For decades, from hardware to electronics, textiles, food, household goods, and general merchandise; retailers have been offering lower prices on goods sourced overseas. Though there has been some change in recent years, most imported goods to the United States originate in China. China’s cost base, infrastructure and manufacturing expertise provides a wealth of opportunities to improve profit margins for US companies.
But 2018 ushered in a new era focused on trade balance with a new series of tariffs. This is challenging retailers and suppliers alike in their approach to global sourcing, impacting both product components as well as finished goods.
The total impact so far has affected $250 billion in imported goods, (just under half of the products that come to the United States) affecting individual households by approximately $167 annually.
Retail strategies to mitigate costs
The first round of tariffs was put in place in January with 30%-50% penalties on solar panels and washing machines. Next came a more broad-reaching tariff on steel (25%) and aluminum (10%) impacting many sectors with products from canned goods to automobiles. In September, an even more aggressive list of more than 800 categories were added with rates of 10% and plans to increase those to 25% by 2019.
Retailers, manufacturers, and consumers will soon be impacted significantly if they haven’t already, and retail prices will start reflecting this at the shelf. There has been strong backlash from interest groups, manufacturers, and retailers citing concerns over economic stability.
Downward sales trends, lower profits, and unintended consequences of labor impacts including reduced hours for American workers or layoffs altogether can have broad-sweeping implications across the US.
The retail industry probably won’t feel the full pressure of these tariffs until 2019 when higher component costs are incorporated into finished goods inventory. Considering canned goods alone – 60% of a can’s cost is made of tinplate steel and a 10% tariff equates to $2 billion in annual costs that consumers will have to absorb.
For retailers, now is the time to start strategizing to soften the blow of this supply chain disruption. What can retailers do?
These are the five areas to focus on moving into 2019:
1. Alternative supply:
As tariffs that retailers or manufacturers did not plan for go into effect, alternative sourcing opportunities must be understood well in advance. This prepares suppliers to meet their needs and product specifications.
2. Imported finished goods vs Domestic component impacts:
In some categories, retailers will find that importing finished goods from countries other than China may put them at a cost advantage versus buying domestically. Buyers need to understand every component that goes into their product lines to weigh their options and can play a key role in maintaining category margin.
3. Forward buy inventory:
Retailers who can stay ahead of the cost impact and take advantage of lower prices will have an advantage in the marketplace.
4. Price / Forecast optimization
As costs rise, retailers must have a fundamental understanding of price change impacts to predict what consumers will be willing to absorb. Unavoidable price increases can lead to significant volume changes and re-forecasting will be critical to meeting consumer’s needs.
5. Optimize the supply chain
In our most recent study, “The Retail Transformation Imperative”, retailers rated their supply chain as “most in need of intervention”. At nearly every retailer, there are significant efficiencies throughout the supply chain that can lead to better profitability long-term.
We will continue to see market leading multi-national organizations take advantage of highly integrated and autonomous supply chains by taking advantage of and leveraging Artificial Intelligence and Machine Learning.
Only through this optimization will small to mid-level organizations be able to compete with market leaders and JDA can be your partner to help bring a more autonomous supply chain to your organization.
Fortunately for retailers, recent weeks brought some positive news from the G-20 summit. The US agreed to hold off on increasing rates on January 1st and will also delay an additional $267 billion of additional tariffs.
Both China and the US agreed to continue negotiations for the next 90 days and on December 3rd, it was stated that China plans to purchase more cars from the US by reducing the 40% tariff into their country. While these are all positive signs, the US and China have significant challenges in the next 90 days to come to an agreement, and retailers should plan for the worst.
Aside from tariffs, further potential threats continue to arise for the American economy. The Mexican border is under threat of closing which would undoubtedly have a crippling effect on both economies. NAFTA is also under scrutiny and could threaten the movement of goods and supplies across North American borders.
JDA’s latest acquisition of Blue Yonder can boost revenues, increase margins, and enable rapid responses to changing market dynamics, including these tariffs. JDA’s Luminate family of solutions transforms real-time data into faster, smarter and more profitable decisions.
Prepare Now by Optimizing Your Supply Chain
Learn more about Luminate Market Price, a pricing solution that maximizes revenue, tapping into pricing and demand insights to optimize pricing across every channel. Luminate Demand Edge can be another solution to these ever-changing needs, enabling retailers to make more informed, risk-aware business decisions.
As a retailer, what will you do to ensure you are well positioned for an uncertain future?