As tariff costs work through the system, brands, retailers and manufacturers are forced to make hard decisions—either absorb the costs and shrink margins or pass costs onto shoppers and risk further subduing consumer demand. Until now, the industry has been doing as much as it can to insulate retail prices, but as retailers burn through frontloaded merchandise, they must address the new goods hitting stores carrying the full weight of the tariff burden.
The industry is navigating a perfect storm: rising supply chain costs, volatile sourcing conditions and cautious consumers. As a result, merchants are taking a surgical approach to increases. But with elasticity still uncertain and holiday forecasts clouded by margin pressures, the next few quarters may expose just how much pricing power brands really have.
Even ahead of tariff impacts, consumer behavior has been evolving in ways that complicate the picture further. Shoppers are holding back, trading down and shifting spend toward off-price, resale, and private-label channels — moves they no longer see as compromises.
This excerpt from the HGI Supply Chain Outlook Call on October 22 underscores why the pricing conversation can’t happen in isolation. Here, John Kernan, of TD Cowen; Kristen Classi-Zummo of Circana; and Jon Devine of Cotton Incorporated share their insights into how fashion must recalibrate to emphasize value and prioritize innovation in order to win consumers over today.
Watch the full Call here to dig more into raw material costs, logistics pressures and supply chain shifts.
Edward Hertzman: John, you said the retailers are trying to really mitigate the costs due to tariffs. But I want to know how much the management teams are talking about what they’re going to eat. How much do they expect the factories and supply chain partners to eat? How much is the consumer should be expected to eat?
John Kernan: Companies have been vague in terms of what they expect to eat themselves, what their factory partners are going to share and what the consumer is ultimately going to bear. But when you broadly look at the retail ecosystem in holiday, there’s companies planning AUR [average unit retail] up as much as high single digits. And depending on your mix of sourcing and your source of geographical revenue, if you’re a company with 50 percent of your revenue in the U.S., and you’re facing those these new tariffs, you can offset most of that hit with a roughly mid- to high-single digit realized price increase, and the consumer has to eat that.
And there’s certainly going to be some elasticity that has to get factored in. But the forecasts around this are extremely difficult, because we just haven’t had a period like this before, in terms of the COGS [cost of goods sold] pressure, in terms of the pricing pressure, where most companies are taking price at the same time. So, companies have been cautious to issue guidance. They’ve given wide ranges of outcomes, and you can see why.
This quarterly earnings season is going to start very shortly. You’re going to really start to get a better view of the initial hit, because the first and second quarter, we were still cycling lower cost inventory through the income statement, through the cost of goods sold. Now in Q3, in the first half of Q4, the first half of next year, all the goods that have been sourced are now going to start to flow through. So, you’re going to start to see some real outsized gross margin impacts. You’re going to see some surprises to the upside and downside when a lot of these companies report, and you’re going to see, like I said, pretty wide ranges of guidance on a net impact to the gross margin, and the consumer in certain areas is going to eat some of these costs.
Pricing is not going to be broad based. Companies are going to try to be surgical and target specific SKUs and franchises, and you’ll see bigger price increases there and maybe no price increases elsewhere. So, a lot of uncertainty. You’re going to hear from a lot of companies starting next week, and it’s going to be fun trying to forecast some of this as we get into the first half of next year, because a lot of this carries over into the first half of next year from a cost of goods sold pressure for both the companies and the consumer.
EH: Kristin, what does your data tell you about price increases to date, and what impact these have had on consumer spending?
Kristen Classi -Zummo: Prices are increasing for the consumer. We’re starting to see that already. For the first few months of the year, prices were actually consistently coming down. But really, since May, we’ve seen gradual price increases in apparel about 1 to 2 percent. What’s interesting is there’s a lot of nuance to what is happening right now. I really try to not paint broad strokes, because we could be seeing a shift in promotion, a shift in category mix, brand mix. When we look at the data, really the biggest driver of price increases so far is new items. So new items in the market [are] more expensive now than they were a year ago. And that makes sense. John talked about this, how we’re seeing brands and retailers really be more selective and strategic about where they’re taking price. It’s not consistent across the board. They’re likely to pick new items. Consumers really don’t have a strong baseline of knowing what this pair of wide leg jeans might have cost a year ago compared to, let’s say, a six-pack of underwear that they’re buying every six months.
