An update on tariffs, driving value, and protecting premium brands

This blog was inspired by Flywheel Co-founder Patrick Miller's point of view in a Commerce Collective podcast episode on recent tariff implementations and how brands need to adapt.

We all know that change in commerce is constant. However, some changes are more disruptive than others, stemming from uncontrollable external forces rather than innovation within the industry.  

Flywheel’s Retail Insights team evaluates the impact of change through the STEIP framework, which stands for “Society, Technology, Economy, Industry, and Policy.” Per the title of this blog, we’re going to dig into the “E” and “P” of this framework. We’ll look at how brands should think about and prepare for ongoing changes to global trade policies and the impact of these changes on consumer spending within the economy.  

Brands faced a compounding inflation and unit challenge before tariffs

Brands are rightly concerned about new tariffs put into place by the US government combined with decreased consumer spending and increased price consciousness, but brand challenges driven by economic forces have been an issue for years.  

Going back to COVID and the economic uncertainty within that period, brands had to take price to keep moving units. But as inflation carried on and benefits such as SNAP/EBT dried up, units stopped moving at the expected speed, overall volume slowed down, and brands could no longer hold off on price increases.  

While brands may have made some gains on a dollar basis during that period as ecommerce boomed, they’re still, all the way to today, left with the problem of needing to move more units to increasingly price-conscious consumers and the endless promo lever is not working on fatigued consumers like it used to.  

With the change in administration and imposed tariffs between the US, Canada, Mexico, and China, we’re at a point where major brands are making public statements about expected slowdown due to economic pressures and the need to increase prices to consumers.  

This leaves brands at a critical inflexion point of needing to figure out how to continue to drive value for price-conscious consumers to get those units moving despite the disruption of new policies and pressures to the economy. It’s a daunting task, but not an impossible one.  

What brands need to do to drive value and move units despite economic pressures

Brands need to accept that tariffs, and policy changes in general, are uncontrollable forces within the market. But - the market serves as a feedback loop for policy. If the market reacts poorly to these changes, the policies will also likely change.  

So what are brands to do to drive value despite tough conversion rates, move units, and navigate potential price increases to price-conscious consumers?  

The answer is...to reverse innovate.  

First, figure out if your consumers are trading down. With AMC, brands can look at customer IDs to determine if a consumer has gone from purchasing a higher-priced item to a lower-priced item within the portfolio. For enterprise businesses with various brands that span premium to value shoppers, AMC can also be used to analyze, at the user level, if consumers are not only looking for lower-priced items within a brand but are also trading down from a premium to value brand entirely.  

A diversification of premium and value brands within a portfolio is a critical buffer to economic pressures and price sensitivities and will serve as a tactic for moving those units in times like these while protecting the premium brand. High-income shoppers will continue to purchase from premium brands despite inflation, and value shoppers still need to be captured and retained.  

With an understanding of what ratio of consumers are trading down from your premium brand to your value brand, you can then compare that to the percentage of NTB shoppers across both for a deeper understanding of what exactly is going on. This will determine where you need to innovate to start moving lower cash outlay products.  

This could look like new value product development or the launch of entirely new value sub-brands. While the initial cost of production for each product may be higher, these products suit the price needs of the consumer and are more likely to drive conversions (and move units). Over time, with supply chain innovation and network efficiency, the need for penny profit at the unit level becomes lower. Additionally, expansion into new marketplaces can be explored to drive new-to-brand sales along with channel-specific fulfilment strategies (e.g. looking for fulfilment cost reduction through click and collect at physical retailers) depending on which channels units are moving through at the highest rate.  

China tariffs make way for North American brands to shine  

In China, tariffs have been hiked up with further increases in the pipeline, completely disrupting low-cost marketplaces like Temu and even Amazon’s Haul strategy. Chinese sellers are being forced to decide whether they want to risk longevity by focusing on short-term gains via these low-cost marketplaces or shift to focusing on true brand-building and prioritizing the full Amazon ecosystem.  

We’ve been talking about the need for Chinese sellers to shift to brand-building to drive long-term success for months, and these tariffs may just be what starts a shift in their approach to commerce. In the meantime, this leaves North American brands with an opportunity to step in and provide the value that shoppers are looking for.  

You might not be able to compete with rock-bottom prices, but rock-bottom prices may just be a thing of the past. Shoppers will be looking for value-priced items, proving the perfect time to invest in building your value brands and innovating through product development with the hopes of eventually prompting shoppers to trade up to more premium brands.  

In conclusion, policy and economics can’t be controlled by brands. But there are ways to innovate to drive value and move units while protecting pricing for your premium brands as long as you’re looking at the right behavioral data to support where exactly this innovation occurs.

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