Three Practical Paths to Controlling Costs Amid Tariff Uncertainty 

By Louis Biscotti, Managing Director, National Food and Beverage Industry Leader, CBIZ

Key takeaways:

• Look beyond net sales: Analyzing gross sales (before deductions for returns, fees, and promotions) provides deeper insights into cost dilution and helps identify where expenses can be controlled.
• Focus on contribution margin: Unlike gross margin, contribution margin reveals how much each sale contributes to covering fixed costs, offering a clearer view of true product profitability and opportunities for cost adjustment.
• Adopt activity-based costing: Allocating expenses to the specific products or channels that generate them (instead of spreading evenly) gives businesses visibility into hidden costs, prevents unprofitable strategies, and guides smarter pricing decisions.
  

Broad tariffs are rapidly increasing costs for businesses throughout the economy, and the food and beverage (F&B) industry is no exception. Today, F&B businesses are seeing the material impact of tariffs affect their bottom line, shrinking margins and challenging growth expectations. Compounding tariff concerns are political and social sensitivities to price fluctuations that carry the potential for reputation risk. 

In the past few months, major consumer brands across industries have been publicly dressed down after announcing price hikes tied to tariffs. Large brands are well positioned to weather the reputational damage of scrutiny, but small and medium-sized businesses may not fare as well if targeted in a similar way. Those large businesses have crucial advantages. They can call on insights into transfer pricing, free trade zones, and other tariff-specific solutions available from their accounting and consulting firms, but those services may be luxuries that smaller competitors can’t afford. With that in mind, this article will cover strategies that enterprises of all sizes can use to mitigate the impact of rising tariff-related costs.

There are often overlooked practical accounting techniques that can help businesses uncover alternatives to price increases by analyzing and controlling their costs. Even if employing these methods won’t entirely negate the effect of tariffs, they should at least help soften their blow and buy time for pending trade deals to be finalized. That may allow price changes to be explored in a more stable economic environment and with a better understanding of long-term trends and forecasts. While tariff-related challenges make these practices particularly valuable today, incorporating them into your standard business practices will prove advantageous in any economic circumstance. Simply put, practices that give you a better understanding of the factors driving costs enable you to improve profitability. 

Step 1: For better cost analysis, look beyond ‘net’

Many companies record just their net sales or sales after deducting fees for slotting, promotions, and allowances. Of course, it’s understandable that net sales, or the amount you collect, is an essential metric. However, knowing your net sales alone does not offer a sufficient platform for the deep analysis necessary to uncover the source of major costs. To do that, you’ll need to know your gross sales.

Getting a grasp on your gross sales allows you to understand the rate of dilution stemming from any returns, product placement fees, or promotional costs. For many in F&B, these expenses amount to as much as 25% of gross sales, although 20% might be a more typical figure. With your gross sales established, you’re prepared to take a much more informed look at costs and curb excesses where possible. In the current environment, it may be the single most accessible way for F&B companies of all kinds to analyze their operational expenses with the aim of mitigating the impact of tariffs.  

Step 2: Understand contribution margin

Contribution margin is another metric overlooked far too often in favor of a more simple but less revealing alternative, gross margin. Gross margin is the difference between your net selling price and the cost of goods sold. However, informed analysis requires another degree of detail that only contribution margin provides. Essentially, contribution margin reveals how much every dollar in sales contributes to fixed costs. Once those are covered, all additional dollars in contribution margin drop to the bottom line.

For example, any products sold on a commission structure will be subject to changes in costs proportionate to the volume of sales. Distribution, labor, production, and utility costs are often variable in nature. Tracking these and other variable costs can be uniquely advantageous as they are typically more adaptable than fixed costs. 

Contribution margin strips out all fixed costs, or costs that are consistent month-to-month, and inputs variable costs, or costs that change along with sales volume, to offer a better idea of each product line’s profitability. 

Step 3: Activity based costing

Activity-based costing allows businesses to allocate expenses to pools of costs that might be closely related to specific products or distribution channels. For example, if you’re selling to a club store, you may incur costs associated with demoing products live. Instead of applying those costs evenly across the board, you can get a better understanding of your business by allocating those costs specifically to the related sales activity. A more universal example might be your accounting department’s expenses. If you have commission-based sales, that will likely require much more heavy lifting from your accounting team, and those expenses should be associated accordingly. 

Developing strategies without activity-based costing is a big risk. Splitting costs evenly across products simply doesn’t offer the visibility necessary to make informed decisions. It can be like a pilot flying blind. You may be committed to pushing products that do not generate value that justifies associated expenses or miss the potential of products that generate sales with little overhead. Proper modeling of different scenarios can keep pricing strategies in line. All products and all customers are not equal.

Raising prices to cover higher costs can be unavoidable in environments like today’s. With tight margins throughout the food and beverage industry, many companies operated on the razor’s edge even before tariffs were introduced. Aligning international tax strategies with supply chain, evaluating inventory levels using the Last In, First Out (LIFO) inventory valuation method, and knowing the impact of the newly passed tax bill can help. Still, pervasive sensitivity to consumer inflation means there are benefits to controlling costs as much as possible elsewhere. Doing so may enable you to forego price rises longer, enhancing your competitiveness and avoiding the reputational damage some have faced when announcing price changes. Once in place, sophisticated cost analysis and control strategies will yield opportunities immediately and far into the future as markets and macroeconomic factors stabilize. 

Louis Biscotti is the national leader of the CBIZ Food and Beverage Services group, has been an entrepreneurial leader in accounting for over 40 years, and is a frequent lecturer and published author on various financial and business topics. His expert advice has appeared in both national and local publications, such as The Wall Street Journal, Newsday, Long Island and New Jersey Business News, Supermarket News, and Food Dive. He also founded a series of best practice forums for food and beverage companies, which attract nearly 500 senior executives annually, as well as an annual food and beverage survey.