The Impact of Tariffs on Retailers and Inventory Control

While the trade war between the US and China has been underway since 2018, recent tariff changes imposed by the Trump administration in May 2019 threaten the retail industry even further.

Since the trade war began, numerous large retailers that had been performing solidly have reported decreasing numbers, and it is thought that consumer spending is being affected by the uncertainty the tariffs are creating.

This uncertainty has led to further challenges for full price retailers as they figure out how to plan inventory for upcoming and recent tariff changes. However, these struggles with inventory control could mean there is more excess inventory in the market, benefiting the off-price sector.

What Are the Retail Tariffs?

The trade war between China and the United States officially began in July 2018, with the Trump administration imposing tariffs on $34 billion worth of Chinese goods[1], causing Beijing to immediately retaliate by imposing their own tariffs. As a consequence of this first retaliation, the agricultural industry was negatively affected, leading to 27.5 million tons of soybeans remaining unsold in the US since the tariff was imposed[2].

Evidence suggests that since the trade war began, these tariffs have already hurt the American economy more than it has China’s. A recent study to assess the effect of the trade war on the US found that the tariffs have so far passed through into domestic prices, with the cost falling on domestic consumers and importers, and not foreign exporters as intended[3].

Therefore, it’s unsurprising that news of further tariffs being imposed provoked a flood of 600 retailers to come forward and warn President Trump of the consequences they felt this would have on the American economy[4]. Large retailers like Walmart, Costco, and Target wrote a letter noting:

“We know firsthand that the additional tariffs will have a significant, negative, and long-term impact on American businesses, farmers, families, and the US economy.”

“An escalated trade war is not in the country’s best interest, and both sides will lose.”[5]

The tariff these retailers were concerned about was implemented on May 10, 2019, whereby President Trump more than doubled the tariff rate on more than a third of Chinese imports. As a result, a total of about $250 billion worth of shipments from China now face an import tax of 25%, up from 10%[6]. The latest tariff will impact a range of products from electronics, metal and textiles, food products and beauty goods.

How Will This Impact Full-Price Retailers?

In a tweet posted on May 5, 2019, President Trump said, “The tariffs paid to the USA have had little impact on product cost, mostly borne by China.” However, since the trade war began, many of the companies who had been on solid trajectories over the last few quarters are now reporting reduced numbers.

For example, Abercrombie & Fitch Co. sales growth has waned over the past few quarters, and the company experienced a 24% drop in its stock price immediately after reporting their quarterly sales back in May[7], while Michael Kors sales fell by 1% in the last quarter due to heavy discounting while trying to clear excess inventory[8]. This revenue decrease was unforeseen and has drastically impacted stock values.

In addition to reduced revenue and falling stock prices, it is predicted that prices for products will have to increase. According to Costco (COST) chief financial officer Richard Galant, “At the end of the day, prices will go up on things.”

With costs and uncertainty rising, this has presented a new challenge for large retailers in terms of inventory control. Businesses are having to reevaluate their retail inventory management to account for tariff changes. Many have been stocking up on their products in preparation of the tariffs, but the retail market moves quickly and an overflow of excess stock will be inevitable.

What does this mean for the off-price sector?

While the imposed tariffs have already led to negative consequences for the traditional retail industry, historically, off-price brands have benefited from disruptions in the market[9]. With rising prices and an oversupply of inventory on the market, retailers will likely have to sell their excess stock to off-price stores, and large value retailers like Walmart will still be seen as offering better prices than their competitors[10].

Another advantage that off-price retailers have is that they usually buy their stock from a more diverse range of countries. Burlington Stores only imports 6% of its products from China, and only 15% of those orders are subjected to tariffs[11].

For brands, the way to stave off lower profit margins during this time is by optimizing inventory control. Accurate sales forecasting can make all the difference for brands that expect tougher times ahead, and who don’t want a boon for one industry to be a disadvantage for theirs. One way to achieve this is by leveraging technology that can analyze inventory and transaction data, which can then be utilized to create a plan of action that more precisely estimates how much, or little, supply is needed to fulfill demand. And in the event that brands do have excess (as is often the case), the right technology can help sellers determine the fastest and most efficient way to move product and recover working capital.

It is still too early to say whether the impact of the recent tariff change will definitely benefit off-price and value retailers, it is likely they will be put in a position of power as increasing prices drive consumers to shop through the off-price channel.

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Sources:

  1. https://www.nytimes.com/2018/07/05/business/china-us-trade-war-trump-tariffs.html

  2. https://www.businessinsider.com/trump-china-trade-war-25-million-tonnes-of-us-soybeans-to-go-unsold-2019-2?r=US&IR=T

  3. https://www.nber.org/papers/w25672.pdf

  4. https://edition.cnn.com/2019/06/13/business/trade-war-trump-china-walmart-target-costco/index.html

  5. https://assets.documentcloud.org/documents/6152231/THH-China-Tariffs-Company-Association-Letter-to.pdf

  6. https://www.businessinsider.in/its-official-trump-ramps-up-tariffs-on-china-escalating-the-high-stakes-trade-war/articleshow/69261999.cms

  7. https://www.bloomberg.com/news/articles/2019-05-29/abercrombie-dives-as-wall-street-spooked-by-slowing-sales-growth

  8. https://www.bloomberg.com/news/articles/2019-06-26/is-parliament-ready-to-back-a-no-deal-brexit-you-do-the-math

  9. https://www.businessinsider.com/tj-maxx-marshalls-to-benefit-from-trump-tariffs-ceo-2019-5?r=US&IR=T

  10. https://www.forbes.com/sites/pamdanziger/2019/05/16/new-tariffs-mean-new-troubles-for-retail-with-plenty-of-misery-to-go-around/#706978ea4412

  11. https://www.buzzfeednews.com/article/leticiamiranda/trump-tariffs-some-retailers-not-affected