How Will Retailers Deal With the New Tariffs Heading Into Holiday 2019?
The retail industry is feeling the effects of 15 percent tariffs imposed on Sept. 1 on a wide range of consumer imports, and is bracing for the impact of their expansion to additional goods on Dec. 15. These tariffs cover a total of about $300 billion worth of imports from China. Increases on tariffs imposed earlier this year were planned for Oct. 15, but were suspended just days before. Also in mid-October, a new round of U.S. tariffs took effect on $7.5 billion worth of European goods such as cheese, fruit, seafood, drinks and clothing.
While the burden of paying the taxes on imported goods will fall on U.S. importers initially, many consumers are worried that those costs will eventually lead to higher prices. Meanwhile, retailers and brands are fearing that consumers might tighten their purse strings so much that major layoffs and more store closures will be necessary. And all of this is occurring while some analysts say the U.S. should be preparing for a recession.
The tariffs will continue to hit the fashion and retail industries hard. The American Apparel and Footwear Association released data showing that the tariffs enacted on Sept. 1 would impact over 90 percent of apparel and some 53 percent of footwear imported from China. Moody’s Analytics recently estimated that the trade war has cost the U.S. 300,000 jobs already, and that the number could rise to 450,000 by the end of the year, with retail being one of the industries absorbing the biggest losses. Furthermore, Coresight Research noted in August that retail store closures this year were rapidly outpacing last year’s and could “easily double” 2018’s total by the end of the year.
With analysts predicting a recession and a new batch of crushing tariffs going into effect just days before the holidays, only those retailers that understand the voice of their customers will be able to achieve their holiday sales and profit goals. Reactionary retailers and brands that lack both the information and market savvy needed to handle major fluctuations in the international supply chain are going to suffer during the all-important fourth quarter. However, those armed with key information — e.g., what products and features customers value most and which retail channels can best withstand price increases — will have some flexibility in terms of pricing in the wake of tariff increases. Furthermore, they will be able to identify where they can cut back on other costs without risking sales or customer loyalty. Those that are in tune with their customer base will make it to 2020 not only surviving, but thriving.
The truth is that any retailer worth its salt has already been preparing for these tariffs and figuring out if, and where, it can afford to raise prices — as well as what other sacrifices it needs to make to maintain both customer relationships and already tight margins. Prepared retailers have anticipated further tariffs and have been stocking up on inventory for months in order to mitigate risk. The August version of the monthly Global Port Tracker from the National Retail Federation and Hackett Associates found that imports at retail container ports were reaching near-record highs as importers stocked up on goods before higher tariffs went into effect.
Some brands and retailers have been resolute, stating that they will refuse to raise prices even while facing increased costs themselves. Michael Kors’ parent company, Capri Holdings, for instance, has claimed it has no plans to raise prices on Michael Kors products, and that the tariffs will not impact the company’s full-year earnings. The fact that Capri Holdings also owns luxury brands Jimmy Choo and Versace may be what's giving the group the flexibility to absorb the cost of higher tariffs on Michael Kors items instead of passing them along to shoppers.
Find the Flexibility
For other retailers and brands, knowing where they can increase prices on a category level and even on an item level will be crucial during the 2019 holiday season. Those that know their customer base well will also know what materials they can change in a product’s makeup, what embellishments they can remove or source at a lower cost, and where they can modify packaging to save dollars while still pleasing their customers.
Consumer-driven analytics can help mitigate the effects of tariffs and help retailers and brands identify where consumers are most willing to absorb price increases on a category, item, channel and regional level, as well as where such increases would likely meet the most resistance. Retailers and brands can make better product decisions by leveraging voice-of-the-customer data. For example, Kohl’s customers may be unwilling to pay even the current ticket price for an item affected by the tariffs, but Nordstrom customers may actually be willing to pay a bit more for it. Retailers equipped with that kind of data and knowledge will be able to maintain, and even improve, margins, while keeping their doors open and their customers happy.
The effects of the Trump administration’s tariffs and the ongoing trade war with China will continue to be felt throughout the retail industry and by consumers. With the risk of recession looming, and stores shuttering at rates much higher than last year, it's essential for retailers and brands to be well prepared with data-driven product and pricing strategies that will allow them to protect their brand, employees, customer relationships and bottom lines.
Jim Shea is chief commercial officer for First Insight, the leading customer-centric merchandising platform used by retailers and brands worldwide.
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Jim Shea is chief commercial officer for First Insight, the leading customer-centric merchandising platform used by retailers and brands worldwide. Jim’s role spans all market- and customer-facing functions, including strategy, marketing, product management and business development.
Jim has held CMO and general management roles in multiple industries, including medical devices, research laboratory products, telecommunications and enterprise software. Jim has also been a driving force behind the IPOs of two venture/private equity-backed companies. At First Insight, Jim is excited about the opportunity to transform the retail industry through enabling better product decision making through data and analytics.
Jim holds a MBA from Stanford University and a BS in Electrical Engineering from the University of Notre Dame.