So, we’re seeing prices are increasing since May, mostly coming from full-price new items. Now we do know as a result, even if consumers might not have a baseline, about three quarters of consumers are expecting prices to go up from tariffs, and specifically when it comes to apparel, about 80 percent said that they’re going to change their behavior.
“This quarterly earnings season is going to start very shortly. So, you’re going to start to see some real outsized gross margin impacts.”
—John Kernan, TD Cowen
EH: What is that changing of behavior?
KCZ: It’s nothing new. It’s an acceleration of what we’ve been seeing, really, since inflation. So, if you think about it, consumers have been dealing with price increases. They’ve really had two and a half years of inflation. They haven’t had time to really adjust. Now we’re seeing those prices come up again. So, it’s an acceleration of those behaviors that we started to see a year or two ago. Consumers are holding back and trading down. Some of the first things we’re seeing is just a pullback in demand. It’s this inverse relationship. As price comes up, we see demand come down. We’re also seeing a shift in where consumers are shopping. Off price, resale, private brands, these areas are outpacing the market. And what’s interesting is that consumers aren’t really seeing these as a trade down. They’re seeing them as ways to save. But from our data, consumers are consistently telling us that they feel that private brands have just as good value and quality as a national brand. They see resale as a smart way to shop, not just for luxury brands, but for everyday brands. So, we’re seeing this channel shift that started a couple years ago that’s really being accelerated by this fresh set of price increases.
EH: John Kernan as a follow up to that, when we think about holiday and spring, are you seeing any impact to the type of goods? What are they telling you in terms of how they’re changing their assortments moving forward, if at all?
JK: Yeah, Kristen nailed it. Off price, private Label, particularly Dick’s Sporting Goods, has had tremendous success. There’s shifting value perceptions among consumers and all the retailers and brands out there have to address that. And we have seen trade down. We’ve seen acceleration in traffic at the off-price retail level, really, since back to school. We think they’re set up for a very good holiday.
Retailers, I think, are still in a test and learn, and the brands as well, in terms of how the consumer is reacting to certain promotions, certain pricing. Like Kristin said, a lot of the price increases you’re going to see are on newness and new franchises and innovation. This is going to be one of the harder holidays for a lot of CFOs and finance teams to plan for. And we had a great holiday last year. The consumer showed up. It was a shortened calendar, and the consumer showed up, and almost everybody was on plan. There was a lot of upside to companies’ Q4 outlooks, and we’ve got a tough compare from this holiday. Hopefully seasonal weather starts to agree a little bit more. And there’s just a lot of uncertainty out there, but the winners right now that we see are the value positions retailers and certainly private label as well.
EH: Why is the apparel inflation in the U.S. market been so much lower than the top-line inflation we’ve seen?
Jon Devine: Well, when you take a look at the apparel market, of course, it’s been very cost-sensitive over the longer term, and retailers and brands and manufacturers have all gotten pretty experienced in terms of how to deal with cost pressures, and they’re aware that there’s a lot of discretionary items that are out there, and some price sensitivity, so I think experience has been a tool that has maybe helped them manage some of this cost volatility in the near term.
And something else that we’ve been facing here more recently, too, in addition to the longer-term downward, movement that we’ve seen in retail prices for apparel relative to the overall CPI [consumer price index] is, that we’ve got to consider economic factors, too. We take a look at apparel, we’re about 2 percent of overall spending. If there’s increases in costs for housing, food, energy, where’s that pinch going to be felt? It’s going to be felt on the more discretionary categories, such as apparel, and we’ve had to be flexible for that reason on price.
KCZ: I think John really hit it. At Circana, we track complete consumer spending, so we’re not just looking at discretionary, we’re looking at food and CPG. We’ve continued to see spend on food, grocery, CPG outpace discretionary. That is absolutely where we’ve been seeing the pullback. Consumers have to prioritize their share of wallet and where they’re spending, and that has been defaulting to necessities.
