The Trade War And Retail: Is Your Holiday Season At Risk?

(FREDERIC J. BROWN/AFP/Getty Images)

It may be July, but many retailers’ and brands’ heads are focused on the holiday season. That’s not surprising. What is surprising is that one of their key areas for concern this year is new and different: tariffs. This wasn’t planned for when they were designing and pricing the products that consumers will be seeing soon.

Recently the Trump administration released another round of tariffs on Chinese goods worth $200 billion. This ramps up the U.S.-China trade war, and leaves retailers and brands wondering if their products will be on the naughty list.

This move comes just shortly after the U.S. imposed 25 percent tariffs on Chinese goods worth $34 billion, and the Chinese responded with their own tariffs on U.S. goods worth $34 billion.

It’s apparent that Trump is willing to go along with this approach. The economy is in great condition, leaving consumers in the best position to deal with any consequences, and he has indicated that directly. Additionally, China refuses to change its unfair practices related to the acquisition of American intellectual property and technology, and it’s costing Americans jobs. As we’ve seen with this administration before, they are going to continue to raise the ante until something gives.

The retaliatory tariffs that China recently enacted target U.S. cars and agricultural goods, such as soybeans and meats. As the trade war continues to play out, we can expect to see short-term price increases on a number of categories including apparel, cosmetics, footwear, automotive accessories, electrical components, home fixtures and more.

The topic will have a big effect on consumers, retailers and brands, and has been discussed heavily by the National Retail Federation (NRF):

“Tariffs on such a broad scope of products make it inconceivable that American consumers will dodge this tax increase as prices of everyday products will be forced to rise,” David French, NRF’s senior vice president for government relations, said in a statement.

Naturally, the cost increases are going to affect consumer shopping habits. I expect the biggest fluctuation to come to fruition in holiday sales. While hikes in costs for production may be made now, we won’t see the price and behavior changes until these products hit the store shelves several months down the line.

Many retailers and brands like Amazon,  Walmart and more were looking forward to another successful holiday season. The economy is in great shape and unemployment is the lowest it’s been since 2000. The reality is, prices are going to go up, and retailers and brands need to be prepared for it.

Consumers will absorb the high costs for goods and differentiated product that they need and want. If the product is not a want or a need, they will pass on purchasing, leading to oversupply. Organizations need to find a partner that enables them to see how their demand will be affected based on the higher price points they’ll have to put in place.

They may find that when they hike up the price on a particular product by 15 percent, the demand for that product decreases disproportionately more. Right now, a number of companies are flying blind and hoping for the best. If they have this forward-looking information on pricing, they have the power to make more informed planning decisions and can adjust buy quantities as needed. Additionally, they can inform all marketing decisions and ensure they are appropriately speaking to their customers in a way that softens the price hike.

If I were an equity analyst, investor or fund manager covering or invested in the retail industry (retailers, brands or manufacturers), I would be calling the CEOs of these companies and asking: “what is your strategy and specific tactical plan to understand the effect of the price increase on the demand for you products? And, given that, are you going to make your financial plan for Q4 and in Q1 2019?”

The key at this time is to be able to look at the implications that this will have once products hit the shelves later this year. Retailers and brands are putting their sales at risk by not taking action now. They could be faced with too much inventory, and will be forced to make deep discounts to clear inventory, which will eat into margins.

Many are expecting more tariffs to come from both countries. Retailers and brands need to plan ahead to put themselves in the best position for when their price hikes hit the shelves. A poor-performing holiday season is an avoidable surprise that Wall Street and investors are not receptive to seeing, especially given the great economy.

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