Your holiday shopping list could be pricier as retailers deal with the trade war
The word “tariffs” probably won’t jump out at you from a store display, and yet tariffs are almost everywhere by now.
Walk to the back of the Five Below store on Market Street, past the rolls of wrapping paper, the winter hats, the makeup kits, and you will arrive at displays of tech accessories that cost more than $5. Under the banner “Ten Below Tech,” you’ll find earbuds for $5.55 and charger cables priced up to $5.95.
The discount retailer announced new prices on social media in mid-November, acknowledging the above-$5 price points might come as a surprise to some shoppers. The “Ten Below” concept is one the company started testing in selected stores in October 2018 — and one that seems to have come in handy during President Donald Trump’s trade war.
Five Below CEO Joel Anderson explained to investors over the summer that raising prices would be one response to tariffs on goods from China, and that Five Below had been testing price increases throughout the year, incorporating customer feedback and early lessons from “Ten Below.”
“It is very important to us that we continue to deliver extreme-value products to our customers,” Anderson said on the August investor call.
The word tariffs probably won’t jump out at you from a store display, and yet tariffs are almost everywhere by now. If a product comes from China, it either has a tariff attached to it or it will by Dec. 15, the next scheduled milestone in Trump’s trade war, when products like smart phones, tablets, and laptops are in line to take the hit.
“It’s everything from furniture to consumer electronics to apparel and footwear ... pet supplies, home goods. It’s across the board. the number of consumer goods that are being affected by tariffs now,” said Jonathan Gold, vice president for supply chains and customs policy at the National Retail Federation.
While the effects of the Dec. 15 tariffs aren’t likely to fall on consumers overnight — it takes time for added costs to work their way through the supply chain — existing tariffs are now colliding with the holiday shopping season, forcing some retailers to make difficult decisions.
“The ultimate question is whether companies absorb the cost to their bottom line or pass that along to their end consumer,” Gold said.
And those costs are adding up. American businesses and shoppers are now shouldering $40 billion worth of tariffs per year, according to a recent estimate by the Federal Reserve Bank of New York.
That burden translates to some combination of “lower profit margins” for businesses, including wholesalers, retailers, and manufacturers, and “higher prices for consumers,” according to the New York Fed’s study. But estimating the exact breakdown of who pays is difficult, the researchers said, because it would depend on other market factors, such as how much competition a business faces.
The United States imposed the first tariffs on goods from China in July 2018, and the most recent round in September, on products such as TVs, digital cameras, and smart-home technology, like speakers and thermostats.
The consumer tech industry in the U.S. has paid $15.5 billion in tariffs since the trade war began, and $2 billion in September alone, according to the Consumer Technology Association, a business trade group.
“We’re just starting to feel the impact of the latest round of tariffs, and we’re bracing for what’s coming Dec. 15,” said Rick Kowalski, a senior manager with the association.
“All along the supply chain, the players — the businesses in the U.S. — have to decide where the costs go,” Kowalski said.
To use a popular tariff-era word, companies are trying a variety of ways to “mitigate” these costs, which are essentially a tax.
Back in June, Five Below’s CEO told investors that the company was working on a “number of options” to mitigate tariffs, including negotiating with its vendors, “price increases on our $1 to $4 items, process efficiencies, and, over time, moving production to other countries," according to an earnings call transcript.
“We will continue to pursue a combination of all these, as well as increasing prices on our $5 items," Anderson said on the call.
Five Below declined an interview request for this story, citing a quiet period before its next earnings announcement. The company also did not confirm whether above-$5-prices on tech items were related to tariffs.
While publicly traded companies strive to explain to Wall Street analysts how they are adapting to tariffs, “mitigation” also just sounds like a big headache, to hear business trade groups tell it.
Negotiating new prices with vendors may involve reopening an existing contract, “and that’s never easy to do,” said Gold.
Shifting production to a country other than China? Not so simple. For one thing, U.S. businesses "may be stuck in a contract with a Chinese manufacturer, and they don’t have a lot of flexibility to change their supply chain immediately,” Kowalski said.
Beyond that, it takes time for companies to build relationships elsewhere, and to ensure that their products are being made to specifications.
Larger retailers, with more flexibility and clout, may be in a better position to deploy these strategies than smaller ones. In August, Target’s chief merchandising officer told suppliers that the company wouldn’t accept cost increases related to tariffs. “Our expectation is that you will develop the appropriate contingency plans so that we don’t have to pass price increases along" to customers, according to a memo obtained by Oregon Public Broadcasting.
“Unfortunately, smaller retailers are more likely to pass on the costs,” Gold said.
Small or large, businesses are dealing with the political uncertainties of the trade war. Amid talks with China to reach a trade deal, the president suspended a tariff hike in October, days before the increase was to take effect.
Could the same happen for the next round of tariffs? “Companies are planning for the implementation of the Dec. 15 tariffs, but they’re certainly hoping the tariffs will be delayed or suspended,” Gold said.
Meanwhile, retailers are already making purchases for summer 2020, “and they’re trying to figure out what’s going to happen with the tariffs,” said Gold. "So it’s very complicated.”