Price elasticity of demand is a concept retailers may want to brush up on—because with new punitive tariffs in effect, some apparel and footwear items may be too elastic to drive sales.
Naturally, with prices rising The NPD Group said in a new report out Monday that consumers will be focused on “necessity” products, or inelastic goods whose demand doesn’t change much with price shifts.
“Sales in automotive categories, men’s and women’s underwear, skin care, and baby gear will respond less to price increases from tariffs, as consumers consider them necessities. The largest expected sales impacts from price increases will likely occur in categories that consumers consider ‘nice to have,’ such as bicycles, handbags, luggage, watches, games, televisions, and headphones,” said NPD, which monitors store-level data to track price increases at the item level and can then isolate the actual sales impact of those increases.
“We are already observing sales reductions in some of the categories where tariffs were introduced in 2018,” NPD added.
And it isn’t the price of goods that will necessarily make shoppers shy away. According to NPD, high- and low-priced items appear in all categories, and the magnitude of the tariff impact on those goods will vary based on how the consumer values that product.
“Consumer perceptions will determine the effect of tariffs on overall spending and the economy,” said NPD chief industry advisor Marshal Cohen. “Consumers will balance price and value according to their preferences and needs, trading down or delaying inessential purchases. Marketers should watch price trends and analyze sales impacts to estimate impact on their portfolios.”
In a separate report released last week, looking at how much certain retailers would have to raise prices to offset the impact of the new, additional 15 percent tariff, which took effect at the start of this month, Bank of America said Amazon would have to increase prices in the U.S. between 2.1 percent and 2.6 percent, and a company like Wayfair would need to raise prices by as much as 4.6 percent.
E-commerce faces the greatest tariff risk because of its potential to impact product pricing, Business Insider reported Bank of America analyst Justin Post as saying. For Amazon’s private-label business, estimates peg the portion of its cost of goods sold attributable to Chinese imports at 20 percent. At Wayfair, imports from China could account for as much as 60 percent of its cost of goods sold.
As such, Amazon and Wayfair—much like many others in the industry that are already scaling back their China sourcing—will likely look to get more goods from other countries.
“We expect substitution in the marketplace to reduce the impact, both from consumers buying from non-China sourced sellers, and sellers sourcing from other markets,” Post said in the Bank of America report.
Price hikes, or the lack thereof, have been the focus of many retailers’ recent conference calls. Macy’s said it tested price increases, found them unfavorable for consumers and decided—that at least while the additional tariffs remain below 25 percent—it won’t be raising prices. And so far, American Eagle and Michael Kors have no plans to raise prices either, despite the tariffs.
Revolve has said it would consider raising prices because its shoppers visit the site for what’s “new and exciting,” so a hike might have little impact on demand. Caleres said it will be “selectively exploring price increases.”
And acknowledging the elasticity of demand for apparel, G-III chairman and CEO Morris Goldfarb, said, “We don’t produce commodities. We don’t produce underwear. We don’t produce dress shirts as a commodity. We produce fashion apparel with primary brands. We have raised prices moderately where we believe it’s effective and our early indicators are that is working as well.”