Retailers can’t seem to catch a break! Just as the industry begins to recover from the COVID-19 recession, it is faced with a new wave of challenges as recent tariff announcements impose higher costs on imported goods.
Retailers around the world are bracing for the impact of the United States’ tariffs on China, Canada, and Mexico on February 1, 2025, as well as the reciprocal tariff policy enacted against all current and potential U.S. trading partners on February 13th.
Let’s take a step back.
What are Tariffs?
Tariffs are taxes on products imported or exported across international borders. Export tariffs are less common than import tariffs and are primarily used to limit the number of natural resources leaving the country. Taxing imported goods can protect local industries from international competition.
Image: Courtesy of IBIS World
In theory, import tariffs would help manufacturers, farms, and other producers in the United States. Unfortunately, the effects of tariffs on the economy are not so cut and dry. For instance, while the 2018 steel and aluminum import tariffs increased demand for US-made steel, they inevitably led to increased costs in the automotive and construction industries.
The economic ripple effect of the newly imposed US tariffs will be felt in supply chains, prices, and profit margins, and the looming reciprocal tariffs levied by world governments further exacerbate the problem.
Okay, that is a lot, but hold on because we still need to put into context just how important these trade relations are.
Canada-U.S. Trade Relationship
Trading partners since the 1800s, the United States and Canada’s ties cannot be overstated.
2024 marked the third consecutive year that the combined value of Canada’s imports and exports of goods traded with the United States surpassed $1 trillion.
With $3.6 billion in goods and services crossing the border daily, Canada is the largest hub for U.S. exports and second only to Mexico as the U.S.’s largest trading partner. Trade between Canada and the US is highly integrated and overwhelmingly involves intermediate inputs. This means that a significant share of Canadian exports to the US are actually inputs for US exports.
It’s safe to say that drastic changes will have drastic implications for retailers and their customers worldwide. Buckle up as we look at those implications.
Impact of Tariff War on the Retail Industry
What does this mean for you, the retailer, and the industry as a whole? Whelp, not to sugarcoat it – increased costs.
The tariffs will create:
Supply Chain Disruptions
Trade wars can disrupt established supply chains. Since Canadian energy (oil, gas, and electricity) faces a 10% tariff, fuel costs may increase. This would raise shipping and transportation expenses, impacting:
- Last-mile delivery costs
- Freight and trucking expenses
- Higher prices on imported goods due to increased shipping costs
Delays in deliveries and increased costs will add to the sourcing challenges.
Sourcing Challenges.
International supplier prices will go up along with transportation costs – directly impacting product margins. Some retailers will turn to sourcing from local suppliers, but this may be difficult due to the increased demand and isn’t necessarily cheaper. Companies like Dollar Tree, which sources nearly 40% of its products from China, may be forced to raise prices, impacting affordability, a move that would directly threaten their ‘affordable’ brand.
In order to handle the increased cost of production, costs will be passed off to the consumer.
Higher Prices for Consumers.
Passing on tariff costs to consumers can lead to decreased demand as customers become price-sensitive and may choose to buy fewer goods or switch to cheaper alternatives.
Companies such as Apple, Walmart, and Dollar Tree have written to the Office of the U.S. Trade Representative to oppose these tariffs. A J.C. Penney representative stated:
“JCPenney’s core customer cannot afford to pay an additional 25% tax on apparel, footwear and household goods … Increasing taxes on hundreds of basic clothing items and home goods will hurt all moms who don’t have inexhaustible disposable income. It will force them to make tough choices.”
Reduced consumer activity means an overall industry slowdown.
Retail Industry Slowdown
Faced with higher costs and slowed consumer activity, retailers may cut jobs or slow store expansions. Brick-and-mortar stores, already under pressure from e-commerce, will struggle to stay open with higher operational expenses.
Okay, okay! This is a lot, but there is good news. So, breathe out, and let’s have a look at the solutions out there for retailers bracing themselves for the tariff storm.
Mitigating Tariff Impact on Retail Business
Not all fluctuations and changes are bad. The truth is retail is a dynamic industry that is constantly innovating to thrive in a given environment. The industry has access to solutions and technologies that can meet the challenges of today head-on. This is especially true with the unprecedented innovation in Artificial Intelligence technology.
Retailers don’t have to give in to an inevitable price increase across their entire business with the consequent outcomes outlined above.
Retailers can pull three primary levers: optimizing their assortment, implementing strategic pricing, and having an agile in-season response.
Mitigate Tariff Impact by Optimizing Retail Assortment
The truth is that retailers often carry a bloated assortment, with only a small percent of inventory generating the bulk of actual revenue.
Put simply, the goal is to prioritize high-margin products that are less impacted by tariffs and reduce the dependency on tariff-heavy imports.
The more granular you can make your assortment strategy, the less bloated and ineffective it will be. The more operational waste you cut, the more savings you can pass on to your customer base, gaining a competitive edge.
To build an optimal assortment, retailers can employ AI-driven Assortment Planning tools, which enable planning at the most granular levels while accounting for all the factors that may impact product demand.
Building the Optimal Assortment Strategy
The most effective assortment strategy will be tailored to the retail location type or cluster.
Not all locations are made equal. A store’s attributes will influence how a particular product behaves. A store’s size, location, climate, and culture-specific demographics are all examples of influencing attributes.
Clustering your assortment by product family is yet another way to maximize the effectiveness of your assortment strategy. Again, consider how product attributes influence product behavior. Are products in your assortment cannibalizing sales from other products?
