Welcome to the era of trade chaos for retail.
Beginning in May, retailers lived with the official reality that a huge swatch of Chinese goods — known as "tranche four" and covering pretty much everything that hasn't already gone through tariff increases already — would get a 25% tariff. Retailers and analysts from nearly every sector warned of price hikes for consumers, disruptions to their supply chain and margin hits. Some companies began rushing in imports to beat the tariffs.
And then the industry got a respite, as the Trump Administration hit the pause button on the tariffs and opened up trade talks with Chinese leadership. You could almost hear the collective exhale of relief from brands and retailers around the country. Maybe the tariff apocalypse wasn't coming, after all.
And then last week, in but a moment — a tweet — the wails and teeth gnashing resumed. President Donald Trump announced the administration would move forward on a reduced — but still substantial at 10% — round of new import taxes on $300 billion in Chinese goods, set to begin Sept. 1. Higher tariffs were not ruled out, and Trump indicated they could go even higher than the previous 25% mark.
Industry response was swift and severe.
"As we've said repeatedly, we support the administration's goal of restructuring the U.S.-China trade relationship," David French, the National Retail Federation's senior vice president for government relations, said in a statement Friday. "But we are disappointed the administration is doubling-down on a flawed tariff strategy that is already slowing U.S. economic growth, creating uncertainty and discouraging investment."
"Tariffs are taxes on American consumers," Rick Helfenbein, president and CEO of the American Apparel & Footwear Association, said in a statement emailed to Retail Dive. "The President's decision to proceed with adding these additional costs for hard-working American families is truly shocking."
Matt Priest, CEO of the Footwear Distributors and Retailers of America trade group, said in a statement that his group was "dismayed" at the decision. "We will not take this news lying down," he added. "This is one of the largest tax increases in American history and it is vitally important that we fight this action on behalf of our consumers and our industry."
The dominant supplier
Retailers and brands have been shifting their sourcing away from China since Trump took office. A 2018 survey by the United States Fashion Industry Association (USFIA) found that a majority of companies said they are planning to cut back on the share of their product that is manufactured in China.
Even so, China remains the "dominant supplier," accounting for 49% of total textile and apparel imports to the U.S. by quantity in 2018, USFIA said in a March report emailed to Retail Dive. The next largest supplier country is India, with a fraction of that amount at 8.1%. For just apparel, China is also the top supplier, but Vietnam grabs the second spot.
Where companies source their products would obviously determine to a large degree how they would fare when the tariffs launch.
"There are varying degrees of companies with exposure," Mike Zuccaro, Moody's senior analyst and vice president, told Retail Dive in June. He pointed to G-III Apparel Group, which does 86% of sales in the U.S. (where the tariffs would hit) and sources more than 61% of its products from China. "So that's pretty hefty."
Analysts with Cowen and Co. have also pointed out several retailers and brands that source heavily in China, among them American Eagle Outfitters (45% sourced in China), Boot Barn (44%), Target (30%), J.C. Penney (30%), J. Jill (30%), Macy's (25%) and Kohl's (20%).
In an ideal world, retailers and brands would shift sourcing to another country with relatively cheap and skilled labor so as to dodge the new duties.
B. Riley FBR analysts led by Susan Anderson said in a June note that many of the apparel and footwear companies they follow are working to shift their vendor base to other countries, mainly Vietnam, Cambodia, Bangladesh, Indonesia and India. In all, Anderson's team estimates that the share of Chinese sourcing among the companies they cover went from 36% in 2017 to 29% in 2018.
The costs of moving out of China
Shifting supply chains is not easy, and doesn't come without cost. For instance, Katie Tangman, Columbia Sportswear's director of global customs and trade, testified in June that it would cost at least $3 million to move its remaining production operations out of China. Those costs include new machinery and training a new workforce.
Zuccaro said that it could take a year or two to find the equipment and move it into other countries. "Some companies have been able to move some things pretty quickly. But was that kind of low hanging fruit?"
"You have to look for places that can make your product in a quality manner," he added. "You might be able to move something quicker, but if it's a higher-end brand that really focuses on quality and craftsmanship and things like that … it might take a little while to just have to train people and build that up."
Moreover, as the industry tries to shift to those other countries, they're running into capacity limitations, Zuccaro also noted.
S&P Global analysts in a June report also pointed to near-term capacity constraints, especially for skilled manufacturing. "It is very difficult to replicate China's well-developed and integrated technology supply chain elsewhere," S&P analysts led by Jennelyn Tanchua wrote.
In some cases, replacing Chinese production might be nearly impossible, at least in the short-term. Take wedding apparel. Steve Lang, CEO at Mon Cheri Bridals and current president the industry group American Bridal and Prom Industry Association, told Retail Dive earlier this summer that his own company sources about 90% from China. The reasons for that have to do with more than cost alone.
"The Chinese have been good at embroidery and beading for 5,000 years," he said. Moreover, factories for wedding apparel are more involved than those that make, say, T-shirts. Facilities must be air conditioned (because sweaty hands can stain white satin and other fabrics) and laborers need to be skilled. "We have a very, very technical product."
Making things more difficult, new factories in places like Myanmar, where U.S. companies are shifting production, might prefer to take on easier-to-make products rather than wedding dresses, which could be a loss-maker for factories in the initial years, Lang added.
Costs started stacking up before tranche four had gone into effect and subsequently put on ice (only to be revived again). The National Retail Federation reported imports in May, the month after Trump announced the tranche four tariffs plans, would rise an estimated 4.2% from the previous year.
"The threat of tariffs is just about as impactful as actual tariffs, meaning people are scrambling, people are looking, people who are diversifying out of China are stepping up that process or expediting that process," FDRA's Priest told Retail Dive in June while the industry was preparing for the announced 25% tranche four tariffs.
As one example, Priest spoke with one of his members that had moved in 100,000 pairs of shoes earlier than planned and was trying to figure out the logistics of pushing those to its distribution centers, he said.
Rushed imports might beat the new tariffs, but they carry risks of their own given the ramped-up modern sales cycle. "Consumers are changing, their attention spans are shorter, the desire for fresh product is strengthened," Priest said. "And when you have to kind of adjust to these artificial political timetables, to get product in to avoid duties, then I think it can disrupt the normal kind of cadence that you've established in the 21st century for American consumers."
In some cases, retailers and brands might be able to renegotiate with their vendors, and effectively share the tariff burden with them. As Moody's senior analyst and vice president Raya Sokolyanska pointed out in a June interview with Retail Dive, the yuan had depreciated shortly after a previous tariff increase on furniture, changing the relative cost of the goods. "So it was easy to go back to the vendors" and ask for price decreases, Sokolyanska said.
Moody's department store analyst Christina Boni noted in an interview that scale and size matter. Those that are larger and of more importance to customers have more leverage to negotiate with vendors.
"The vendor needs you just as badly as you need them," Keith Daniels, a partner with investment and consulting firm Carl Marks Advisors, told Retail Dive earlier this summer. "Retail is the vendors' customer. So I think the retailers will have the majority of the leverage."
But there are limits.
"In essence, I think the headline is that you're not going to be able to re-engineer it at all, you're not going to get the vendors to eat it all," Moody's Boni said. "The consumer is going to have eat some of it ... on some level."