As earnings season wraps up, there’s one word on the tip of every executive’s tongue: tariffs. And buried under their latest quarterly earning stats are some fascinating insights about how retailers are thinking about the looming trade restrictions.
However, don’t expect a single company line. Reactions to tariffs range from tentatively concerned to tentatively optimistic, depending on the retailer’s business model.
In some ways, the biggest deciding factor is the diversity of their manufacturing portfolio and how far along retailers are in finding suppliers outside of major markets such as China, according to Lauren Beitelspacher, associate professor of marketing at Babson College, who specializes in supply chains.
“Who this is going to hurt the most is smaller retailers who either don’t have the negotiating power to take on production capacity in these other countries or don’t have the financial capability to absorb the cost of the tariffs,” she said.
And yet raising prices is a tough sell in this economy, Beitelspacher added, putting the onus on retailers to find another way to deal with higher costs.
Hard to calculate: While imports make up just 2%–3% of Best Buy’s assortment, CEO Corie Barry said she expects vendors to pass on the cost of tariffs, “making price increases for American consumers highly likely.”
However, the question of elasticity—how much prices can move up or down—is less straightforward. CFO Matt Bilunas said the calculation could vary across product categories and SKUs, and depends in large part on what consumers can tolerate.
“The giant wild card here, obviously, is how the consumers are going to react to the price increases,” he said.
Barry added that estimating potential increases is made harder by the fact that Best Buy depends on a “replacement and upgrade cycle where people really need this stuff, so it’s difficult for us to understand elasticities perfectly because you don’t have anything predictive in our history that looks or feels quite like this.”
- Due to this complexity, Best Buy’s fiscal year guidance doesn’t account for tariffs, but it did offer a ballpark estimate of their impact: If the 10% tariff on Chinese goods is in effect for the entire year, comparable sales could drop 1%.
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Maximum flexibility: Like Best Buy, TJX Companies, owner of Marshalls and TJ Maxx, expects some negative sales impact from Chinese tariffs, but sees a “silver lining” due to the nature of its more flexible off-price business, according to CEO Ernie Herrman.
Herrman explained that TJX buyers work backwards from retail price, meaning buyers pick and choose products based on will sell at a sufficient discount to draw customers. “It’s really not up to them to have to worry about what the vendor is getting caught up with in terms of tariff or inflation or other costs,” he said.
This tracks with a comment from Beitelspacher, who said price increases are likely to take place when “retailers are beholden to the facilities they’re currently working with.”
In TJX’s case, its assortment is constantly shifting anyway. That’s built into the business model of being an off-price retailer. “If our buyers or merchants don’t see something in one vendor or one good...they can always be more flexible in terms of the way they handle the market,” Herrman said.
Golden opportunity: Looking at the macroeconomic picture, discounters see another opportunity to benefit from tariffs. As more stores close, Herrman said, this is “going to create more buying opportunities for our teams.”
Rival discounter Ross Stores President and COO Michael Hartshorn echoed this optimistic sentiment—optimistic for discounters, of course, not the market overall. Disruptions like this could be beneficial to off-price, he said, “as there’ll be more closeout opportunities down the road.”