In This Article:
There are hardly any warm and fuzzy pre-holiday feelings in the corporate HQ confines of major retailers thanks mostly to President Donald Trump’s protracted trade war with China.
Think more along the lines of chaos and fear among the executives in charge of pulling the execution strings ahead of a three-month period that could either financially make or break a retailer’s year (and the year after).
“Most apparel retailers will avoid U.S. price increases, in our view, but if the tariff rate ticks higher, price increases are unavoidable. Mitigating strategies can only go so far because factory capacity outside China is getting increasingly constrained and concessions are not an optimal long-term solution,” says long-time Bank of America Merrill Lynch retail analyst Lorraine Hutchinson.
In short, retailers are caught between a rock and hard place right now.
The chaos ensues
The Trump administration slapped China with fresh 15% tariffs on some $125 billion of largely consumer products on September 1. Whereas products such as smart speakers, T-shirts and footwear side-stepped the first round of tariffs, they weren’t so lucky to get a reprieve this go around.
Roughly 77% of all shoes, clothes and home textile imports to the U.S. from China now has a tariff attached to it, according to research by the American Apparel and Footwear Association. More tariffs on apparel and footwear lurk on December 15.
To their credit, retailers both big and small have seen the writing on the wall all year long. They have used most of the year to reconfigure their supply chains, moving as much production as possible out of China to other regions such as India and Vietnam. Back-to-school merchandise and some holiday assortments were also brought in early to warehouses this summer so as to avoid the tariff increases.
Due to these Herculean efforts, the effects of the trade war did not materially hurt the earnings of major retailers in the first half of the year. Hat tip to the executives just making it happen.
Even still, Hutchinson points to two harsh realities despite the efforts of retailers to protect their profits.
For one, apparel and footwear sourcing costs are now starting to rise following a six-year stretch of flat to lower costs. Thank you, Trump trade war, which is causing supply chain disruption across many industries that have relied on China for decades.
It’s inefficiency in its finest form for an industry that could least afford it.
Says Hutchinson, “We expect costs to rise over the next several years because Trade War has accelerated the supply chain shift across multiple industries, creating tight capacity and an inflationary environment around key manufacturing hubs in Southeast Asia. We see risk that even a modest annual increase in sourcing costs could pressure margins for many brands given apparel pricing remains deflationary.”