The specter of higher prices has been hanging over the U.S. consumer since Liberation Day. But thus far, retailers have mostly avoided hikes by employing tactics like frontloading merchandise and leaning into their supply chain relationships. Now, with few of those lifelines left, consumers are likely to start seeing the impact of higher duties at the racks. To ward off a total revolt, stores have been attempting to finetune their pricing strategies, with increases applied judiciously.
In their Q2 earnings calls, apparel companies like Lululemon, PVH and URBN spoke of “modest” price increases, “targeted” approaches and “surgical” strategies.
Those measured comments belie the fact that the quarter, which ended either at the end of July or early August for these brands, represented the front end of the tariff impact. As the industry works through goods that may have dodged the worst of the tariff duties, these merchants could be forced to broaden their increases.
Speaking on a call for the Port of Los Angeles in mid August, Dr. Zachary Rogers, assistant professor of supply chain management at Colorado State University and a lead author of the Logistics Managers Index, said prices for low margin goods like apparel, have already started to tick up, and it’s just the beginning.
“You are already seeing some vestiges of it with back to school, kids’ apparel, toys, things like that, have seen some significant price increases year over year,” he said. “We can’t expect the middle mile or overseas suppliers to eat much more cost than they already have. We’ve sort of pulled all of our levers already, and so now you would expect to see that cost get pushed downstream to consumers.”
Given the tariff rates, Murali Gokki, managing director for global consultancy BRG, said retailers have no option but to share the burden—and face the consequences.
“The magnitude of the increase will warrant many retailers to increase the ticket and this is not just about protecting margin percentage. This is about survival as cost efficiencies may not be sufficient to bridge the gap,” he said. On the consumer side, it’s going to change their buying habits. “And we think many consumers will be trading down or consume less. I believe it is going to be a combination of both.”
Average selling prices for apparel this summer are starting to tell the tale.
Kristen Classi-Zummo, executive director and industry advisor, apparel for consumer insights firm Circana said prices in May and June increased very moderately, but they jumped 2.5 percent yoy in July. “When we looked at what was driving price increases, it all came from new items in the market. So full price items were more expensive,” she said.
Even among those products, prices weren’t increased uniformly though. As the retailers themselves noted, they’re picking and choosing where they see opportunities. “[Retailers are] taking prices up on not just certain categories. It’s certain SKUs, while others they’re keeping the same price. So, there’s such small movements happening,” she said.
But even with those thoughtful strategies, spending is taking a hit. “We did see a bit of a moderate relationship with those categories that had an increase in price this year, we saw a pullback in demand and vice versa. Ones where there actually was a decrease in price, we saw a more positive demand,” Classi-Zummo said.
Though she noted the decrease in spending isn’t as clearly linked to higher prices as it was in 2023 when inflation caused lower demand. At this point, the relationship between the two is “more confusing, volatile and a bit more convoluted.”
But even that tenuous relationship illustrates why retailers are being so cautious about how, where and when they institute any increases. It also has them continuing to look to their brand and factory partners to find ways to keep costs down.
Pricing Strategies
On the pricing side, retailers with multiple categories like department stores and big boxers are zeroing in on which categories are bringing shoppers in, how regularly and how they can leverage each product to their advantage, according to Niranjan Chandrasekaran, senior vice president, services at data insights company Impact Analytics.
“Using these category and product roles, they define a competitive pricing strategy where they invest margin in being highly competitive on destination categories and key value items to protect price image, while relaxing the competitive bounds on convenience categories and profit driver items to regain some of that margin,” he said.
For apparel, specifically, retailers could be slightly insulated from negative consequences related to higher prices. Given the price fluctuations across fashion it can be hard for the consumer to register that they’re spending more. Who’s to say whether the jeans you’re considering are more expensive than the ones you purchased last year due to tariffs or variations in style, cut and fabric quality?
Chandrasekaran said the promotional environment also creates a moving target that makes prices harder to pinpoint in fashion. “Apparel categories are generally less price sensitive to ticket price because there are very frequent promos on apparel leading to less visibility for ticket price,” he said.
But he said this same dynamic presents a different challenge for retailers as they try to determine where they can increase those tickets. “The difficulty is in calculating the promo elasticity because seasonality, promotions and holidays all tend to happen at the same time for these categories,” he said.
The key to teasing out answers like these is leaning into technology, Gokki said. Unfortunately, brands and retailers are often doing themselves a disservice in this regard, he said. “The reality is that many of those tools are not being fully utilized or deployed. It’s equal parts of lack of understanding how the tool works and letting go of legacy practices.”
For the stores that are, drilling down on price elasticity on the SKU and store level will help them create strategies that speak to their specific tiers. For department stores, where promotions are near constant, Chandrasekaran said merchants need to understand where those deals are actually helping and where they’re potentially hurting. “It is important for them to know which items are inelastic and do not drive incrementality when promoted so that they can stop running those wasteful promos.”
For big box chains, the key is to unlock the power of their house brands, Chandrasekaran said. “For Big Box retailers, it would be important to understand the relative elasticity between national brand and their private label, so that they can drive more volume to their private label where possible to regain some of that margin.”
Consumer Impact
While Classi-Zummo said retailers are feeling the tariff impact more on their private label collections, where there’s no brand partner to help absorb those increases, she said the fact is, private label is having a moment at retail. And it’s not just about price.
“Consumers are seeing private label and private brands have just as good or even better quality and value, and we’re seeing a bit of a shift towards those private brands” she said. “[National] brands still have power, and I think they need to take that back but they need to do a better job at communicating the variance of that price point.”
That same attitude is driving sales at off-price and the clubs.
She said today’s shopper is savvy and they want value. If they’re seeing someone on social media raving about the quality of the joggers they just scored at Costco for a fraction of the name brand price, they’re naturally going to check it out. The stigma on shopping across channels is long gone, putting more pressure on full-price and traditional retailers.
That’s just one way consumers are changing as they feel more pressured, Gokki said.
“The shopping pattern of the consumer is constantly shifting but when their wallet is being squeezed, which is what is happening right now, we expect consumers to rationalize where they spend,” he said.
The result isn’t just a shopper trading down to a less expensive version of a jacket, for instance. That shopper could opt to skip that purchase altogether in favor of a pair of shoes or even something for their home. “The substitution quotient has actually gone up pretty significantly in recent times. And retailers appear to not have quite caught up to that, especially pure-play specialty retailers,” Gokki said.
Classi-Zummo reports seeing consumers prioritizing their grocery list and necessities more today, where they’re also feeling the impact from the tariffs.
It all adds up to bad news for this industry, she said. “What I think is almost the most detrimental to this erratic demand is not the price of apparel, but the price of everything else.”
