Tariffs & trade developments–what we’re seeing week of 4/14

This is the first installment of a new weekly series providing updates on tariffs, the global economy, and how to prepare amidst the uncertainty.

How the retail industry is grappling with tariffs two weeks in

Tariffs have become the central focus for any brand over the last two weeks. To some degree, consumers and businesses knew this was coming. US Consumer Confidence and the Economic Uncertainty Index both started to meaningfully decline prior to the April 2 announcement of tariffs.  

In anticipation of higher prices caused by tariffs, there are some initial signals that US consumers have moved up purchases in some categories. For example, according to Flywheel Market Share data on Amazon during the week of April 6th to April 12th, sales in the Televisions category were up over 35.6% YoY. By comparison, Television category sales were up 12.7% YoY from March 2nd to March 8th, potentially indicating a short-term acceleration in tariff-exposed categories.  Similarly, the Toys & Games category was up 34.0% YoY that same week in early April, compared to up only 2.5% YoY in early March.  

After nearly two weeks of an extremely volatile economic environment due to tariff uncertainty, the primary response we are seeing from both retailers and brands is to prepare but not overreact or make decisions that can’t be reversed. In just the last week, US tariffs have been increased on China, paused or reversed on 75 other countries, and partially exempted for industries like electronics and computer components. While current attention is primarily on the US impact, tariffs are affecting retailers and brands all over the world that are threatened by the potential of retaliatory tariffs, rising raw material costs and disrupted global supply chains.  

Tariff exposure also varies tremendously by category and geography. Tariffs represent a significant challenge to US brands that primarily manufacture in high-tariff countries like China, while brands that tend to source materials and manufacture products that they sell locally will be less impacted. In general, this means that manufacturers of consumer electronics, apparel, furniture, and household goods are likely to face greater tariff headwinds compared to grocery businesses.  

Regardless of individual circumstances, the brands we work with are prioritizing 3 initial areas to navigate the potential disruption caused by tariffs:

• Protecting against short-term supply shocks

• Preparing for difficult pricing decisions

• Overperforming competition in uncertain times

Managing inventory risk

The natural first step for any brand should be carefully assessing their supply chain risks and tariff exposure. Most brands source raw materials or have manufacturing facilities outside of the US, and brands with operations in China are particularly impacted at this moment.  

This makes managing current on-shore US inventory in brand warehouses or in retailer-owned distribution centers very important. Brands will need to balance sell-through of current inventory with protecting against out-of-stocks. This has the potential to slow promotional activity and media spend, particularly with businesses concerned about having sufficient inventory on hand. With so much unpredictability, we expect brands to take advantage of tariff pauses to secure more inventory in the US to protect their business in the short-term.

Reassessing supply chains

At the same time, brands are scrambling to identify the most effective ways to replenish their inventory from around the globe, including relying on more tariff-favorable manufacturing hubs for any products that will be sold in the US. For example, an electronics brand may look to leverage their manufacturing facilities in Mexico for any US-bound products, which are often shielded from tariffs under the USMCA free trade agreement, while utilizing facilities in China for products destined for other markets.  

They could also creatively leverage their international portfolio as a near-term solution to inventory shortages. For example, a seller of cleaning products may choose to introduce a brand in the US that is popular in Latin America but unknown to US consumers instead of importing a familiar brand from a tariff-impacted market. While businesses were forced to be agile in similar ways during the initial months of the COVID pandemic, this remains an immensely complex process, not only because of the interconnectedness of global supply chains, but also because every choice made to accommodate the US business requires adjustments by operations in other markets as well.  

Addressing price pressures

Our growing expectation is that price increases are not going to be easily accepted by retailers. Walmart has reportedly approached their Chinese-based manufacturers to reduce prices, while Amazon has been very hesitant to approve increases with their vendors. Because most products in current inventory have not yet been impacted by tariffs, retailers are naturally hesitant to avoid rising costs using the broad excuse of tariffs at this moment.  

Retailers are constantly comparing price to competitors, so as long as prices in the category remain stable, no retailer will want to be the first mover that increases selling price and weakens competitive positioning. Additionally, we expect retailers to insist that margin remains consistent, first emphasizing COGS and trade spend, then adjusting selling price later if necessary.  

