At FEE, Peter Jacobsen shows the clear financial reason why Walmart and other big US retailers are passing along the price increases due to Trump’s tariffs rather than “eating them”:
Recently, a post from President Trump on Truth Social went viral. An attempt to convince retail giant Walmart to keep prices down despite the tariffs, it read:
Walmart should STOP trying to blame Tariffs as the reason for raising prices throughout the chain. Walmart made BILLIONS OF DOLLARS last year, far more than expected. Between Walmart and China they should, as is said, “EAT THE TARIFFS”, and not charge valued customers ANYTHING. I’ll be watching, and so will your customers!!!
Trump’s demand here is, simply put, unreasonable, and it reflects a basic misunderstanding of how pricing decisions are made in a market economy. Let’s unpack why.
Walmart’s Thin Margins
The biggest problem with the President’s view is that it doesn’t pass a basic numbers test. To break it down, let’s look at Walmart’s financials.
It’s true that Walmart generates billions of dollars in revenue each year, but revenue alone doesn’t tell us how much Walmart makes.
To understand that, we need to consider profit, which accounts for the company’s costs. More specifically, we want to look at Walmart’s net profit margin, because that’s an extremely important indicator of whether Walmart could realistically “eat the tariffs”.
Depending on the source, Walmart’s net profit margin is somewhere between 2% and 3%. Let’s split the difference and say it’s 2.5%. What does that mean?
That means, if Walmart sells you $1 of goods, it only keeps 2.5 cents in profit. That’s right, 97.5 cents goes toward inventory, employee wages, store maintenance, and a variety of other operating costs.
Put another way, if you spend $100 at Walmart, they make $2.50 in profit.
Now let’s say you buy a $100 television that Walmart imports. A $20 tariff is imposed — an added cost Walmart has to pay to import the TV. Before the tariff, Walmart was making $2.50 in profits. After the tariff, it’s now taking a $17.50 loss.
The only way Walmart can still sell this TV is by raising the price.
At this point, a tariff supporter might respond: “The easy way to fix this is to buy US-made TVs instead!”
Sure — you can avoid tariffs by only buying domestic, but the problem is that domestic TVs tend to be more expensive. If they weren’t, Walmart wouldn’t be importing them in the first place. So even if Walmart pulls international TVs off the shelves and replaces them with US-made ones, the prices still increase.
Here’s the key point: “eating” the tariffs is not an option. Walmart operates on slim margins, barely making pennies on the dollar — there isn’t room to eat 20% cost increases!
