The Hidden Costs of Tariffs – How Retailers Are Absorbing the Shock

Tariffs on imported goods are hitting American retailers hard, driving up costs and squeezing already thin margins. Retailers now face a tough balancing act—absorbing increased costs or raising prices and risking customer loyalty.

But can your customers absorb another price increase? According to the Tax Foundation, the combined effect of the 25% tariffs on Canada and Mexico and the 10% tariffs on China could shrink the U.S. GDP by 0.4% and increase taxes on consumers by $830 in 2025. Even Walmart recently announced that the uncertain climate would make 2025 a challenging year.

Plus, the impact extends beyond pricing—supply chain disruptions and increased administrative costs are forcing retailers to rethink their entire strategy. In this landscape, retailers who survive—and thrive—will be the ones who adapt to make smart inventory decisions.

Find out the direct and indirect costs of tariffs and five strategies retailers are using to absorb the shock in 2025.

What are the Direct and Indirect Costs of Tariffs ?

Tariffs create more than just higher price tags—they trigger a ripple effect across the entire retail ecosystem:

Rising Costs of Raw Materials and Finished Goods : Higher tariffs on textiles, electronics, and consumer goods mean increased costs at every stage of production. Retailers are now paying more for inventory while facing pressure to keep prices competitive.
Supply Chain Disruptions and Adjustments: Shifting supplier relationships, longer lead times, and unpredictable delivery schedules are becoming the norm. Retailers need to rethink their sourcing strategies to minimize delays and cost overruns.
Administrative and Compliance Costs: Navigating complex tariff regulations requires extra time and resources. From adjusting pricing structures to managing import documentation, these hidden costs add up fast—and eat into profits.

direct and indirect costs of tariffs for retailers

How Are Retailers Adapting to Absorb the Shock ?

Retailers are taking different approaches to manage the financial strain of tariffs. Fortunately, it’s not just guesswork, it’s about adapting strategically.

1. Absorbing Costs Through Margin Compression

Some retailers are choosing to take the hit, sacrificing margins to avoid alienating price-sensitive customers. While this can protect short-term sales, it’s not sustainable without a strategy to offset the losses elsewhere. Make sure to maintain your initial markup, or else you’ll undermine your overall profitability.

2. Adjusting Product Sourcing and Renegotiating Supplier Contracts

Retailers are diversifying their supply chains, shifting production to tariff-free regions, and renegotiating terms with vendors. Having fewer and meaningful vendors could allow for negotiation and potentially better prices and terms. Flexibility and strong supplier relationships are becoming key competitive advantages in 2025.

3. Passing Costs to Consumers Through Price Hikes

For high-demand or niche products, retailers are testing modest price increases. Where possible, look to go upscale as higher earning customers will not have the same price sensitivity.

However, balancing increased costs with customer retention is tricky—raising prices too much risks losing customers to competitors. Start by changing prices to reflect vendor pricing on new goods coming in, as to get insights into your customers’ tolerance for higher prices and create a future cushion for potential markdowns.

4. Exploring Alternative Cost-Saving Strategies

Savvy retailers are turning to technology and automation to offset rising costs:

POS retail software helps track sales trends and adjust pricing dynamically.
Inventory management systems reduce waste and improve stock levels, ensuring capital isn’t tied up in slow-moving products.
Streamlining logistics and automating fulfillment can reduce labor costs and improve efficiency.

retailer using pos retail software and inventory management systems on computer

The Takeaway

Tariffs are here to stay, and retailers need to adapt or face shrinking profitability. The most successful retailers are taking control by optimizing their supply chains, adjusting pricing models, and leveraging retail inventory systems and POS software to improve efficiency and protect margins.

Need help navigating the impact of tariffs? Get a free consultation here to find out how Management One’s advanced tools for demand forecasting and sales optimization can help you identify cost-saving opportunities and drive profitability.