Fierce competition forces retailers to consider alternatives to price increases

When Treasury Secretary Scott Bessent said last month that “access to cheap goods is not the essence of the American Dream,” making an argument for the Trump administration’s controversial tariff policy, the country’s biggest retailers had just made it abundantly clear cheap goods were still the essence of their business models.

• “We’re going to focus on value for our customers and we’re going to do everything we can do to control prices and keep prices low,” Walmart US CEO John Furner told shareholders in February.
• A few weeks later Costco CEO Ron Vachris said, “We are prepared and our people are very well equipped to lower prices and defer any cost increase that comes our way,” and Target CEO Rick Gomez stressed that the company’s primary focus remained delivering competitive prices to customers, even as tariffs could pressure profits.

And yet, many expect tariffs to work against these goals: The National Retail Federation estimated that consumers could lose between $46 billion and $78 billion in spending power per year if the Trump administration’s initial plan for tariffs was implemented.

“The moment prices start rising a significant proportion of that is going to be passed onto the consumer,” Mark Matthews, executive director of research at NRF, told Retail Brew. “These retailers have a responsibility to their shareholders to maintain profitability, and I don’t think anybody can expect them to start turning their margins negative.”

However, higher prices are not always the solution to recovering margin. As the last year of heavy discounting and price cuts have shown, driving volume is also a major priority for retailers, and getting the price right is key to attracting and retaining customers. That’s why some experts are counting on retailers, especially those with the most resources and market power, to do whatever they can to avoid passing higher costs on to their customers, from haggling with suppliers to reining in their promotional strategies to become more cost effective.

Cutting back: The latter is an area where retailers may have some leeway to cut back, and claw back some margin, before even thinking about raising their everyday prices. According to Jeff Bulger, strategic principal at supply chain firm Relex, about 1 in 3 promotions don’t generate additional revenue. “They are just drains on the retailer,” he said.

Matt Pavich, pricing expert at Revionics and former manager of merchandising process and systems development at Target, said ineffective promotions are a “recurring theme in retail, and it’s a quick way to find that margin that you might lose from tariffs.” For example, if you were offering 25% off before, drop the discount to 15%. It’s still a promotion, Pavich added, but “you’re saving millions and maybe won’t have to now change your everyday price.”

Fierce competition: The problem for many retailers is that the competitive environment makes adjusting prices or promotions difficult, particularly when the biggest players are setting the pace. As Amazon and Walmart’s recent spring sales made clear, the biggest retailers are competing directly on who can offer the steepest discounts. “Walmart has a lot of say in when inflation stops and when it doesn’t,” Pavich said. And even as costs rise, competition remains the most important variable for retailers when it comes to pricing, he added.

“The competitive strategy is the one that is most important to them,” he said. “They might have to make adjustments to it, but the reality is…there’s still going to be those items that you absolutely have to be matching Walmart within 5%.”

Knowing the source: One potential upside is that if prices do go up, it will be easier for consumers to understand the cause, Matthews of NRF explained. Compared to the pandemic-era inflationary cycle, when many consumers pointed the finger at large corporations, tariffs present a more obvious target.

“I think the calculus will be pretty clear here,” he said.