News, Industry Trends, Retail

A Look at the Impact of Tariffs on Retailers

News, Industry Trends, Retail | September 06, 2019

The ongoing 'trade war' between the United States and China continues to cause concern in global markets. The recent announcement of additional tariff increases on Chinese imports -- the first of which went into effect on Sept. 1 with more planned to follow on Dec. 15 -- led to up-and-down swings on the various stock exchanges during the last two weeks of August, capping off a volatile month on Wall Street.

While hope that the United States and China will return to negotiations is rekindling, it looks more and more likely that retailers will need to continue to adapt to the impact of the tariffs, at least in the short term. The longer the trade war persists and the higher the tariff increases go, the more likely it will be that consumers will feel the impact of the tariffs on their wallets. 

This situation puts retailers in a very tough spot. While customers are used to small and expected price increases, some of the realized and estimated increases have been extreme. Outside reported on a possible 25% increase in pricing on bicycles and associated gear due to tariffs levied earlier in 2019. During a public hearing at the time of these announced tariffs, Rich Harper, manager of international trade for the Outdoor Industry Association, noted that the impact of the tariffs, "could very well put some small, medium-sized companies out of business." This is obviously a devastating worse-case scenario outcome, but it reinforces the serious potential impact of tariffs on retailers.

More recently, retailer Williams-Sonoma released its second quarter net revenue report on August 28. The company reported a 7.5% increase in net revenue over the same period in 2018. What makes this announcement particularly noteworthy is that it was accomplished while Williams-Sonoma was directly impacted by the ongoing trade war. During the company's coinciding Q2 2019 earnings call, Laura Abner, president and CEO of Williams-Sonoma, noted that the company's ongoing "aggressive tariff mitigation plan" had allowed it to minimize the impacts on the company's bottom line. This mitigation plan includes cost-saving initiatives in a number of areas, but also "selective price increases" according to Julie Whalen, EVP and CFO at Williams-Sonoma.

The Williams-Sonoma disclosure does a great job of highlighting that even if retailers have a solid plan in place and take steps to minimize the impact of tariffs on customers, a trickle-down impact to them (in the form of price increases) is likely unavoidable. The widely-reported on estimate from JP Morgan analysts predicts that the most recent round of tariffs is likely to increase the average household impact from $600 to $1000. Consumer retail spending was up again in July after gains in June, which is a good sign for retailers as they head into the holiday stretch of the calendar. But time will tell if the latest rounds of tariffs will stymie this summer's positive trend and/or impact holiday sales.

Customers understand that these tariffs are out of retailers' control, but this understanding shouldn't be confused for or used as an excuse for retailers to justify across-the-board price increases. That's a sure-fire way to turn customer sentiment negative very quickly. Instead, retailers should develop plans and business-wide initiatives that prioritize cost-savings initiatives and minimize price increases. It's likely that these actions will resonate with consumers and create the feeling that the company understands their plight and is doing everything in its power to support them. As demonstrated by Williams-Sonoma, this approach can deliver positive results.

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