The best retail assortment planning solutions, such as Retalon’s Assortment Planning Software, build a plan that cuts costs on transportation, storage, and over-stocks while allowing you to take advantage of the best-performing inventory by allocating it to in-demand locations, bringing in maximum profit.
Mitigate Tariff Impact by Implementing Strategic Pricing
Raising prices may indeed be inevitable, but you don’t necessarily have to do so indiscriminately across the board. A strategic planning approach sets product-specific prices that reflect cost, demand, product location, seasonality, and a slue of other relevant factors.
Effective pricing has always been challenging as retailers traditionally relied on sales history to build their pricing strategy. AI-driven pricing solutions go much further in accurately predicting, calculating, and recommending product pricing, markdowns, and promotions.
The next generation of retail pricing tools, such as Retalon’s Price Management Software, considers and accounts for a thorough and inclusive collection of factors that influence setting an optimal product price, building a markdown strategy, or rolling out a new promotion.
Some considerations include:
Price Elasticity of Demand
The price elasticity of demand calculates how sales demand for a product will be influenced by the price at which the product is sold. Set a price too high; demand will drop; set the price too low, and lose potential profit.
Seasonality
Seasonality affects how certain products perform, whether this is due to a holiday sales spike or a product that doesn’t fit with climate demand (e.g., a snowsuit in the summer months). However, seasonality can shift year to year and vary from one location to another, making planning ineffective when relying on historical data alone.
Product Demand Cannibalization
As with product attributes, product pricing can also cause cannibalization within your assortment. A burgundy purse set at a lower price might pull sales away from a similar beige purse. Not all price cuts lead to better sales outcomes.
AI-driven tools use many more factors to build an optimal pricing strategy; some examples include:
- Price zones & store types
- Vendor Cost Changes or Manufacturer Suggested Pricing
- Promotional and Markdown Pricing
- Different Sizes, multi-packs, and white-label products
- Inventory availability
- Demand forecast
- Fulfillment methods
- Unique business-specific constraints and preferences.
By implementing a strategic approach to pricing, you can minimize consumer shock that leads to lower consumer engagement. Furthermore, you can open your doors to the consumer base that the competition is pushing away by blindly marking up their inventory.
Mitigate Tariff Impact by Having an Agile In-season Response
We are entering an unpredictable time, making the retail industry even more turbulent than usual. Whether caused by politics, natural disasters, or simply an exciting new trend, being able to respond to changes can be the difference between thriving and shuttering your doors.
Traditionally, retailers build a plan that is then implemented for a sales period. Unfortunately, once the plan is in action, there is little visibility into its success. Even if there were, retailers have few levers they can pull to correct the plan once it is in action. Imagine if you could correct the course of the sales period in real-time.
Picture this: You are two weeks into the sales period. You look at your computer and see how much inventory has been sold in each store location. You click your mouse and see how these sales compare to the forecasted demand. The demand prediction is automatically adjusted to account for the real-world sales that are occurring.
Huh! Store A is performing better than expected, which is good news since store B inventory is hardly moving at all! That’s fine; you have Retalon’s Inter-store Transfers tool. It calculates the exact quantities of the specific SKUs that need to be transferred to which store locations. You implement the new allocation, and your inventory is rebalanced across the business, meeting sales demand while reducing overstocks and markdowns.
Yes, it’s possible. The best inventory management solutions are built on a unified analytics platform, connecting your data across locations and processes- providing a holistic approach that achieves more accurate analytics.
This means that retailers can access the most accurate demand forecasts, receive actionable recommendations, and adjust their strategy in real-time.
These technologies give retailers far more control over the future of their business than ever before. For instance, you could run ‘what-if’ scenarios. Build a plan and run it within the solution pre-season. Run multiple scenarios to compare and decide on the best course of action before spending a penny.
Assessing Your Retail Business and Taking Action
So, the good news is that successfully navigating the challenges brought on by tariffs is very much possible. However, it is essential to note that blindly reacting to rising costs without a solid plan can lead to wasted resources, inefficient spending, and poor decision-making. Instead, businesses should focus on assessing their specific vulnerabilities and opportunities within their supply chain, pricing strategy, and inventory management.
You can’t change everything at once, so knowing which strategy to implement is priority number one. Remember, not every business will be impacted in the same way, and spending resources on unnecessary adjustments can be just as harmful as failing to act.
One of the most effective ways to do this is by running an AI Impact Assessment, which can provide data-driven insights to pinpoint precisely where retailers should focus their efforts. By identifying which areas are most affected by tariffs and which solutions will have the most significant impact, businesses can make informed decisions that maximize profitability while minimizing risk.
Be agile and proactive. The ability to forecast changes, test different strategies, and adapt quickly will be the difference between those who thrive and those who struggle in the face of economic uncertainty. Pull the levers available to you: assortment planning, strategic pricing, and inventory management. With recent advancements in AI, retailers have more power than ever to take control of their operations and maintain a competitive edge.
Now’s the time to take control of your business’s future. Don’t wait until it’s too late—embrace innovation and stay competitive! Connect with an expert to see how your specific business can get prepared.
About the Author
Alina Sayapov, M.Ed., PMP, is the Director of Marketing and resident translator of tech-to-human at Retalon. Alina uses her Masters in Education to turn retail AI jargon into plain English (and occasionally, puns). When she’s not strategizing content or fueling growth, she’s probably explaining to someone why machine learning isn’t actually scary. Alina’s real mission is to make smart technology less intimidating—and maybe even fun. She believes that if AI can predict what a retailer needs before they know it, marketers can at least try to explain it without a PowerPoint. 
