Retailers Respond to the Latest Tariff Updates

August 2025

Introduction: A Challenging Backdrop

Over the past six years, retailers have faced challenges in adapting to a series of unpredictable events that have led to numerous significant shifts in consumer behavior and the operating environment. First, in 2020, the COVID-19 pandemic led to significantly reduced in-person shopping, and in some cases, temporary store closures, greatly impairing traffic and sales in stores. At the same time, e-commerce demand soared to unprecedented heights, leading retailers to adapt by investing heavily in e-commerce infrastructure and omnichannel capacity. Shoppers, restricted from spending on travel, dining out, and other experiences and services, were spending heavily on consumer goods, particularly in certain sectors such as home improvement, furniture, exercise equipment, and other home goods. Supply chains were also impacted by the pandemic, resulting in unpredictable lead times and soaring shipping container costs. In addition, market wage rates for frontline retail employees increased materially, and many retailers were forced to increase wage rates to retain store and supply chain associates.

In 2021 and 2022, the COVID-19 “revenge spending” phenomenon took hold, under which consumers shifted their spending back to travel, dining, services, and experiences that had been restricted during the pandemic. Consumer balance sheets were still bolstered by pandemic-era enhanced unemployment benefits, stimulus payments, and student loan payment deferrals, leading to continuing strong retail spending as well. On the supply chain side, shipping container costs reached their peak in the second half of 2021 and then began to decrease. However, the onset of the Ukraine War in February 2022 introduced another source of supply chain uncertainty and price volatility. Elevated shipping container costs were accompanied by extended shipping times and unpredictable supply chains. As a result, many retailers placed larger-than-usual inventory orders, and many placed them earlier in the season than they typically would to ensure goods would arrive in time for key selling periods, particularly the Holiday shopping season.

However, as consumer stimulus payments and enhanced unemployment benefits ran out in 2022 and 2023, many retailers realized that demand was declining from the 2021 rebound they had experienced. This left many retailers wrong-footed; having anticipated continuing elevated demand, many ordered too much inventory too early due to optimistic sales forecasts and concerns about supply chain delays. As a result, many retailers were over-inventoried coming out of the peak fourth quarter selling seasons in 2022 and 2023, leaving retail leadership teams faced with difficult decisions about whether to engage in elevated promotional activity to move through excess inventory, or risk carrying aging inventory forward in hopes that it would sell through over time at a higher gross margin.

The period from 2023 to the present has seen many traditional brick-and-mortar retailers struggle with consumers whose behavior reflects tightening household budgets and concerns about the uncertain state of the economy. They have seen reduced foot traffic in stores, lower average tickets at the register, and customers shifting their purchasing toward promotional periods and discount retailers. Of course, there have been exceptions; certain retailers have outperformed and navigated this period more successfully than others, and certain categories have seen greater volatility than others (such as demand for products for the home and casual apparel, which saw surges in demand during the pandemic). But Hilco has observed many retailers who have experienced these general trends to varying degrees.

This sequence of events, along with elevated rates of inflation across many operating expenses throughout this period, has left many retailers struggling to achieve profitability and with balance sheets that are not as strong as they were pre-pandemic. We have already seen elevated levels of retail bankruptcy filings and store closures in 2024 and 2025, as some major retailers have not been able to successfully navigate this chain of events. As other retailers attempt to navigate and recover from the impact of these events, yet another disruptive new challenge looms large on the horizon.

Tariffs: The Next Hurdle for Retailers

2025 has seen rapidly evolving and highly volatile tariff policies being proposed or implemented by the US government. Tariff policies have been proposed for numerous countries, with explicit or implicit opportunities to eliminate or delay them for countries that are willing to enter into trade negotiations and make certain concessions to the USA.

On “Liberation Day” (April 2, 2025), the administration introduced a baseline 10% tariff on nearly all trading partners, and additional reciprocal tariffs on 57 countries. There quickly followed a cycle of retaliation between the USA and China, which saw the current administration ultimately raise the proposed reciprocal tariff on Chinese goods as high as 125%. However, the USA ultimately backed down from this highly elevated level of Tariffs from China, and anticipated tariff rates have returned to relatively lower levels.

As it stands at the time of this writing, forecasts anticipate a likely scenario of 10% tariffs on a large majority of consumer goods imports from all countries to the United States, and 34% tariffs on consumer goods imported from China. Tariff policy is a highly complex issue, and there are many nuances beyond those figures, as well as potential for abrupt and significant changes. However, the majority of retail executives Hilco has spoken with recently are generally anticipating an overall increase in tariffs on all goods imported from abroad, and for China to face higher tariff rates than other countries.

Some retailers placed orders ahead of proposed tariff implementation dates or delayed orders to await clarity on tariff policy, however in general retailers appear to be maintaining a relatively steady ordering cadence and not making big bets to try to time tariffs, and Hilco has not seen many examples of significant changes in overall inventory positions of retailers related to tariff strategy as of now.

Strategies for Retailers to Manage Tariff Impacts   

Retailers are exploring multiple approaches to addressing the impact of increasing inventory costs due to tariffs on their operations, some of which are detailed below.  A successful tariff mitigation strategy will likely combine all of these approaches to varying degrees.

