Exploring the Tariff Environment: Insights on Retail and Consumer Product Companies

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By Gennady Spivak, Managing Director and Matthew Wesley, Analyst

On April 2, 2025, President Donald Trump announced a 10% tariff on all imports and higher rates for certain countries. Tariffs are again transforming global trade, significantly impacting the retail and consumer goods industries. Sectors, such as apparel, electronics, home goods, agriculture and automotive parts are experiencing increased financial pressure. These tariffs impact both retail and consumer product companies directly and indirectly. However, with proper planning and adopting constructive and innovative strategies, businesses can soften the burden.

Background on Recent Tariff Activities

President Trump signed three executive orders on February 1, 2025, imposing a 25% tariff on imports from Canada, Mexico and China. While tariffs on Chinese goods were expected, the tariffs on Canada and Mexico were a surprise. These countries are major trading partners, with 78% of Canadian exports and 80% of Mexican exports heading to the United States, according to the United Nations Comtrade Database. In response, Canada, China and the European Union have imposed retaliatory tariffs on U.S. goods. The universal 10% tariff on all imports became effective April 5 and additional “reciprocal tariffs” targeting specific countries with significant trade surpluses with the U.S. were set to take effect April 9. That same day, the administration announced a 90-day pause on the reciprocal tariffs to most countries.

Further developments are expected in the evolving tariff landscape and we’re closely monitoring the situation to keep you informed.

Direct Tariff Impacts on Retail and Consumer Product Companies

Rising Costs and Compressed Margins: Retailers are already facing pressure on gross margins due to inflation. They will now need to decide whether to pass these tariff-related cost increases on to consumers, potentially lowering demand, or absorb the costs within their margins. Price-sensitive categories, including apparel, electronics and household goods, may struggle to pass on the increased costs to consumers.
Financial Metrics to Monitor: Retail and consumer product companies should closely monitor key financial metrics and indicators such as gross margin, earnings before interest, taxes, depreciation and amortization (EBITDA) margin, working capital cycles, inventory turnover, sell-through metrics, net orderly liquidation values (NOLV) on inventory and liquidity metrics.

Indirect Tariff Impacts on Retail and Consumer Product Companies

Supply Chain Disruptions: Rapid changes in supply chains caused by disruptions to typical procurement processes may impact sourcing and inventory management indirectly. This could result in extended lead times, port congestion and strategic adjustments. Companies heavily dependent on goods or raw materials from countries affected by new tariffs may experience a disproportionate impact.
- Retailers should assess tariff exposure across their suppliers and products, improve transparency and seek cost-sharing agreements to reduce tariff burdens.
Impact on Consumer Spending: Higher product costs due to tariffs may reduce consumer spending. Companies must balance maintaining profitability with retaining customers.
Reduced Supplier Discounts: Suppliers may offer fewer discounts and tougher terms during times of increased tariffs unless urgent liquidity needs force them to adjust.

Strategic Responses, Opportunities, Risks and Mitigation Strategies

Supplier Base Diversification: Companies should explore alternative sourcing locations not affected by tariffs. Larger organizations with extensive global supply chains may be better positioned for this shift. Countries like Vietnam, India, Indonesia and Malaysia offer viable options.
- Businesses must consider risks such as potential disruptions, increased lead times, variable product quality, higher labor costs and additional ancillary costs for storage, warehousing and shipping expenses.
Inventory Management Optimization: Retailers must adapt inventory strategies swiftly, including increasing inventory ahead of anticipated tariff hikes or tightening inventory to prevent high-cost, slow-moving stock. Accurate demand forecasting is essential, as miscalculations could significantly impact financial stability and inventory valuations due to excess or slow-moving inventory. Businesses should monitor the impact of inventory decisions on key financial metrics like inventory turnover and gross margins.
- Businesses should be aware of misjudging consumer demand, potentially leading to overstock of tariffed goods with slower sell-through rates and eroding inventory value with lower NOLV while tying up liquidity.
- Lenders should closely monitor their borrowers’ inventory metrics, appraisals and turnover rates, adjusting borrowing bases as needed to reflect changes in tariff-affected inventory.
Renegotiation of Costs and Contracts: Retailers should negotiate with suppliers to share tariff-related cost burdens. Flexible contracts accommodating tariff fluctuations, negotiated discounts and extended payment terms can help mitigate financial pressures and maintain healthy trade relationships.
- Maintaining strong relationships with suppliers and customers and offering transparency in tariff cost mitigation goals is crucial.
- Businesses with strong brand loyalty can position products as premium or value-added through justifiable price increases, while others can leverage private-label products from countries with lower tariff increases.
Tariff Engineering and Free Trade Zones: Leveraging free trade zones (FTZ) strategically can delay or legally avoid tariffs. Effective use of these zones requires comprehensive planning and regulatory compliance expertise to minimize tariff-related costs.
- Businesses should consider additional costs when exploring FTZ options, including shipping, duties, warehousing and storage facilities.
- Consulting with specialized trade compliance advisors can provide legal and effective options on FTZ and other tariff engineering strategies.
Reshoring and Nearshoring: Reshoring manufacturing and production lines to the United States or relocating closer to domestic markets (e.g., Mexico or Canada, although they are also affected by tariffs) may prove financially beneficial.
- Businesses should carefully evaluate trade-offs, balancing potential cost savings with increased domestic labor, operational expenses, increased working capital needs and infrastructure buildout.
- When tariffs make imports more expensive, domestic manufacturers who previously imported goods can capture market share by sourcing locally. Certain consumer goods companies that produce locally (i.e., furniture or apparel) may benefit retailers looking for non-tariffed suppliers.
Investing in Technology and Infrastructure: Investments in technology and infrastructure can be a longer-term strategy to alleviate tariff impacts through enhanced operational efficiency and agility. Advanced analytics, automation and real-time inventory tracking can reduce long-term operational costs. These investments can lead to increased productivity, which can be tracked through real-time reporting.
- Businesses must plan for the initial capital investment and maintenance of technology upgrades and infrastructure buildouts.
Strategic Pricing Adjustments: When product pricing is inflexible and consumers are price sensitive, tariff-related cost increases passed on to consumers can result in lower sales. Companies should consider selective price increases on products with lower price sensitivity, scaling up prices through promotional or bundled offerings or targeted price increases to offset price hikes and avoid losing customers.
- Businesses should model financial scenarios reflective of the pricing adjustments and impacts on sales and gross margins.
Data Analytics and Consumer Insights: Using data analytics can help businesses understand product elasticity and consumer willingness to pay higher prices, preventing lost sales or brand erosion.
Continuous Adaptation and Flexibility: Companies should remain flexible with adjustments made on tariff cost implementation as trade policies are fluid and can change quickly. Real-time data-driven decision-making and scenario-based financial modeling enable businesses to respond swiftly to tariff changes.

