Operating conditions
- Supplier price is not the complete inventory cost when merchandise must cross borders, ports, carriers, customs processes, and receiving points before it is available to the retailer.
- Import duties, transport, handling, insurance where directly attributable, customs-related charges, and other inbound product-acquisition cost can change the inventory basis before any customer sale occurs.
- Freight and tariff movement can change gross margin even where retail price and unit demand remain unchanged, because the merchandise enters cost of sales at a different carrying value.
- Customer delivery, payment fees, returns, marketplace fees, and paid customer acquisition occur after the inbound merchandise-cost boundary and remain outside this explainer.
Invoice to Receipt
The supplier invoice establishes the opening product cost, while the inventory recognised at receipt can carry a wider set of costs required to bring the merchandise to its present location and condition. Under international accounting rules, purchase price, import duties, transport, handling, and other directly attributable purchase costs can form part of inventory cost.
For retailers sourcing internationally, that creates a financial difference between the commercial price negotiated with the supplier and the cost that ultimately reaches the inventory ledger. Freight market disruption, tariff changes, customs treatment, and currency movement can alter that difference before the merchandise produces revenue.
International homeware evidence
Gross-Profit Bridge
FY24 gross profit of £40.454m reconciles exactly to FY25 £34.847m through lower revenue, higher freight, and a residual sales-mix and other margin effect.
Ultimate Products FY2025 audited results. Revenue was £150.135m in FY25 versus £155.497m in FY24; gross profit was £34.847m versus £40.454m; gross margin was 23.2% versus 26.0%. The company reported a £3.1m year-over-year freight increase, including £2.0m from elevated shipping rates, and separately identified sales mix as another gross-margin factor.
City Shift Finance reconciliation. The revenue step applies the exact FY24 gross-profit rate, calculated from published FY24 gross profit divided by FY24 revenue, to the £5.362m revenue decline, producing a -£1.395m gross-profit effect. The -£3.100m freight step is the company-disclosed year-over-year freight increase and includes £2.0m from elevated shipping rates. The -£1.112m sales-mix and other step is the residual required to reconcile exactly to published FY25 gross profit; the company specifically cited sales mix as another gross-margin factor but did not separately quantify that effect.
Inventory Basis
Inbound product-acquisition cost becomes financially significant because it can enter the carrying value of merchandise before sale. One international fashion group states that stock in transit includes the actual purchase cost together with estimated customs duties and shipping, while its cost of goods sold includes sourcing, shipping, customs duties, logistics, and selected handling costs.
That accounting boundary distinguishes inbound product movement from the costs of serving the customer after the sale. Shipping to an online customer, returns processing, merchant fees, marketplace commissions, and paid customer acquisition do not become part of this page merely because they are also attached to a retail transaction.
Current global retail evidence
Tariff Cost Path
Games Workshop paid about £12m of new US tariffs in FY26 and recognised a £7.8m reclaim, while tariffs reduced core gross margin by 0.7 percentage points.
Games Workshop Group PLC results for the 52 weeks ended 31 May 2026. The company reported approximately £12m of new US tariffs paid, a £7.8m tariff reclaim recognised, and a -0.7 percentage-point tariff effect in its core gross-margin bridge.
The approximately £4.2m net amount is a City Shift Finance arithmetic calculation: £12.0m less the £7.8m recognised reclaim. The company’s published gross-margin bridge separately reports the -0.7 percentage-point tariff effect. The sequence illustrates company-specific tariff economics and does not establish a retail benchmark.
Cost Components
- Supplier price. The commercial invoice establishes the opening merchandise value after trade discounts, rebates, and other purchase adjustments.
- Inbound freight. Ocean, air, rail, road, port, and related transport required to bring merchandise to the receiving point can alter the inventory cost basis.
- Duties and customs. Import duties, non-recoverable taxes, customs-related charges, and brokerage can add cost before the goods become available for sale.
- Insurance and handling. Directly attributable insurance, handling, and other receipt-related charges can form part of inbound product-acquisition cost where the accounting policy supports that treatment.
