Karat Packaging reported cost of goods sold up 20% in Q1 2026, driven almost entirely by import tariffs and duties that climbed from $3.4 million to $10.5 million year-on-year, according to the company's earnings transcript published by The Motley Fool. Gross margin compressed and net income margin fell to 6.1%, yet the Los Angeles–based supplier of disposable foodservice packaging retained distribution across national restaurant chains and regional buyers. The company did not lose major accounts during the quarter.

Karat managed the increase by segmenting customers into three buckets and tailoring the price conversation to each. Large multi-unit operators with annual contracts received advance notice in writing ninety days before renewal, with line-item breakouts showing tariff impact separately from base product cost. Regional distributors were offered a tariff pass-through clause tied to Harmonized Tariff Schedule codes, letting the buyer see exactly which SKUs carried the new duty and which did not. Single-location independents received a flat percentage increase with a grandfather window—accept the new price by a date certain and the hike takes effect sixty days out instead of thirty.

The segmentation worked because it separated the tariff story from a vendor trying to grab margin. When a buyer sees "Import duty Chapter 39 plastics: +$0.14 per case" on a line item, the conversation shifts from "Why are you raising price?" to "What can we do about the duty?" That reframe kept Karat in the RFP. Buyers who might have switched suppliers for a generic price increase stayed put when they understood the cost was legislative, not opportunistic, and that every competitor faced the same duty schedule.

A small physical-product brand facing its own tariff or freight spike can run the same play on a tight budget. First, pull your top twenty accounts by revenue and divide them into three tiers: those who buy on contract, those who reorder monthly, and those who buy sporadically. Write three short emails—one per tier—each under ten sentences. For contract customers, lead with "Our Q2 landed cost includes a new $X.XX tariff per unit under HTS code XXXX.XX. Your contract renews [date]. We will honor current pricing through [date] and apply the new cost after that." Attach a one-page PDF showing the old cost structure, the new tariff line, and the revised unit price. For monthly reorder accounts, send a note that says "Effective [date sixty days out], our cost on [product name] rises X% due to import duty increases. We are passing through the tariff at cost—no markup. If you confirm your next order by [date thirty days out], we will ship at the old price." For sporadic buyers, send a simple announcement with a grandfather date and a link to the CBP duty schedule so they can verify the code themselves. Total time: two hours. Total cost: zero.

The difference between a price increase that breaks an account and one that holds it is often just clarity and a sixty-day window. Karat Packaging did not hide behind "market conditions." They named the tariff, cited the code, and gave buyers time to adjust their own pricing or find budget. That honesty is cheaper than a rebate program and harder for a competitor to undercut, because the competitor pays the same duty and cannot pretend otherwise.