Tariff Impacts on Lender-Borrower Relationships

In most lender and borrower relationships, tariffs introduce new risks for both borrowers and lenders. As borrowers experience the effects of tariffs, profit margins are likely to compress, leading to lower profitability, weakened key financial ratios and potentially breaching financial or loan covenants. This can result in a decline in liquidity.

Borrower Impacts: Borrowers may feel increased financial stress, reduced profitability and margins, inventory cost pressures and higher risks of lender covenant breaches. This often leads to lower borrowing availability against their allowable collateral and causes liquidity constraints. Borrowers should assess their increased need for working capital for possible inventory buildup, provide detailed financial forecasts identifying tariff impacts and engage proactively with their lender to adjust financial covenants and credit terms.
Lender Impacts: Lenders face heightened credit risk as borrowers may experience financial decline due to tariffs. Lenders will typically increase their vigilance around portfolio risk management, potential deterioration in loan portfolio quality and fluctuations in utilization rates. These will be reflected in inventory valuation adjustments, more frequent collateral reviews and stricter borrowing standards for high-risk borrowers dependent on tariff-exposed imports.
Interrelation of Impacts: As borrower risk rises, lenders become more cautious, leading to enhanced risk management and credit monitoring. Retailer inventory and sales health are critical to creditworthiness and with higher scrutiny, lenders will likely be more cautious when working with certain borrowers.
Proposed Solutions: Transparent communication, proactive financial scenario modeling, covenant flexibility and robust liquidity management are critical considerations.
Additional Monitoring: Increased oversight, along with more frequent key metric reports and collateral level assessments, may be used to continuously monitor and evaluate the borrower’s risk profile. This includes:
- Monitoring inventory quality and turnover
- Tracking in-transit inventory levels and the timing of receipt of goods, especially for companies with overstocked or slow-moving inventory
- Assessing the need to secure additional financing to cover potentially higher working capital requirements.

Successful lender-borrower relationships as the tariff landscape changes may depend on closer collaboration. Working in partnership with their lenders, companies can evaluate mutual strategies through adjustments to loan terms, either temporarily or through longer-term relationships.

Trade Credit and Payment Term Changes: Lenders may offer payment term extensions to cushion the impact of tariffs, address delayed payments from customers facing higher prices (leading to higher accounts receivable) and manage slow or non-paying customers.
Increased Lender Oversight: Lenders will likely require more frequent reporting on key metrics, collateral levels and granular data (e.g., units sold, margins on tariff-affected products) while continuously evaluating borrowers’ risk profile.

Proactivity and Resilience in a Shifting Trade Landscape

The introduction of new tariffs by the United States has increased uncertainty and complexity for retail and consumer goods firms, along with their financial partners. These tariffs create challenges like higher costs, supply chain disruptions and tighter margins, but they also present opportunities for strategic adjustments and operational improvements. Retailers and consumer product companies must stay proactive by utilizing varied sourcing strategies, advancing their inventory management systems, adjusting pricing and improving technology to reduce risks and remain competitive. Successful cooperation and clear communication between businesses and lenders will be crucial in navigating the evolving tariff environment. By anticipating changes, adjusting strategically and consistently assessing financial and operational strategies, organizations can turn possible threats into lasting opportunities for long-term strength and growth.

We Can Help

PKF O’Connor Davies often advises retailers, consumer goods companies and their lending partners. We assist our clients in managing the evolving landscape of tariffs and their financial impact by conducting additional due diligence and maintaining a proactive communication approach. We offer comprehensive business consulting services, including scenario-based financial modeling, risk management guidance, supply chain consulting and liquidity and inventory management services.