Currency Effects
Supplier currency can change the local-currency merchandise cost between order, shipment, receipt, and settlement. The financial effect depends on the contracted currency, purchasing terms, hedge structure, and the accounting treatment applied to later exchange differences, so not every currency movement is automatically capitalised into inventory.
The landed-cost read therefore keeps the purchase-currency exposure beside freight and duty rather than treating foreign exchange as a universal surcharge. What matters is the amount that ultimately enters the local-currency product cost and the point at which subsequent exchange effects move elsewhere in the financial statements.
Allocation Basis
Shared inbound charges rarely attach evenly to every SKU in a shipment. Freight can be driven by weight, cubic volume, container use, or handling intensity, while duties and insurance can be more closely related to product value, tariff classification, origin, and declared customs value.
The allocation basis changes the apparent unit economics even when the shipment total is fixed. A single blended percentage can therefore move cost away from bulky, high-duty, or high-value products and into items that consumed less of the underlying inbound cost.
Receipt Variance
Estimated landed cost can differ from the amount eventually accounted at receipt because freight invoices, customs assessments, duty rates, insurance, demurrage, brokerage, and currency settlement do not always arrive at the same time as the goods. The resulting variance matters when price and gross-margin decisions were made against an earlier estimate.
That variance belongs to the merchandise-cost process rather than the customer-service cost stack. Post-sale fulfilment and delivery, returns, payment fees, marketplace commissions, and paid customer acquisition remain separate because they arise after the inbound product-acquisition boundary owned by this explainer.
Retailer Data
- Purchase basis. Supplier invoice price, trade discounts, rebates, contract currency, and Incoterms establish the commercial starting point for the merchandise.
- Inbound basis. Freight, duties, customs-related charges, insurance, handling, and other directly attributable receipt costs establish the wider product-acquisition cost.
- Allocation basis. Units, value, weight, cube, tariff class, or another consistent driver determines how shared shipment costs reach individual SKUs and categories.
- Variance basis. Estimated versus actual receipt cost remains visible so later freight, duty, customs, and currency changes can be separated from supplier-price movement.
Landed Cost Read
- Inventory basis. The analysis traces how supplier price becomes the cost carried in merchandise before the customer sale occurs.
- Margin exposure. Freight, tariffs, duties, and other inbound cost can reduce gross margin even when selling price and unit demand do not move.
- Cost attribution. Shared shipment cost is retained against the SKUs and categories that consumed the underlying freight, duty, handling, or insurance burden.
- Boundary control. Customer delivery, returns, payment fees, marketplace charges, and paid customer acquisition remain outside landed cost and inside later contribution economics.
Analytical Limits
Landed-cost treatment varies by accounting policy, Incoterms, destination, tariff classification, country of origin, recoverable tax treatment, freight ownership, insurance terms, customs process, hedge structure, and the point at which the retailer takes control of the merchandise.
The company evidence on this page illustrates how inbound freight and tariffs can reach gross margin. It does not establish an international benchmark for freight burden, duty rates, tariff exposure, insurance cost, or a normal landed-cost uplift over supplier price.
Retail Profit Recovery
City Shift Finance works with retailers separating supplier price from inbound product-acquisition cost when merchandise margin changes before store, fulfilment, and customer-service costs are considered.
- Ultimate Products Annual Report 2025. FY25 gross margin 23.2% versus 26.0% in FY24; £3.1m increase in freight charges, including £2.0m of additional shipping cost from elevated freight rates.
- Games Workshop FY2026 results. Approximately £12m of new US tariffs paid, £7.8m tariff reclaim recognised, and a -0.7 percentage-point tariff effect in the core gross-margin bridge.
- H&M Group Annual and Sustainability Report 2023. Stock-in-trade includes purchase cost together with estimated customs duties and shipping for goods not yet arrived at stores.
- IAS 2 Inventories. Inventory cost includes costs of purchase and other costs incurred in bringing inventory to its present location and condition; purchase cost includes import duties, transport, handling, and other directly attributable costs.
- Scope. This explainer owns the movement from supplier invoice to inbound merchandise cost at receipt. Customer-delivery fulfilment, payment fees, returns, marketplace fees, and paid customer acquisition remain outside the page.
