Tariff Tensions Test Retailers' Pricing Strategies

Major U.S. retailers are deciding whether to pass higher costs from tariffs directly to consumers or absorb the increases and hope shoppers remain loyal.

Walmart, a bellwether for U.S. retailers, reported a jump in second-quarter sales. CEO Doug McMillon said the company is working to avoid raising prices, but costs for new inventory are climbing.

"We're keeping our prices as low as we can for as long as we can," he said. "As we replenish inventory at post-tariff price levels, we've continued to see our costs increase each week, which we expect will continue into the third and fourth quarters."

Target, Lowe's, and Home Depot also reported earnings this week, each pointing to challenges from tariffs. Target leadership said that price increases are a "last resort."

Keith Niedermeier, director of the Center for Brand Leadership at Indiana University, said retailers may be willing to take a short-term hit to keep shoppers happy.

"It's a tough situation because eating the price hikes is not a long-term strategy," Niedermeier said. "Short-term firms that are not passing along the price increases are buying a lot of goodwill with their customers. There's no doubt about it. The question is, is that a good long-term strategy, which no one really knows quite yet because we don't know how long these tariffs are going to last."

Some retailers are responding with discounts to attract customers. Kohl's has expanded its coupon policy, while Target has added inexpensive "mini" beauty products.

Retail spending was up in July for the second consecutive month, but any price hike is likely to hit lower- and middle-income consumers hardest.