October 4, 2019

Top Strategies to Tackle Tariff Increases

By Michael Sacco, Partner, Advisory Services

Top Strategies to Tackle Tariff Increases Consumer Products

As recorded by the American Apparel and Footwear, 91.6% of apparel, 68.4% of home textiles and 52.5% of footwear imports from China were affected by the 15% tariff that began September 1. Companies are continuing to face supply-chain disruptions and increased margin concerns, making it glaringly apparent that tariffs with China are no longer just a short-term problem. If you rely on China for manufacturing, it’s time to start strategizing ways to stay profitable despite additional tariffs.

While trade policies are largely beyond your control, you can still proactively prepare your business using these top strategies:

1. Negotiate with Vendors and Suppliers

If you have positive relationships with your suppliers, get a head start on renegotiating terms. Suppliers and vendors should be willing to work with their customers. Chinese factories do not want to lose business, so you should consider using that requisite to negotiate better rates. Many companies successfully worked with their vendors to lower costs across their supply chains and continue to do so.

Also, opt for a long-term deal to lower the costs across your supply chain. If you can guarantee needed goods at current market prices, you can limit the impact of the tariff increase.

2. Raise Prices Where Necessary

Take a fresh look at your profit margins. Think about which costs can be absorbed and offset. Knowing where you could trim the fat or what kind of cost increases your customers will stand for is essential to making adjustments. To that end, communicating with your customer is key. Understanding what they are willing to accept and being transparent about your reason for doing so are important aspects of keeping them loyal to your business.

For example, Walmart, the world’s largest retailer, said prices for shoppers will rise due to higher tariffs on goods from China. The company said it will seek to ease the pain, in part, by trying to obtain products from different countries and working with suppliers.

Explore New Markets

Companies that manufacture in China in addition to other countries have an advantage because it’s easier to shift to an already existing factory relationship outside of China. Many companies have started the process of moving their manufacturing to other countries like Vietnam, Cambodia, Mexico and India. This may seem like an obvious solution to the increase in tariffs, but it’s no easy task. Most other countries lack the infrastructure, resources and manufacturing experience available in China. It is also extremely difficult to quickly shift production, as companies need to build new relationships, negotiate pricing and ensure that the factories are compliant with safety regulations, etc. Also, the fact that so many companies are exploring countries outside of China creates a competitive challenge. Many countries like Vietnam are already reaching capacity and are adjusting their prices to meet the demand.

Of course, there is more than one way to tackle a challenge. Beyond these three approaches we have seen companies take the following routes when addressing pressure from tariffs:

  • Wholesale companies are splitting the tariff increases three ways among themselves, retailers and Chinese suppliers.
  • Buying and replenishing inventory that moves, rather than focusing on slow-moving goods, has allowed companies to more effectively manage inventory levels.
  • Exclusion requests of certain products.
  • Value reduction/first sale strategies.
  • Duty drawbacks.

An uncertain environment around tariffs and trade can be frightening for many businesses. As the U.S. and China continue to talk, with no resolution in sight, it’s critical that you contact your Marcum advisor to create the best strategy in place to absorb the tariff hikes and avoid significant disruption to your business.