Tariffs: How Smart Retailers and Brands Are Handling the Trade War
The trade war with China has been cited as a primary cause of much of the recent economic volatility, from the stock market dive last fall to fluctuations in oil prices. While it's clear that tariffs are creating some level of instability as companies and investors try to guess what will happen next, many retailers and brands have already taken action in order to prepare for the worst.
As we know, in September 2018, the U.S. implemented tariffs on $200 billion worth of Chinese goods (in addition to the $50 billion already in place). These tariffs carried an initial rate of 10 percent, with a plan to increase them to 25 percent by Jan. 1, 2019, while adding $267 billion in additional goods to the list. In December, the U.S. and China agreed to a temporary truce, moving the Jan. 1 date to March 1, 2019, as the two sides work towards a larger trade deal.
The move in September 2018 caused many retailers and brands to spring into action, front-loading deliveries of 2019 product into the fall of 2018 before the originally planned Jan. 1 rate increase. Inventories of some retailers ballooned, and freight prices for containers going from China to the U.S. surged over 100 percent from the prior year, according to CNBC. These cost increases and rising inventory levels have created major challenges for some retailers already operating with marginal balance sheets.
Other companies, skeptical of the temporary truce and expecting a protracted trade battle, have taken more significant measures. I've spoken with many wholesalers, brands and vertical retailers that have moved a significant percentage of their production away from China in the last few months, shifting their business to Cambodia, Vietnam and other locations. Nike, Adidas, Under Armour and other brands have moved production lines from China to Southeast Asia and India, according to a report by Japanese financial newspaper Nihon Keizai Shimbun. This is highly disruptive to the supply chain and introduces risk, but many companies view these moves as essential in order to avoid the dramatic cost increases of Chinese goods.
There's another solution that's not that far less disruptive — raising prices. “Many retailers will now be faced with a difficult choice of whether to pass the cost increases across to consumers or to take a hit on their margins," said Neil Saunders, managing director of GlobalData Retail, in Business Insider. "Fortunately, the consumer is currently in a position to cope with some mild rises in retail prices.”
Art Peck, CEO of Gap Inc, said to Bloomberg: "We're watching it very, very carefully, as you can imagine. In some cases, we'll have no choice but to pass the impact of these tariffs through to our consumers."
The question for retailers and brands: which products can bear price increases without seeing significant volume declines? Some products are inelastic (think gasoline and cigarettes), meaning that increases in prices tend to generate minimal decreases in demand. Most apparel, footwear and fashion products tend to be more elastic.
First Insight recently performed a Price Elasticity Study which showed declining elasticity in certain categories such as childrenswear and womenswear, while elasticity was increasing in menswear and home goods. By starting at a category level, companies can assess which broad groups of products can bear price increases.
Within a category, such as menswear, the brand itself can have a major impact on price elasticity. Some strong brands are able to command price increases without seeing volume declines, even in categories where elasticity is increasing. Think Vineyard Vines. This lifestyle brand is the king of full-price selling, and Gen Zers can get their parents to shell out big bucks for just about anything with the signature whale emblazoned on it.
Finally, within a brand or category, there will be certain items where customers are willing to absorb a price increase, and other items which will need to be discounted. By assessing the entire assortment — item by item — companies can determine whether an aggregate price increase of the entire line can offset the increases in production costs.
The challenge: retailers and brands need to make decisions now on which products to shift away from China and which ones should remain. They can’t wait to let the next season run its course and then make these decisions — it will be too late. They also can’t use historical data because the customer is moving quickly; the market, preferences, trends and competitive set changes from season to season.
The only way for retailers to know which brands, categories and items will bear a higher price is to gain real-time consumer feedback on products now. By testing products with consumers, companies can identify the forward price elasticity of each product and can make decisions on how much prices can be raised and on which items. By using predictive analytics, they can also see how much demand will decrease based on these price increases, helping them to make informed decisions.
Armed with this type of data, companies can be more strategic about their manufacturing decisions and can better manage risk. This is a prudent approach regardless of what happens over the coming year with the trade war.
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.