In 2025, higher inflation could force retailers to get smarter on promotions

In 2024, inflation slowed. Prices dropped. And big box retailers smashed the discount button like their lives depended on it—and maybe it did. As inflation-weary customers increasingly traded down to discounters and private label brands, companies had to stay competitive on everything from cost to in-store experience.

Now a new year is starting, and a new presidential administration is calling for hefty tariffs on imported goods from major trading partners such as China. Some experts believe this policy could reaccelerate inflation, and raise costs for retailers at a time when consumers are demanding lower prices and markdowns.

“2025 presents a lot of economic uncertainty based on stated policy positions which may or may not take place in the US,” Matt Pavich, pricing expert at Revionics and former manager of merchandising process and systems development at Target, told Retail Brew. “The largest one looming over retail is tariff increases which, by definition, equal a cost increase on not only imported goods, but products manufactured or grown domestically with imported components.”

• The National Retail Federation estimates that Trump’s proposed tariffs could cost US shoppers between $46 billion and $78 billion per year.

Pavich added that segments such as apparel would see the most immediate impact, but the effects could also spread to grocers, as the cost of essential food industry imports such as potash and nitrogen fertilizer increases.

Sam Rines, macro strategist at WisdomTree, noted that the impact will vary across retailers depending on the progress they’ve made on overhauling their supply chain in recent years.

“There is a non-trivial number of companies that have completely reshaped their supply chains over the past six or so years,” he said. “The most striking is RH who stated they will have zero exposure to China at some point in 2025.”

This shift away from China notably began as early as 2018.

Smarter promotions: For those retailers that could experience an impact, the answer to higher costs can’t just be to just hike prices and then otherwise stick to business as usual, Pavich explained. The onus is now on retailers to innovate.

“From a pricing perspective, this means that savvy retailers will need to go back to best practices used during peak inflation,” he said. “This includes leveraging AI and analytics to identify the items that are most important to consumers then price and promote them accordingly.”

The further adoption of generative AI could help retailers improve the effectiveness of promotions without increasing costs.

GenAI should make it easier to generate multiple iterations of promotional text and other creative elements, Xiaojing Dong, associate professor of marketing at the Leavey School of Business at Santa Clara University, wrote in an email.

Combined with machine learning and data modeling, the technology could make it easier for retailers to send “the right messages and promotional materials to the right customers at the right time,” she said. “Retailers that can effectively implement these new technologies would gain competitive advantages by enhancing promotional effects while reducing the promotional costs.”

The year of winning on volumes: Ultimately though certain dynamics from 2024 will only gain momentum in 2025, according to Rines, who expects promotional activity to pick up this year, “but not to a distressing degree.”

Echoing his comments from earlier this year, he noted that “volumes should be a focus as pricing power has waned, and this will require sustained market spend and targeted promotional activity.”

The question is what exactly will drive volume, he added. Will it come from retailers finding ways to get shoppers to “trade up” from discounters and private labels? Or will it be a zero-sum game of clawing away market share from competitors?

“In many ways, 2025 will be the year of volumes winners and losers after nearly everyone won on price,” he said.