Price Increases

Of course, when the cost of inventory increases, an obvious solution would be to raise prices accordingly and maintain a consistent product gross margin. Many retailers did just that during the COIVD era, and due to stronger household balance sheets, rising wages, and ubiquitous price increases across the economy, customers were relatively accepting of price increases. In the current era of tighter household budgets and value-conscious consumers, retailers are anticipating greater challenges in getting customers to accept across-the-board price increases. Retailers will need to be more selective about where to take price increases and carefully monitor the response from consumers to any price hikes.

Price Negotiations with Vendors

In reaction to previous tariff increases and freight cost surges, many retailers negotiated with their vendors to absorb some of the increased cost by lowering the prices for inventory purchases. Many are continuing to hold these conversations, but these negotiations alone likely cannot mitigate the entire impact of the new round of tariffs. Many vendors have also seen their margins challenged due to pricing concessions already made during previous periods of volatility and may have limited room for further concessions.

Divesting Sourcing from China

Many retailers have been working to gradually shift their manufacturing out of China over the past several years in response to concerns about elevated tariffs specifically targeting China, as well as other concerns about concentrating their sourcing in China. This initiative has once again gained urgency due to the recent tariff policy announcements.  Certain categories, such as apparel, may be relatively easy to relocate, while more sophisticated manufacturing for items such as electronics may prove more challenging or time-consuming to relocate.

Redesign Products to Lower Costs

Another approach to addressing increased tariff costs without raising prices is to review the bill of materials and the manufacturing process cost for products and substitute lower-cost materials and manufacturing processes into product builds. Done correctly, this approach may result in lower factory costs on goods without a noticeable change in perceived quality by the consumer. However, retailers must be careful not to materially lower the quality of products while maintaining the same pricing, as consumers are becoming increasingly savvy about understanding what goes into the products they buy. Reports of this kind of tangible quality decline can spread quickly on social media and negatively impact a brand’s reputation.

Look for Cost Savings in Other Areas

Beyond strategies directly focused on managing the expected increase in the cost of inventory and negative impact on gross margin, retailers are also reviewing their overall operating expense structure to look for any other areas where expenses can be reduced to compensate for expected gross margin deterioration. These could include initiatives to streamline or renegotiate supply chain expenses such as freight and warehousing; reductions in force to lower payroll expenses; and reviewing marketing strategy and budgets to ensure that marketing dollars are only being used in the most effective manner.

Diligence Topics for ABL Lenders

ABL lenders have rightly been focused on these new tariffs and their expected impact on ABL loans and Company performance. There is no one-size-fits-all approach to understanding and mitigating tariff impact, particularly given the rapidity of new announcements and changes to tariff policies. If Companies experience significant shifts in their inventory or operating metrics, an updated inventory appraisal is an excellent way to understand the impact of these shifts on NOLVs fully. In addition, Hilco recommends that lenders have regular discussions with their retail borrowers touching on the following topics:

Current Sourcing Concentration by Country: Lenders should understand the borrower’s current import concentration by country. The lender should seek to understand any initiatives to relocate sourcing to different countries, the timing for when these changes will begin to result in reduced tariff costs, and what the anticipated impact of this will be in terms of overall vendor concentration by country. The lender should also inquire about particular products that cannot be relocated due to specialized manufacturing requirements or other considerations, such as certain electronics and footwear.

Timing of Tariff Impacts on Cost of Inventory: An ABL borrowing base typically determines borrowing capacity utilizing a certain percentage of inventory at cost based on appraisal NOLVs. As new inventory subject to higher tariffs enters a Company’s eligible inventory, it would be expected to increase the cost basis of inventory overall. Lenders should be aware of the timing and magnitude of the overall impact on the inventory cost basis related to increased tariff rates.

Accounting and Payment Timing of Tariff Costs: This would also be a good opportunity for lenders to review inventory cost accounting methodology to fully understand how tariff costs impact the Company’s balance sheet and cost of inventory, as well as to review any duty deferral programs such as the use of Foreign Trade Zones employed by the Company which may impact the timing of tariff payments and the cost basis of inventory in the Company’s accounting. Lenders should consider reserving against any deferred duties on the borrowing base.

Tariff Mitigation Strategies: Lenders should discuss with borrowers any plans to implement the tariff strategies discussed in this article or any other strategies, and request that the Company provide analysis of the expected impact of these strategies.

Operating Results: Lenders should closely monitor operating results and compare them to Company budgets and forecasts to understand the impact of Tariffs on sales, gross margin, and inventory levels. Lenders should also monitor any other changes in operating expenses, as tariffs may have unanticipated second-order effects on the costs, such as business services, payroll, and lease expenses.

Conclusion

The tariff regime continues to evolve rapidly and unexpectedly, making it challenging for retail leaders to plan and budget effectively for the future. In the wake of the Covid-19 pandemic and subsequent events, which have left many retailers in a weakened position, Tariffs represent yet another difficult challenge without a clear solution. Consumer balance sheets and discretionary spending have also been challenged in recent years, which represents an additional headwind facing retailers. Concerns about tariffs not only impact the planning and financial performance of retailers; they have also been cited by consumers as a top concern, which is contributing to cautious spending patterns.

Successful Retailers will have to demonstrate the ability to make intelligent decisions in an uncertain environment. And, ABL lenders will once again have to find ways to work with their borrowers to best support them through this challenging period, while also managing portfolio risk. Hilco’s retail appraisal and operations experts are always available to help lenders navigate the constantly evolving retail landscape.