Holiday retail sales ended 2025 on a solid note, validating the National Retail Federation’s optimistic $1 trillion forecast. Data showed sales rising about 4%, with consumers actively shopping — albeit selectively — seeking deals and trimming discretionary purchases to preserve expenditures for loved ones. December sales increased year-over-year in six of nine retail categories, led by clothing stores, sporting goods stores and digital products.
But that was then, and new realities have since set in. Retailers mainly shielded consumers from 2025 tariff hikes by bringing goods in early and absorbing or pushing tariff costs upstream. Now that front-loaded goods have sold through, 2026 marks a clear shift.
Merchandise hitting shelves today is fully exposed to tariff pressure, often with price increases that retailers can’t — or won’t — absorb. Product also looks and feels different. In some cases, design and construction have been strategically simplified; in others, “tariff-engineered.” Assortments are streamlined with rationalized SKUs. Private label, which companies rely on for higher margins, is on the rise.
Tariffs have certainly dominated the headlines — affecting everything from planning, pricing and production — but the unpredictability surrounding them has proven to be the bigger disruptor.
“Uncertainty is a bigger threat to future bookings, plans and execution than the reality of higher tariffs,” said Jason Kra, president of LF Markets USA, overseeing Li & Fung’s wholesale and distribution business in the U.S. “If something is fixed and you know what it is, you can model around it — strategize, redesign product, figure out your competitive advantage. Uncertainty means you can’t do any of that because you don’t know what your anchor is.”
Strategic Pricing and Tariff Engineering
The retailers best positioned for 2026 are those that have accepted tariffs not as a temporary shock, but as a systemic condition.
Holiday goods were already ordered when Liberation Day tariffs hit, so it was a matter of who would absorb those added duties. Negotiations on previously quoted FOB prices went into overdrive. Today, there is less wiggle room. As Kra said, “Today, the price is the price. Some retailers will still ask for a handout, but that’s not there anymore.”
“The biggest shift is honesty,” said Jawed Bhinder (JB), vice president of CRM and business development at supply chain management group M5 Groupe. “Six months ago, tariffs were negotiated around. Today, they’re priced in.”
To offset tariffs on current Spring/Summer 2026 merchandise, brands had time to strategically engineer assortments, effectively redesigning for a higher-cost future.
Where possible, they absorbed increases or reworked inputs and construction to minimize sticker shock. The strongest operators applied unavoidable increases selectively — rebalancing margin across entire departments rather than pushing uniform increases to consumers.
“Retailers don’t raise prices evenly,” said Kra. “They protect commodity items and push increases into newness where consumers don’t have price memory.”
For that reason, frequently reordered basics — such as a three-pack of cotton T-shirts—often remain loss leaders. Margin recovery instead comes from refreshed assortments, elevated design and differentiated product portfolios that raise the average margin without alienating shoppers.
Kra gave an example of averages. “Let’s say the tariff increase for H2 averaged out to be about 15%. If retailers paid half of that, say 7%, that’s 70 cents on a $10 product. So a $10 product lands at $12, $13, they sell it for $25. Can you absorb 70 cents into your margin on that $10? It’s not that bad. It doesn’t mean your price goes from $25 to $30. It means a couple items might go up to $30, but 70% of your items stay at $25.”
On the upside, compelling new styles with distinctive materials, attributes and marketing support have been proven to command higher prices among consumers with fewer promotions.
For instance, American Eagle Outfitters reported record holiday sales, citing strong margin performance driven by customers “embracing new product collections” and responding to its latest marketing initiatives. The retailer raised its Q4 outlook, projecting comparable sales growth of 8% to 9%.
Elsewhere, a major sporting goods retailer shared that it split tariff increases on in-production goods with existing vendors, while on new developments it focused on re-engineering product to “maintain integrity, quality and retails” wherever possible. Rather than a blanket pricing strategy, the company adjusted by category — raising prices in some areas while relying on promotional cadence changes in others.
Another common tactic has been offering lower-cost versions of the same silhouettes — often through subtle changes such as lighter-weight fabrics or alternative materials.
“We do have customers looking to shift to less costly fabric to help bridge the margin gap,” said Mark Ix, director of North American marketing at China-based denim mill Advance Denim. “There are many ways to reduce cost, from shifting to less expensive yarns (which we don’t do) to shifting away from more expensive colors. But it’s not easy—especially if you’re trying to match the look and feel of a more expensive style.”
