WASHINGTON — As Congress and President Trump craft new policies on taxes, trade and regulations, chief executive officers like Emanuel Chirico of PVH Corp. are cautiously trying to navigate the turbulent waters in sourcing and investment that are inevitably churned up with change.
This story first appeared in the March 7, 2017 issue of WWD. Subscribe Today.
Chirico, who was in the nation’s capital late last month to give a speech about the proposed border adjustment tax, sat down with WWD to discuss the myriad challenges facing not only his business but that of the fashion and retail sector at large.
WWD: What is your take on the idea of a border adjustment tax on imports proposed by the House? What is the potential impact on brands and retailers?
Emanuel “Manny” Chirico: My concern is this is a 20 percent incremental tax on imports. I don’t even think it is truly a tax. It’s another duty. It’s another tariff on top of [existing tariffs.] Unless we raise prices there are no profits. It’s gone.
The apparel industry and retailers even more so are working on razor-thin margins. What is insidious about this tax is lower margin businesses are going to get hurt the most. For us, just to break even we would have to raise our prices between 15 and 20 percent and that’s a big increase.
WWD: Will you be able to absorb the costs and will retailers pass it on to the consumer?
M.C.: What will probably happen is it won’t get 100 percent passed through. It will get absorbed and eat into Macy’s profits or other retailers’ profits, my profits and the manufacturers’ profits at the end of the day and we’ll have to absorb that in the overall scheme of things. So it’s going to be a burden on companies.
Look, what people are saying is it will force demand down for apparel on a unit basis. I would hope that we could keep the dollars equal but we will be making less units. What history shows if you are going to raise prices 15 percent, units are going to go down even more than that. So consumers will just buy less or they will make a decision to go to a lower-price brand if they have to.
WWD: President Trump has said his goal is to create more incentives to not only keep companies and jobs here in the U.S. but to also attract more companies that moved offshore. But you said the ship [for apparel manufacturing] has sailed. Why?
M.C.: When I joined the company 20 years ago we had 15 factories in the United States. If you went back 10 years farther there were 35 factories in the United States producing 70 percent of what we were selling in the United States.
Today, we just make hand-made ties in the United States at our manufacturing plant. We’re just [in line] with the industry — 98 percent of what we make is imported into the United States. There are very, very few brands that do any real manufacturing in the U.S.
WWD: So shifting production back to the Western Hemisphere or to the U.S. is not a viable alternative for you?
M.C.: The economics just aren’t there to bring apparel jobs back to the United States. [If a border tax is imposed] and other changes are made, you might see the 98 percent [of imported apparel] could move to 95 percent. It would be big growth for the industry on a percentage basis but relatively small overall.
My sense is it could come back at the higher end, in designer jeans, and with really expensive and innovative product. We will be able to bring more of that to the States, but at the end of the day it will still be 95 percent imported goods related to apparel and accessories. It’s just the nature of the supply chain and where it’s developed and built. Bangladesh pays a dollar an hour. It’s a high wage in Bangladesh. How do you compete with that when 50 percent of the product cost is labor?
Even what I am wearing today is not made in United States. Calvin Klein Collection suits at $2,500 could be made potentially in the United States. But the moderate priced $500 suit? You can’t make it here. Sure we can develop it over time but because we are competing with such low-wage countries, it’s not really what we want to develop for our workforce.
We have to recognize if we do this consumers at the end of the day are going to pay a higher price.
WWD: Are you concerned about protectionism and more barriers being putting up through punitive tariffs and other measures?
M.C.: My concern is about the economic impact that would have and walls going up. It’s not good for the American industry. Because there is growth going on around the world and we need to be part of that growth but we also need to be a major influencer about how the world develops.
The world loves American brands but if you start building this protectionist environment it’s going to have ramifications, not only on how we do business but it’s going to have ramifications on our American brands. You see it in Mexico to a degree with people picketing Starbucks — an American company — and Coca-Cola having to deal with the ramifications.
Nobody wants to feel like they are being bullied or beat up either. We have to be careful how we balance that all out and it will have a major impact on us because our brands are sought after around the world. There is a reason people love Calvin Klein throughout Europe and Latin America and South America and a clear part of that DNA both with Calvin Klein and Tommy Hilfiger is these are great American designer brands. There would be a fallout if those brands starting getting a negative connotation of being American.
WWD: How do you characterize the business climate under this new administration?
M.C.: I think there is a lot of enthusiasm out there but there’s a lot of uncertainty out there too. The retail industry and the apparel industry are really feeling that pressure. The pressure that’s going on in the distribution channel is fundamentally changing over time from brick and mortar to more online and that’s putting pressure on businesses, even in what was a strong economic year last year with about 2 percent overall GDP growth.
When you look at the way most companies are planning their business right now, we are all being cautious about it. Where we see growth is much more international than we do in the U.S. We are managing the U.S. to continue to be our biggest market and a profitable market for us but we are not looking for outsize growth in the States.
Our two big brands are fundamentally doing better competitively. We are gaining market share with Calvin Klein, with Tommy Hilfiger and that’s really what’s driving our growth in the States. The pie itself is not growing significantly. Brick-and-mortar retail is actually shrinking. Every one of my major customers has some kind of store consolidation. Macy’s talked about [closing] 100 stores. The feeling is over the next three years there will be more on the horizon as they develop their omnichannel strategy, grow their e-commerce, direct to consumer business; as that continues to grow, the store base will continue to shrink. It’s a challenging environment that we are all dealing with.