Founder’s Letter: Transparency in the Face of Tariffs
Showing up as a guest at Kingpins and seeing (almost) everyone from the industry felt both familiar and entirely stress free. The show was almost impeccable and I say “almost” only because whatever was not impeccable was minor and easy to fix for next time, which I am sure will be done. I had a great time and an interesting time, as always. I was happy that the show was so busy and there were so many things for visitors to see and do on the two floors. I love that the show tries so hard. That’s very commendable and apparent to everyone. And they take risks and gamble on ideas. Better to risk and try than not to try at all, so congratulations to the Kingpins team. Could not have done it better myself.
Now if they could get facial recognition, that would be appreciated and about time! And if all of us guests were able to “order” our food delivered to our location, that would also be amazing. I would love it if they worked on that.
Despite the mood of congenial camaraderie at SugarFactory, the cloud of tariffs and an uncertain future hung in the air. Can’t plan a business when the rules are constantly in flux. Rumors are useless and too much time was taken talking about such things. What is fact is that duties are going up not down, and China and the USA are not so friendly anymore — at least as of today.
On the government side, nations (other than China, which isn’t trying to negotiate) are considering how they can get the USA to lower their duties by buying more from the USA or dropping their own tariffs. Cotton plays a role because China for the foreseeable future will no longer be buying USA cotton. That leaves other countries stepping up to buy US cotton (not to mention US soybeans). A story going around the show was how tens or hundreds of millions of dollars were tied in US cotton bound for China but unable to enter. All that cotton now has no home, which puts added stress on the brokers. I can only imagine that there are some deals to be made with anyone that has the cash and “space” to store it all.
Many suppliers are generally glum remembering the losses they took during the pandemic. They are more than a little bummed out about the prospect of those losses returning. Earlier this year, most good companies were projecting positive growth. That’s no longer the case. Catch-up time seems to have ended. Reinvestment is not likely. And sustainability? It fell off the ladder.
Even before the show, I had been on a lot of calls with supply chain members looking for hope and solutions to counteract what they fear could happen. I met foreign government officials who were figuring out what to import from America to keep their duties from skyrocketing.
Just days before the show, I was told that three brands asked all their suppliers for discounts. I won’t single the brands out, but suppliers told me two want 10% lower prices from fabric and garment vendors to help them keep their retail prices stable. It’s hard to make sense of the rationale for that concept. But I’ll try to break it down:
The American president raises import tariffs for American retailers, brands and importers (BRIs), but those stores and brands ask their supply chain to pay it.
I keep thinking I am missing something? Why should a mill in Cambodia or India pay for what an American president charges his own citizens?
It would seem logical to me that the president is expecting consumer prices to go up. I mean, Apple will charge more for their phones and computers; grocery stores will charge more for Mexican avocados, as will wine stores and those that sell Swiss chocolates or watches. Why would the denim industry not go that route, as well? Is a Mexican farmer taking a reduction to keep grocery prices stable?
I did some calculations to see what the effect of the tariffs would be on prices. If we assume a 300% markup over cost of goods, a $10 jean FOB jean would retail for $38 instead of $35. This calculation is based on an additional 10% being added on to current duty rates. (I did not consider the crazy tariff amounts that are currently on the 90-day pause list and likely to be avoided with new deals.)
My takeaway: Is it really necessary to keep prices down in order to do business? Why?
And if the BRIs really do need the prices to remain the same, who should pick up that difference?
The supply chain already was not making proper margins for the big brands before the new duties. If they are asked to participate in keeping prices stable after new duties, where are they supposed to get that money from? And how sustainable is that business model? Let’s be honest, before any increase in duties all major “basic” orders, at least in the USA, are heavily negotiated. To keep basic business, everyone has already committed to low margin or in many cases, to no margin. Where do they draw from now? I simply don’t understand where buyers think the money comes from?
Luckily, that’s not my problem any more but I do hope the negotiations between BRIs and supply are fair, not extortive, not threatening or debilitating to the fragile supply chain.
In my dreams, the big buyers would invite their suppliers (say denim mills) to a meeting where all of them sit at the same table and everyone discusses together how to keep everyone’s business afloat because the problem is the same for all parties.The backdoor, secret, one-by-one negotiations pitting one supplier against the other is not healthy or fair. It has to stop. Let them all be at the same table, make negotiations over the same issues and everything be transparent so that everyone can see what everyone will do and feel like real partners. Transparency has to be the way forward. Doing things this way would get good results and brands would get kudos for doing difficult things the right way rather than bad Karma and gossip.
Happy Spring everyone. Hope is eternal.
