President Trump’s escalating trade war is hitting retailers and clothing brands that dragged their feet in diversifying away from China or failed to properly manage inventory, experts said.
Simultaneously, Washington and Beijing’s tariff spat is boosting apparel and accessory prices, particularly in leather goods and handbags, where price tags are projected to increase by 5 to 10 percent during the holiday season. This will make the year’s top sales event even more challenging than in the past, also because it will be one week shorter in 2019, they added.
“The business-as-usual guys who have taken too long to adapt to the tariffs and still have 3,000 hoodies on the floor [as an example of overstocked product] will get hurt,” said Ilse Metchek, president of California’s Fashion Association, estimating that earnings could also fall 5 to 10 percent for procrastinating merchants. “But those who understand the issues and adjusted inventory accordingly will do better.”
Macy’s Inc., J.C. Penney Co. Inc. and Dillard’s Inc. are examples of retailers that waited too long to implement coping mechanisms against growing tariffs, claimed Craig Johnson, president of consultancy Customer Growth Partners.
“Those big guys have taken some risk mitigation steps, but have not done so adequately or for a long enough time,” he explained.
Private-label brands Inc at Macy’s and Arizona and Worthington at Penney’s have been particularly hit, he added. “Some people began re-sourcing out of China five years ago, not in response to tariffs or Trump but because of rising labor costs. Those are ahead of the curve,” he added, listing Walmart Inc., Target Corp. and Costco Corp. as examples.
Whatever their coping strategies, many brands are facing losses from the U.S.-China battle, said Steve Lamar, executive vice president of the American Apparel & Footwear Association. “I can’t comment on how individual companies will do, but the fact is there are 15 percent tariffs on almost all apparel from China now and on Dec. 15, another 10 percent kicks in for all textiles, apparel and footwear,” Lamar said.
He singled out the so-called tranche 3 of Trump’s levies that came into effect in September 2018. The list covers textiles, travel goods and leather apparel and accessories, including handbags, gloves and hats, such as those sold by the Coach and Michael Kors. That market segment is set to see tariffs swell to 30 percent on Oct. 15, up from an initial 10 percent, and is seen suffering the greatest blow from the tariffs.
“These products are already showing price increases from 5 to 10 percent and they will get larger in the New Year,” Lamar said.
Other apparel and footwear prices may also be marked up during Christmas, he added. This is because most apparel categories were hit with a 15 percent tariff on Sept. 1, while additional products are set for inclusion in an upcoming round on Dec. 15, which could see as much as $550 billion of American products subject to higher duties, up from $300 billion.
This, of course, could change during this week’s pivotal U.S. and Chinese meetings in Washington. D.C., which could persuade Trump to delay or refrain from imposing the new hikes days before Christmas.
Lamar said that’s unlikely to happen, however. He advised companies to prepare for the worst case scenario and continue diversifying their sourcing strategies to avoid losses.
As the tariffs ordeal continues to bite, experts said lean inventory management has never been more crucial. Avoiding losses “will depend on how retailers manage their inventory. They need to buy less, not have thousands of hoodies on their floor,” Metchek said. “If they do that, it won’t affect their profits too much.”
Retailers and brands would also benefit from shifting sourcing beyond Vietnam, the second-largest exporter of apparel to the U.S., but one that’s quickly becoming saturated.
“Vietnam is an oversold alternative,” Metchek claimed. “If everyone started making things in Vietnam, it would sink. There is no infrastructure there — they don’t have fabric, nor roads. They also lack rules and regulations and have intellectual property issues.”
While Indonesia is a better alternative, its manufacturing know-how must improve, she added. Other Asian countries also carry human rights issues, like Cambodia or Malaysia.
Observers said near-sourcing to Mexico and Central and South America is also picking up for basic apparel, while “Made in the USA” strategies are gaining popularity, particularly for high-end fashion items or more niche segments such as jeans making in Los Angeles.
While savvy inventory management can help boost margins, nothing beats planning ahead, said Johnson.
“If you were smart, you started diversifying your sourcing mix four to five years ago,” he said, adding that specialty brands such as Chico’s, Talbots and Chill, as well as Gap, Banana Republic and Express, have benefited from that strategy, setting up shop in Indonesia, Cambodia, Philippines, Thailand, Bangladesh and Vietnam to offset higher operating costs.
Still, many of Southeast Asia’s emerging sourcing spots are unprepared for a manufacturing boom, so moving there presents a unique set of challenges that will take some time to address, according to Johnson.
“They are trying to build infrastructure [he said of U.S. makers eyeing those countries] but they don’t want to build a plant hoping someone will come. They need to have a sourcing contract first and that requires planning” with their customers to ensure they can obtain financing for new manufacturing sites.
Whatever happens with the trade war, which some observers say may not be resolved until after the 2020 elections, one thing is for sure: The issue is making everyone increasingly nervous.
“Uncertainty is killing everyone,” said Lamar. “When will the next tariffs happen, how they will happen, etc….You can’t accurately cost items.”