An internal memo from Amazon indicates its willingness to “share the tariff impact” on a “case-by-case basis”, an approach likely to be replicated by other retailers. However, we have also seen some instances in which Amazon is asking brands to show evidence that they’ve worked to reduce manufacturing costs before approving any price increases, and price increases are likely to be limited to a smaller portion of a brand’s portfolio. We also expect retailers to approve price increases gradually, but only as overall market selling prices increase comparably, similar to the approach that retailers took during the pandemic.  

Lastly, we expect retailers to provide more transparency around the impact of tariffs. For example, Canadian retailer Loblaw has introduced a “T” symbol that indicates if a product is sourced directly from the US and impacted by tariffs, while retailers in Europe are employing various indicators for products originating from local European markets. We have also seen discussions about retailers listing tariff surcharges as a distinct line item in the price of goods.  

Winning in volatile times

With tariff pressure mounting, many brands hope to be the last in their category to raise prices. We are seeing some brands plan to dramatically pull back on promotions and media spend to manage sell-through and protect margin, while others plan for retail media investments to be reduced only as a last resort. For brands that find themselves in a favorable position because their supply chain may be less exposed to tariff impacts than their competitors, it is a unique opportunity to gain share through advertising while others in the category are forced to be more conservative.

Beyond the immediate shocks, one of the likely long-term effects of tariffs is higher prices, which have a disproportionate impact on lower-income consumers. In challenging economic environments, brands typically face a shift towards private label and a decrease in discretionary spending.  

Right now, the universal impact is how much time and energy teams are having to spend on assessing risks, following the ever-shifting policies, and trying to plan based on information that could be outdated in a matter of hours. It remains a fast-moving  situation that requires agile scenario planning, during which brands can be optimizing a few key areas that position them for success regardless of tariff policy.

Refine portfolio strategy  

• Assess your portfolio, identifying the truly profitable items to invest in and those that you may need to deprioritize

• Create a balanced portfolio with opening price point options serving economically-stressed shoppers and higher margin items targeting higher-income consumers

• Invest in product differentiation to defend against private label  

Maximize your media spend

• Use this as an opportunity to interrogate media goals, not just chasing “high” traditional metrics like ROAS but instead leveraging tools like AMC to identify media that drives long-term performance

• Understand the role that each item plays in overall brand growth, prioritizing the right balance between growing with repeat customers and campaigns to attract new-to-brand shoppers

Build stronger customer partnerships

• As tariffs force you to be more selective, invest in the channels, categories, customers, and markets that will fuel your long-term growth

• Joint business planning is more important than ever. Ensure that you understand your customer’s priorities and know what you need to ask for so you can build a mutually profitable relationship that can withstand and navigate tariff headwinds  

Questions brands should be asking themselves during planning

• What actions have we already taken in anticipation for the tariff announcements? Given latest announcements, do we need to make any adjustments or prepare for alternative scenarios?

• What immediate actions have we taken in the past 10 days due to the recent tariffs announcements? Is there something we didn’t do that we should have and need to put into place this week?

• What pivots do we need to make in our pricing strategy and the timing of those? Which SKUs have pricing inelasticity?

• What trade-offs should we scenario plan for as it relates to tariffs impact?

• What are our COGS and profitability impact scenarios that we’ll plan for due to tariffs?

• Where is our biggest risk with impending tariffs?  Which categories? Which brands? Which SKUs?

• How are our retailer partners responding to the tariffs? Have we observed anything different from them (e.g. in terms of negotiations)?

• How can we shift our inventory management strategy to hold inventory where advantageous and where can we accelerate shipments?  

• What are we hearing from our leadership team on how tariffs are impacting their decisions? How can I best support in my day-to-day?

• What spend decisions will I need to evaluate / scenario plan for?

• Do we need to renegotiate with suppliers?

• Is our manufacturing in advantageous locations where this could actually be a comptetive advantage for us? If so, how can we invest to stay ahead?

You don't have to tackle the complexities of tariffs alone.  Flywheel’s Consulting team and the data and research hosted in our Retail Insights platform are here to help your brand adapt, strategize, and stay ahead in an ever-changing trade environment.