“This is a highly fluid situation and we’ll need to manage quantity decisions as we measure the price elasticity of impacted items,” underscoring how Walmart adjusts its inventory and pricing strategy based on customers’ sensitivity to price changes.” – John David Rainey,  Walmart CFO 

In a recent interview (see below), Walmart Chief Financial Officer John David Rainey explained the company’s adaptive pricing strategy amid escalating tariff pressures. Rainey made it clear that Walmart does not apply blanket price increases to all tariffed goods. Instead, the company uses economic fundamentals—particularly the concept of price elasticity of demand—to decide which products absorb costs and which products offset them through price increases.

Rainey stated:

“If you’re selling something that’s maybe a discretionary item for $300 and there’s a 50 or 100% tariff on that, it’s going to be more challenging to sell the same number of units.”

This comment reflects a textbook application of elasticity theory. If a product is price-sensitive (elastic), such as a discretionary good like electronics or seasonal apparel, a price increase due to tariffs could cause a sharp drop in sales. In such cases, Walmart is likely to absorb the cost increase to maintain volume.

Protecting the Profit Margin

However, as Rainey continued:

“We’re going to look across all categories of products and… maybe change prices on other products that might not have a tariff applied to them.”

This marks the strategic pivot. Walmart selectively raises prices on products with inelastic demand, such as household necessities and staple items, where consumers are less likely to reduce their quantity purchased despite modest price increases. These goods act as economic buffers to sustain profit margins without triggering a sharp decline in overall sales.

In summary, Walmart’s approach is not reactive but economically surgical: shield elastic goods from price hikes and strategically increase prices on inelastic, non-tariffed items. The CFO reinforced that this flexibility allows Walmart to protect its market share while managing margin pressures:

“We want to make sure that we’re maintaining the appropriate price points and the price gaps to our customers.”

Appendix – Understanding Price Elasticity of Demand (Econ 101)

Definition:
Price elasticity of demand (PED) measures the sensitivity of consumer demand to a change in price.

Equation:

Price Elasticity of Demand  =  % Change in Quantity Demanded/
                                                                            % Change in Price
          ​​

• Elastic demand (|PED| > 1): Demand drops significantly when prices rise.

• Inelastic demand (|PED| < 1): Demand remains relatively steady despite price changes.

Application at Walmart:

• For elastic goods (e.g., TVs, imported toys), Walmart partially absorbs tariff costs to avoid losing customers.

• For inelastic goods (e.g., toothpaste, toilet paper), Walmart raises prices, knowing demand won’t drop significantly.

This allows the company to offset losses on tariffed items with margins on stable-demand goods—a cross-subsidization model powered by demand analytics.

Real-World Examples and Strategic Outcomes

Walmart’s elasticity-based pricing strategy shows how foundational economic theory can guide real-world decisions at scale. Consider these illustrative examples:

• Imported Bluetooth speakers face a 50% tariff. Given their elastic demand, Walmart absorbs the cost and holds the price at $29.99 to avoid volume loss.

• Laundry detergent, a non-tariffed good with inelastic demand, sees a subtle price increase from $9.49 to $9.89. The small uptick boosts margins with negligible impact on unit sales.

• Pet food or vitamins, typically low-elasticity items, could also carry mild price increases to help Walmart maintain profitability across the broader product portfolio.

As Rainey noted,

“There might be some areas where we want to play offense… absorb some of that impact in the short term for the benefit long term.”

Walmart’s ability to integrate elasticity, inventory timing, and tariff forecasting exemplifies smart macroeconomic thinking in retail operations. It’s a strategy rooted in Econ 101, executed with Fortune 1 scale.

Go to 1:16 in the video.