How Retailers Can Navigate Rising Tariffs and Supply Chain Disruptions
The economic climate retailers face today is next level. Rising tariffs, volatile supply chains, and shifting consumer expectations are making it hard to navigate. The rapid increase in costs across retail categories — e.g., cosmetics, pharmaceuticals, packaging, and sporting goods — is putting pressure on already slim margins, forcing businesses to reevaluate inventory planning and sourcing strategies and with good reason. Gartner has emphasized the importance of building resilient, future-ready supply chains through 2030, advising businesses to invest in key capabilities this year.
Moreover, recent data from Katana Cloud Inventory's database of over 1,500 small and medium-sized (SMB) manufacturers and retailers reveals some surprising findings. In Q4 2024, the cost of goods sold (COGS) in cosmetics and pharmaceuticals surged by 103 percent compared to Q3. This created a high-risk scenario for businesses struggling to pass these costs onto consumers. Meanwhile, for comparison, the B2B wood and timber industry saw an 84 percent cost increase yet managed to sustain demand through higher pricing. Fashion and apparel brands, on the other hand, experienced a more gradual rise in costs, but still saw declining gross margins, highlighting the growing challenge of cost absorption.
Beyond rising expenses, the tumultuous tariff landscape is already shifting global supply chains. Many retailers, particularly in cosmetics and fashion, are shifting production away from China and other low-cost labor markets. Instead, they’re accelerating the reshoring movement, and the data shows it. This has led to unusual inventory fluctuations, with a significant spike in inventory levels in early 2025, which is a surprising deviation from the typical Q1 downturn.
Times are changing and the way retailers are working is too. To navigate these disruptions, businesses must take a proactive, data-driven approach.
Rethink Inventory Management to Avoid Overstocking
The start of the year has seen a surge in inventory levels. This was particularly true in B2B industries, where businesses were stockpiling raw materials like steel and sporting goods in consumer sectors. While stockpiling can reduce risk against supply shocks, it also ties up working capital. Businesses must balance just-in-time inventory models with strategic reserves to mitigate risk without overcommitting.
Strengthen Supplier Diversification and Regional Sourcing
With packaging materials and essential consumer goods increasingly at risk, retailers should look to avoid potential shortages and build resilience by diversifying their supplier base. They'll need to get creative and resourceful this year, looking at backup options. The latest tariff-related spikes in raw material costs highlight the necessity of nearshoring and leveraging multiple suppliers to prevent stockouts.
Leverage AI-Driven Forecasting for Smarter Pricing Strategies
Luxury segments, such as footwear and perfumes, saw price hikes of over 50 percent and 25 percent, respectively, in 2024. Yet, consumer willingness to absorb these costs may shift in 2025. This will be an interesting issue to watch. Artificial intelligence-driven inventory and pricing models should help retailers assess demand elasticity. And this, in turn, should ensure they remain competitive without eroding margins. Will AI save the day? Only time will tell, but I’m betting on the teams employing it.
Prepare for the Next Wave of Tariff Fallout
Following the recent tariff executive order, purchasing volume from Canada and Mexico to the U.S. tripled, and price spikes are expected to follow. In some cases, SKU prices have already doubled or tripled. This has caused lead times to increase by 25 percent to 100 percent for certain retailers. To mitigate these impacts, businesses must anticipate shifts, closely monitor evolving trade policies, and adjust sourcing strategies accordingly.
With tariffs, inventory volatility, and cost surges shaping the first half of 2025, retailers need a smarter, tech-driven approach to supply chain management. The teams that leverage real-time data and forecasted insights will be best positioned to protect margins and navigate uncertainty in the months ahead.
Ben Hussey is the co-CEO of Katana Cloud Inventory, an inventory management platform that helps companies manage over $3 billion in sales annually.
Ben Hussey is the co-CEO of Katana Cloud Inventory, an inventory management platform that helps companies manage over $3 billion in sales annually. Ben has led many successful sales and revenue teams, helping businesses enhance their e-commerce, manufacturing, inventory, and order management capabilities while delivering amazing customer experiences. In addition to these roles, Ben spent a decade working for a large telecommunications company, leading commerce initiatives of varying sizes and types — from initiation to delivery and run-time. He’s passionate about the impact software can have on a business and working with high-performing teams to deliver results.
