The Supply Side: Retail margins face uncertainty in back half of 2025

Retailers of all sizes face many uncertainties in their businesses thanks to tariff impacts, weaker consumer demand and a slowing global economy. Weaker sales are forecast, and many of the largest retailers have lowered their earnings guidance.

“We haven’t seen this level of uncertainty in our industry since COVID,” said Anne Zybowski, vice president of global consumer solutions and analytics at Circana. “Some would argue that this is more uncertain than COVID was.”

In a recent webinar, she said retailers can’t just sit this one out, and there will be winners who pick up share and come out stronger on the other side despite lower margins for nearly everyone.

Given the uncertainties, Walmart, Target, Dollar General and other mass retailers have said prices may have to be raised if lower tariffs are not negotiated with China and other major trading partners. Walmart execs vowed to hold prices down as long as possible as they try to spread the higher costs across multiple categories, rather than hit categories like toys and patio furniture with the full brunt of the tariffs.

Dollar General recently warned that prices could rise, even though the retailer does not import as much as its competitor Dollar Tree. Walmart outperformed in its first-quarter comp sales, taking share from other retailers unable to hold prices down. Analysts have said holding firm on prices amid the rising costs of goods will hurt retailer margins for the balance of the year, unless favorable trade deals are reached soon.

Jan Kniffen, CEO of Kniffen Worldwide, said the efficient operators with scale will take share, even if their margin and full-year profits are compromised. He favors Walmart, Costco and TJX noting they have the scale and strong balance sheets to come out stronger on the flip side of the challenging operating environment.

Conversely, Target missed its sales forecast and reduced its full-year revenue guidance amid comp sales performance down 3% for the quarter. CEO Brian Cornell said May 21 that price hikes would be a last resort.

A trend Circana data identifies is that discretionary spending is underperforming food and consumables sales, which took a toll on first-quarter earnings before the tariff impact. Through May 12, spending on general merchandise fell 2% in dollars and units were 3% lower than the same period last year. Food and beverage sales posted 2% dollar gains with unit sales down 1%. Non-edible consumables posted 1% sales gains in dollars, with units down 1% from a year ago.

Circana reports that 85% of consumers perceive grocery prices on everyday items are more expensive than a year ago. About half, 49%, said they shop for deals and promotions more often, and 44% are cutting back on non-essentials. One in three consumers said they are using coupons more often, and 27% are changing to private brands to save money. Also, 28% are buying items or less expensive items, and 24% are shopping at value retailers.

Circana also evaluated tariffs on the general merchandise categories that have retailers concerned, noting fewer shipments and empty shelves being a possibility.

PARTY FOUL
Oskar Kaszubski, chief growth officer and co-founder at Firstmovr, said most tariffs on imported categories of goods coming from China, including toys, ranged from 7% to 24%. The proposed tariffs were to rise by 145% in April, only to be paused for 90 days.

“Let’s be clear, a 145% tariff is more of an embargo than a tariff,” Kaszubski said. “We saw shipments and container bookings down over 60% amid the aggressive rhetoric, and it feels like every day something new is happening.”

He said even though the 145% tariffs were paused temporarily, a 30% rate is still in effect, and many of the goods had no tariffs a year ago. He also said there are core trends companies are following during the uncertain times. He said those importing a lot of goods from China are starting to take price increases to help cover the margins and then use promotions later if the product does not move.

“We’re also seeing some that are leveraging consumer fear of what’s next to drive sales, and we’re seeing a lot of tariff deals and especially some companies that have warehouses here are using tariff deals and even calling them tariff deals to help incentivize purchasing now because you might not be able to afford it later,” Kaszubski said. “Other retailers are acting now to try and provide value to consumers, focusing on loyalty and building trust and calling out manufacturers for higher prices that have persisted for two years.”

Kaszubski said categories to monitor coming from China that will be subject to tariffs range from party decorations to cosmetics. Circana reports that 90% of party decorations are imported from China. Following are other categories with the percentage imported from China:
• 79% of video and card games
• 76% of all toys
• 67% of cutlery sets
• 65% of cooking utensils
• 59% of glassware
• 56% of sporting equipment, fishing equipment and electric heaters
• 51% of electric batteries
• 46% of telephones
• 43% of headphones and microphones
• 40% of vacuum cleaners
• 38% of computers
• 37% of footwear
• 29% of apparel and home textiles
• 25% of washing machines
• 19% of air conditioners and refrigerators.

Kaszubski said many toys were previously exempt from tariffs, and even a 25% tariff is a big price escalation. Some estimates are as high as 77.5% on toys, and retailers will have hard choices to make. He expects some out-of-stocks this holiday season because retailers from Walmart to Target have said they will cautiously order seasonal items because they do not want to repeat the inventory glut they experienced two years ago when coming out of the pandemic.

Brands from Mattel to Microsoft are balancing the timing of pricing and promotional strategies to offset tariff impacts. The Barbie Swimsuit Model price has risen from $10.49 to $14.99, and the Xbox Series X console price is up $100 to $599.99 over the past two months.

CONSUMER SENTIMENT
Circana reports that 66% of consumers are concerned about the potential effects of tariffs, and 80% are concerned that there might be an economic recession in the U.S. within the next few months.

Zybowski said consumer sentiment is not always representative of spending. But among consumers who plan to purchase home entertainment in the upcoming year, 45% plan to delay the purchase or reduce the total spend. Just 4% said they would buy early to lock in a lower price, and 10% said they would trade down to a lower-priced item. One in three buyers would not purchase if prices go up.

Among lower-priced items like cosmetics and beauty care, just 18% plan to reduce or delay the purchase, and 45% said they will stock up early to save money. Just 2% said they would not purchase amid higher prices. Meat and seafood is a category where 40% plan to buy as usual, with 22% stocking up early, and 8% who will not purchase if the category price rises.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics, and is sponsored by HRG.