Additionally, too, in terms of inflation, we forget that right after the pandemic, we saw huge growth in apparel prices. For about a year or so, it was double-digit growth. And even if brands and retailers weren’t impacted with inflation, we saw there was a willingness for consumers to spend, and many brands raised their prices in accordance. So, we’re already coming off of some pretty steep price increases in the not-too-distant [past]. There is a little bit more wiggle room for margins, so that’s why I think we’ve seen that slow down a little bit, but in the recent history, we have seen some pretty high increases overall in apparel.
“While we talk about the importance of focusing on tariffs and supply chain, you cannot forget about newness and innovation, because without that, the industry is really going to be stagnant.”
—Kristen Classi-Zummo, Circana
EH: Kristin, where does apparel rank in overall terms of share of wallet, and where are the bright spots?
KCZ: Apparel has had a larger share of wallet in years past, and we continue to see that share shrink to other categories. Beauty, since the pandemic, has consistently stolen share from apparel. In times of inflation, uncertainty, economic stress, where consumers are prioritizing food and needs, beauty continues to grow. That industry taps into newness, innovation, joy, health and wellness, something that is checking all the boxes of value with consumers. So, beauty, absolutely is a growth driver, and it really has hurt the industry.
Again, I think there’s been this health and wellness boom. It’s shifted as to what it’s looked like. It was more about being natural, it’s more about longevity, GLP-1, weight loss. There continues to be this focus on health and wellness that might be shifting in definition. But we know it’s grabbing consumers’ interest and consumer spend.
And let’s not forget health and wellness, beauty, these industries have just led in terms of innovation. In apparel, the industry suffers when there is a lack of newness and trends. So. While we talk about the importance of focusing on tariffs and supply chain, and we know businesses and brands are focusing so much finances and resources, you cannot forget about newness and innovation, because without that, the industry is really going to be stagnant.
EH: is there a direct correlation between job numbers and consumer spending as it relates to apparel, if we get those job numbers?
JD: It’s all pieces of a bigger puzzle. So I think a story that has been helping support consumer spending over the past couple years is that inflation continues to be high, but wage growth has been outpacing inflation and whether or not that’s going to be able to be sustained or not. Obviously, these latest payroll numbers we’ve had have been pretty weak.
And, we haven’t seen wage growth drop off a cliff yet, but if we do see the labor market soften a little bit more, I think that element that has been a source of support for consumer spending, probably could expect to get a little bit weaker.
EH: I see that a lot of companies right now are blaming tariffs, uncertainty, geopolitical issues for weak performance. But the reality is, some of this has nothing to do with that. How much of this do you think is directly correlated to a change of consumer preferences versus just tariff impact?
KCZ: You don’t want to waste a good crisis, right? Why not blame tariffs? I don’t want to diminish how this is impacting the industry. But again consumers, they’re just being more selective. They haven’t stopped shopping altogether. So, I think the brands that are really understanding the value that their consumers are buying into, they’re understanding newness, they’re understanding trend, they’re checking all the boxes, they’re the ones that are winning. There’s a big bifurcation in the market where you see that brands are doing well, and it’s premium brands. You mentioned On, Hoka, premium running brands, Alo, activewear brands.
I mentioned earlier, nuance. We cannot paint broad strokes. There is so much nuance to what is happening in the data and consumers’ preferences to where they’re shopping right now. So, for a brand or retailer, you have to go a little deeper. You can’t just focus on an active tennis skirt, knowing that people are buying activewear. How are you differentiating yourself and creating that value that’s different than a private brand? How are you focusing on quality? How are you messaging what really separates your brand from that other private brand, that lower-priced brand on the floor?
One of the things I also talk about is, those traditional seasonal holidays are still important, but there’s so many other outfitting opportunities that I think the industry is ignoring. Like the Super Bowl. How are you maybe thinking about some sports licensing? So, for the past 5 years, NFL apparel has grown at a 4.5 percent CAGR the 2 weeks leading up to the Super Bowl. We see dress sales have been a little stagnant, but the week leading up to the Kentucky Derby, it’s the third largest dress sales week of the year. Younger consumers they represent about 24 percent of activewear growth. Well, think about that Gen Z woman who’s going back to college. She’s maybe looking for a wardrobe refresh. She has events that she’s buying for. Think about the outfitting triggers. The brands and retailers that are winning are communicating their value, they’re really strong and clear on their messaging, what sets them apart, and they’re leaning into these outfitting triggers throughout the year.
