The T-Word, and the dangers of "Wait and See"
At trade shows and in board rooms, in retail stores and sales agencies, a dominant theme in conversations this fall has been the looming Jan 1 introduction of 25% tariffs on a host of Chinese-manufactured goods entering the United States.
Naturally, everyone is hoping that trade negotiations will result in this higher tariff never coming into effect. Nevertheless, this kind of hopeful optimism is strongly countered by a lurking fear that in fact the 25% tariff will stand, and that the Casual Furniture industry as we know it is, well, basically doomed.
I speak facetiously, of course. But in reality, a lot of independent retailers who do significant volume with Chinese-manufactured goods are suspended between these two prongs of optimism and fear; and as a result, there is an alarming degree of unintended inertia in the most critical buying season of the year.
While our industry continues to boast excellent domestic manufacturing in Aluminum and Resin categories, in most other categories - Woven, Cast, Wood, Umbrellas, Fire and more - an overwhelming majority of American suppliers design and warehouse products that are manufactured in China.
A recently published survey in Casual Living of over 300 members of the International Home Furnishings Representatives Association showed that 44% percent of respondents believe tariffs will drive American suppliers to move production out of China and into other countries in the Pacific Rim. 10% of respondents believe tariffs will result in American suppliers manufacturing some or all of their products domestically. Ultimately, more than 50% of industry respondents believe the long-range impact of these tariffs will be that US suppliers move their production away from China in future; and this bears up with anecdotal evidence in the field this fall in our conversations with retailers, manufacturers and sales reps.
With all that said, the fact remains that none of this has any bearing on the current 18/19 retail season. Anyone who has had even the tiniest exposure to Asian manufacturing knows that it is a long, laborious process to find a new factory, let alone to work through all of the engineering and manufacturing systems development needed to move an entire product line over to a new facility. Doing this inside of two years with a predictable, consistent quality level in production is miraculous. And a whole lot can happen in the retail landscape in two years.
So let's return to this present moment in time, and think about some of the known quantities.
1. If you as a retailer have been doing business for years with a reputable American supplier whose production is in China, it may help to remember that your American supplier a) was just as freaked out as you were on Sept. 26th, and b) they have a plan. They understand your reticence and hesitation. They are making every effort to financially mitigate the potential effects of a 25% tariff if it comes. They are also looking at long-term solutions that may include moving production to a country whose goods are not subject to tariffs, and are putting measures in place now to safeguard your mutual long-term success. They want to partner with you, and are happy to take time to talk through a variety of possible scenarios with you as you look toward your own retail selling season.
2. If your American supplier runs a US warehouse, the tariff only applies to the real production cost of the furniture from the manufacturer. This is meaningful for a few reasons:
a) costs associated with transportation (ocean freight, packing materials, etc.) are significant on a percentage basis, and aren't subject to tariffs; b) if cushions are domestically made (which is typically the case with all major US suppliers), naturally there is no tariff, bringing down the blended tariff surcharge for a complete unit with cushion; and c) the US wholesale price from your supplier includes a narrow profit margin, which of course is not impacted by duties. We are hearing varying numbers right now, but targeted blended tariff surcharges should be in the 15% range to the dealer, not the full 25%.
3. Suppliers are generally going to be transparent about the tariff rate that is passed along to the dealer; and naturally, knowing the exact percentage impacts pricing at the consumer level. It is worth remembering that if no additional retail margin is taken on the tariff surcharge, the real tariff-based increase that is passed along to the retail consumer can get down to about 8%.
4. This isn't going to last forever. No one on either side of the negotiations wants a prolonged high-tariff situation. While a firm resolution or end date is not yet in sight, 25% will not be the new normal; it is a negotiating tactic. It may be painful and unsettling, but it shouldn't shake our collective focus on growing our respective businesses, the same way we do every season.
5. At some point, tariffs or no tariffs, everyone is going to need some furniture to sell. As a retailer waiting for stock, it's nicer to be at the front of the line than the end of it. In the current climate, chances are excellent that both American and Chinese factories are going to be overloaded in late winter with 'urgent' stocking orders that were not placed in the fall; and as we all know, in a short retail selling season, even one lost week of time in April can have a disastrous impact on the fiscal year.
Hopefully, by the time we all reconvene at the Chicago shows in 2019, this season of uncertainty will be a distant memory. But between now and then, let's prepare for a strong retail season in the face of some difficult, but ultimately temporal, circumstances. I have great faith in all of us.
Love and sunshine,