No, Big Retailers Can't Stop Tariff Price Increases
Tariff coverage in the news has slowed a bit. After all, some of the most eye-popping rates (such at the 145% tariff on China) are currently on hold, and there is a legal challenge which may potentially take the current tariffs (enacted under the authority of the International Emergency Economic Powers Act of 1977) entirely off the table — though at the same time it’s quite possible the administration would re-instate them via another procedure.
They are, however, very much a continuing presence for pricers and for many businesses.
Part of the issue is that the tariff situation keeps changing, and so for businesses which are affected by tariffs it becomes necessary to update the actions the company is taking to deal with the tariffs on a near weekly basis.
As I discussed a while back on an episode of the Pricing Evolution Podcast, uncertainty itself has a high cost for businesses. That’s certainly something that I’ve seen at the company I work for and at others where I’ve talked with pricing and business leaders recently. The hours we’ve collectively put into dealing with tariffs have crowded out a lot of other things we could have been doing this year.
But another thing which has been in the news recently is that major retailers which have been holding off on increasing prices due to tariffs (as they first attempted to find alternate sources and wait to see if negotiations would result in a near-term end to tariffs) have gone ahead and announced price increases.
Walmart, Best Buy, and Macy’s are three of the highest profile retailers to make such announcements so far.
This naturally led to some politicians (notably the president) observing that these retailers make lots of money and that they should absorb the tariffs rather than raising prices.
It’s pretty common to hear politicians and pundits arguing that retailers should absorb some cost or other, whether it’s tariffs, increased wages, or fuel/freight costs. Part of the issue is that our largest retailers are very large, and so it seems like they should have the resources to play chicken with an economic freight train and win.
However, it can be useful to look at the actual numbers. According to Forrester research, the entire retail industry had net profits of $133 billion in 2022. Walmart, the nation’s largest retailer and one of its largest companies overall, had a net profit of $15 billion in 2024.
By comparison, the total tariffs collected by the US government in May of 2025 were $68 billion, an increase of $30 billion from May of 2024.
If we annualized that $30 billion increase, it would mean be a $360 billion cost. Obviously, not all the products being charged import duties are going to retailer. Many of them are products destined to be used by US manufacturers or other B2B businesses rather than consumer retail.
But since the annualized cost of the current tariff level is almost three times the total profit of all US retailers, I think it’s reasonable to say that US retailers do not make enough money to absorb tariff costs.
The classic children’s novel Hans Brinker relates the story of the brave little Dutch boy, who uses his hand to plug the hole in a dike and thus saves his village from being flooded. But just as it’s questionable whether a boy shoving his hand in a hole in a dike would actually be successful in stopping a flood (outside the constrains of a moral tale) it turns outs that retailers are also not able to hold back the ocean of tariffs.
This points to an important lesson for business owners which is the flip side of the insight that a small increase in price can significantly increase your profits:
Because the average company has costs much greater than their profits, they do not have the ability to absorb a significant increase in cost without passing it on in the form of a price increase.
Concretely: The average US public company has a net profit of 8.5%. This means that their total costs (including product cost, overhead, taxes, etc.) are equal to 91.5% of the company’s revenue.
If total cost increases by just 5%, more than half of the company’s profit is gone.
Companies do not have the resources to just sit back and absorb significant cost increases. For those bringing in material from Europe, the cost is up 10%. For those bringing in material from China, the cost is up 30%.
For those companies that are bringing product or even raw materials in from abroad, it is going to be virtually impossible to avoid passing on some cost. The companies simply do not have the resources to avoid it.
And retailers have some of the lowest margins. Walmart had a net margin of 2.9% in 2024. Kroger had net margins of just 1.5%.
While even low single digit margins on a total revenue of hundreds of billions can run to serious money, it simply is not within the power of a major retailer to absorb significant cost increases without passing them on. The entire retailer business model is, effectively, one of passing costs through while doing very efficient operations.
Even for other, more profitably businesses (say, Apple with its massive manufacturing base in China) it would be difficult for a company to experience a double-digit tariff and not pass it through eventually in prices. And sure enough, Apple uses its political influence to get a “phones and electronics” exception to the tariffs early on.
Large companies generally know this pretty well. Whatever they may say publicly, they are in the business of passing their costs on.
But small companies can sometimes be led astray by rhetoric about what “responsible businesses” will do in the face of various cost increases, including import duties.
So this is my key message to small and medium size businesses: If you find yourself facing significant cost increases due to tariffs, first try to offset that cost increase by changing where you are sourcing your products or via other cost savings. But once you’ve done everything you can to avoid tariff costs, you must go ahead and do the difficult work of passing the price increase you have experienced on. You probably do not have the resources to absorb it yourself.
There will be customers (some of them much bigger than you are) who tell you that it is your job to absorb the cost of tariffs. And you should do everything you can to find other savings to mitigate their impact.
But once you have done everything you can to avoid the tariff impact, if there remains any significant cost increase to you, it will have to be passed on to customers. If you don’t, you put yourself at risk for a massive decrease in profitability, which can have far reaching effects on your business.