How to Measure the Impact of Tariffs on Your Cost of Goods Sold
Tariffs are a hot topic in the CPG world, and for good reason. Many wineries and CPG brands rely on complex global supply chains that are heavily impacted by tariffs. These additional import taxes can affect the cost of raw materials, ingredients, packaging, and finished goods, driving up your company's cost of goods sold. If your business isn't prepared for the impact of tariffs on COGS, even small increases can eat into your margins and throw off your pricing strategy.
As tense trade relations create uncertainty across global supply chains, tariff awareness is more important than ever. As the CEO of Balanced Business Group, I'm proud to help clients with accurate modeling and scenario planning — essential steps in navigating the ever-changing tariff landscape. In this hands-on guide, I explain how to quantify tariff costs and integrate them into your COGS model. I also explore ways you can use the data to inform financial planning, adjust sourcing and pricing strategies to protect your margins, and prepare the business for long-term success.
Identify Tariff-Affected Items in Your Supply Chain
The first step in managing tariffs is to audit your supply chain and determine which products are exposed to import duties. Understanding current tariffs and potential future changes can help you develop more accurate COGS models.
Start by identifying the products your company imports directly. Then, analyze the rest of the items you purchase. Even if you're buying them domestically, they may be imported by vendors and co-packers.
For example, your business might buy French wine from a distributor. Chances are, the distributor purchases the wine from an importer. The importer pays the tariffs and passes the costs onto the distributor in the form of higher prices, which inevitably increases your costs. Even though your business isn't directly importing the wine, you have indirect exposure to tariffs.
Finished products are only one part of the puzzle. Brands often overlook the imported goods used to produce domestic products. A winery might import corks from Portugal, glass bottles from China or Mexico, and barrels from France. In the CPG industry, packaging is a big concern; businesses often use materials from China and Germany. Other products likely to carry import duties for CPG brands include sweeteners and functional ingredients such as spices.
Once you have a list of imported products, find the Harmonized Tariff Schedule code for each one. You can request the codes from suppliers or find them on bills of lading or cost breakdowns.
To determine which products carry tariff risks, look up each HTS code in the United States International Trade Commission's Harmonized Tariff Schedule. The results page shows the current rates.
Products imported from certain countries — usually, China — may be subject to additional Section 301 tariffs. These products come with HTS subheadings. To find the additional tariffs, search for the subheading in the Office of the United States Trade Representative's search tool.
Calculate the Per-Unit Impact of Tariffs on Your COGS
Once you have a list of tariffed products and the current duty rates, you can calculate the impact on your per-unit costs. This calculation helps you understand how tariffs affect your gross margin, a key financial metric for food and wine entrepreneurs. It's essential, particularly if imported items make up a significant percentage of the total product cost.
Here's a simple formula to calculate gross margin:
[(Sales price - COGS) / Sales price] x 100
If you import a bottle of wine from Italy for $10 and sell it for $17, the per-unit gross margin would be [(17 - 10) / 17] x 100, or 41%.
Now, let's say the United States imposes a 20% tariff on Italian imports. Instead of paying $10 per bottle, you pay $12. Measuring COGS with tariffs changes the gross margin calculation to [(17 - 12) / 17] x 100, reducing your gross margin to 29%.
Small tariff increases can add up, creating a considerable impact on your margins. Let's say you run a small coffee-roasting business. Every bag of coffee you sell is made with imported coffee beans and packaging. Your COGS is $7 per bag, with $2 going to packaging and $4 going to beans. A 10% tariff would increase those prices to $2.20 and $4.40, bringing your COGS to $7.60. If you sell the bag for $12, here's how the tariff would affect margins:
Original gross margin: [12 - 7) / 12] x 100 = 41.7%
Gross margin after tariffs: [12 - 7.6) / 12] x 100 = 36.7%
Integrate Tariff Costs Into Your COGS Model
A traditional static COGS model isn't designed to accommodate regulatory shifts and fluctuating tariffs. To better reflect the impact of tariffs on your company's financial model, build dynamic inputs into the COGS tab.
To start, separate the base cost (the cost of purchasing an imported product) from the landed cost (the base cost plus the additional expenses required to bring that product to your business: import fees, customs duties, tariffs, shipping, handling, and insurance, for example).
Including landed cost as a line item highlights the true impact of tariffs on COGS. This figure makes it easy to track the costs of changing tariffs over time, so you can monitor trends and make adjustments to stay competitive. Incorporating tariffs also enables more accurate forecasting and scenario planning by clarifying the implications of evolving trade policies.
I know this might sound intimidating, especially for brands with complex global supply chains that rely on imported goods. As trade uncertainty persists, however, it's critical. At Balanced Business Group, my team and I work on COGS calculations for winery and CPG clients to monitor tariff costs across a variety of SKUs and an international network of suppliers.
Use Tariff Insights to Guide Pricing and Sourcing Decisions
Once you've modeled the impact of tariffs on COGS, you can use the data to improve decision-making, improve CPG and winery accounting, and protect your margins. Larger companies may be able to absorb part or all of the tariffs. For smaller CPG businesses, a common strategy is to increase prices.
Passing tariff costs to consumers isn't always a feasible option, especially as rising costs affect spending behavior. Alternative ways to offset tariffs include negotiating better deals with vendors or exploring different sourcing options. The latter is particularly important if the majority of your imported inputs come from a trade adversary such as China. You may reduce tariff exposure and future risk by finding suppliers in nations with better trade relations.
At Balanced Business Group, I also encourage clients to consider implementing budget tips and reducing their reliance on imported goods. Our financial models help brands understand and analyze the potential impact of shifting to domestic suppliers, switching to non-tariffed products, or redesigning packaging. For example, a winemaker could transition from imported corks to domestically produced twist-off caps.
Tariffs are nothing new, but they present a risk, especially when customers are already feeling economic pressure. Brands that fail to account for tariff exposure in financial planning could face margin compression that hampers growth and restricts cash flow. It may also force companies to revisit payment terms with suppliers, damaging relationships and disrupting the supply chain.
Stay Proactive and Protect Your Margins
Over the years I've spent helping CPG brands develop sustainable financial strategies, one thing has become clear: When it comes to tariffs, a proactive approach is imperative. Companies that rely on imported goods must integrate tariffs into COGS for accurate financial planning. Understanding the financial impact of tariffs helps you make better pricing decisions and develop sourcing strategies that protect your margins.
For support in building dynamic financial models and refining your cost structure to manage tariff exposure, contact our team at Balanced Business Group.
Author: Pedro Noyola
Pedro Noyola is the CEO of Balanced Business Group (BBG), a company dedicated to helping Founders in the CPG food and beverage industry gain financial confidence. At BBG, Pedro combines traditional accounting with tailored financial guidance, providing industry-specific insights to ensure sustainable growth for passionate food entrepreneurs. He is also an angel investor and a mentor to emerging CPG brands via SKU and TIG Collective. Pedro’s career spans leadership roles at FluentStream, where he helped the company achieve recognition as one of the Fastest Growing Companies in America by Inc., and Telogis, where he was part of a team that grew the company’s recurring revenue from $50 million to $1.2 billion in under five years.
Pedro holds a BA and MPA from The University of Texas at Austin and an MBA from Harvard Business School. He is an active member of the Young Presidents Organization, continually seeking growth in both leadership and learning. Outside of work, Pedro enjoys family time and outdoor activities, drawing personal fulfillment from his roles as a husband and father.