Some companies are also pursuing tariff engineering — the legal art of strategically modifying design or construction to qualify for more favorable classifications under the Harmonized Tariff Schedule (HTS). Two well-known examples include adding felt soles to sneakers to reclassify them as slippers (Converse) or adding “nurse pockets,” small zippered pockets below the waistline of shirts to quality for reduced tariffs (Columbia Sportswear). While those were high-profile cases during earlier tariff cycles, such engineering today often happens quietly in the background.
Walmart President and CEO Doug McMillion called this out in its May earnings call on Q1 2026. “We also have suppliers shifting materials from tariff-impacted components [to others] where there is no tariff,” he said. “Our merchants, sourcing team and suppliers are being creative. It’s been impressive to watch our team identify opportunities and adjust.”
Stretching the Sourcing Map
Forget “China +1” or even “China +2.” For many retailers, the reality is now “China +10.”
According to the U.S. Fashion Industry Association’s 2025 Fashion Industry Benchmarking Study, at the firm brand and retail level, approximately 60 percent of large companies with 1,000+ employees reported sourcing from 10 or more countries in 2025, a significant increase from the 45 to 55% percent range reported in 2022 and 2023. Nearly 60% plan to expand sourcing even further this year, the study found. On average, companies expect to increase sourcing from five additional countries through 2027, up from four in last year’s survey.
It’s all about balance and the ability to pivot when necessary. “In my world, we think about supply chain, excluding Central America, as a 25% average,” said Kra. “So 25% should be somewhere around China, 25% should be in ASEAN, 25% Indian subcontinent, which includes Bangladesh, Vietnam, Pakistan, and 25% in Africa, Middle East, Turkey. If you have that, you can navigate to a minimal soft landing, or a minimal hit and [then] to a soft landing.”
But diversification must be meaningful — not cosmetic, experts agree.
“If a company can shift 20% to 30% of volume within a quarter without chaos, that’s real diversification,” said Bhinder. “If they ‘added a country’ but still panic when tariffs move, that’s cosmetic.”
True diversification extends beyond final assembly to include materials, trims and regional ecosystems. While Bhinder cautioned that there is still no full substitute for China in apparel and textiles, nor for Vietnam in footwear, the industry still needs to adapt. “We need to make strategic partnerships, re-explore manufacturing locations like Egypt, Pakistan, Jordan, Cambodia, Myanmar, Morocco, Kenya and others. What if India really gets a 500% tariff? What if other countries face more tariffs? We can only find answers to these ‘ifs’ once we start action — now.”
Methodical shifts are much more effective, requiring research on geopolitics and capacities.
“Factories are not sitting empty. Everybody’s running at 80, 90, 100% of order and capacity,” said Kra. “[You have to ask] what is worth the money? Countries like Egypt have gone up in demand and they only have a 10% tariff, but there’s a limitation on growth. So they’ll grow at $500 million of exports this year, but that’s in the scheme of $1 trillion globally. So what are you really moving from country to country — 10% fluctuation to the global scale of global business?”
Relationships Over Location
In 2026, a “relationship, relationship, relationship” mindset may matter as much as any “location, location, location” sourcing strategy. Retailers that have positioned themselves well have invested in long-standing supplier partnerships built on trust, flexibility and institutional knowledge.
And it’s not only about finding the lowest cost, but the lowest friction. Speed to market is becoming a critical lever and it requires agility and flexibility. Buying closer to need reduces markdown risk, helps get product right, and preserves margins that can offset higher duties.
“Brands increasingly expect partners to support last-minute changes, lower minimum order quantities (MOQs), manage raw material sourcing, and provide value-added services,” Dr. Sheng Lu, Professor & Director of Graduate Studies in the Department of Fashion and Apparel Studies at the University of Delaware, wrote in his Apparel Sourcing and Trade Outlook for 2026.
But proximity alone doesn’t guarantee agility. “This shows why, based on trade data, Asian suppliers overall are more competitive and have captured more market share in the U.S. and EU markets in 2025 than near-shoring suppliers,” said Lu.
The sporting goods retailer also stressed the benefits of maintaining strong relationships, especially in today’s uncertain climate, saying, “No vendor partnerships ended due to tariffs. In most cases, our vendors were able to shift production to alternate countries to minimize cost increases.”
Rather than triggering disruption, tariffs often reinforced existing relationships, allowing brands to preserve assortment breadth without sacrificing long-term partners for short-term savings.
“The biggest mistake is confusing lowest cost with lowest risk,” said Bhinder. “When brands abandon long-term partners, hidden costs show up later in delays, markdowns and reputational damage.”
Kra echoed the sentiment. “Any supply-chain company worth its weight in salt won’t walk away from relationships it’s spent years building. There’s a learning curve, but the work now is about pivoting around the disruption — not starting over.”
