai Clarke
BrainTrust

Don’t. This is my first word of advice to retailers who are trying to match pricing with tariffs. Market pricing should reflect market conditions, not governmental duties.

Any smart retailer has multiple SKUs for any particular category and just because one of these (Chinese based) is more expensive doesn’t mean that all of the others are.

Also, sometimes a particular product is price inelastic (this means that pricing has little or no impact on the product’s sales velocity.

Finally, if retailers are going to be in the tariff game, are they also going to be in the fuel game, logistics and packaging game, etc. I doubt it. Retailers need to focus on their core competencies … retail. Not tracking prices from external forces.

Shikha Jain
Guest

There are three things to consider when taking price increases as a response to tariffs.

1. Be surgical: Oftentimes, a response to a cost increase is to take blanket prices up. Understanding the role a product plays in your portfolio (is it a traffic driver, margin builder etc.?), the current price that it is at and what it means for crossing thresholds is key (similar to #4 in the article).

2. Write and rewrite your communication: Many companies face consumer backlash when they just say the what — i.e. that they are taking a price increase without the why i.e. commodity cost increases due to tariffs. Be clear also to tell consumers which products will see the price increase and by how much.

3. Watch your competition: Everyone will be be hit on the bottom line, but be aware of what competitors are signaling in terms of their price intentions. Sometimes it becomes a game of chicken since no one wants to be the first and take the hit on the volume or demand.

Andrea Leigh
Guest

Pricing is no longer a channel-specific game, especially in eCommerce. We’re going to see a lot of disruption online as these new cost structures take hold for manufacturers and retailers react. Manufacturers are trying to pass the increased cost structure through to retailers through increased product costs, but there’s no reason for the retailer to accept them and raise their prices until they see other retailers do the same. In fact, some of them explicitly won’t — forcing the manufacturers to accept decreased margins, especially if the retailers in question aren’t sure *all* retailers are accepting cost increases. Take Amazon for example — many of our clients (manufacturers) have attempted to pass tariff increases through to Amazon, but they are at a stalemate, with many of them forced to absorb the price increases or stop shipping product to Amazon.

wpDiscuz
Braintrust
"Look for opportunities for slight price increases without creating shock. My guess is there is room here."
"Politics aside, this is where price optimization can help. Retailers should be able to analyze the elasticity models for each of their impacted categories..."
"Face the facts; this is a global economy and we need each other more than the public realizes. Time to stop playing games for votes."

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