Situational strategy: How to stop tariffs from tariff-ying your customers

Situational strategy: How to stop tariffs from tariff-ying your customers

This month’s announcement that the Trump Administration would be raising tariffs to 25% on $200 billion worth of goods will have a significant impact on retailers across the country. Investors have weighed in by punishing the market with a particular ire focused on companies tied to consumer spending. For retail, specifically, a new UBS report claims that roughly $40B of sales could disappear and 12,000+ stores are at-risk for closure given the new round of tariffs.

It has become clear that whether the additional tariffs are lifted – or endure – the ramifications of the policy decisions will be felt over the long run. Given the impact to retailers, here are three ways that retail leaders can successfully navigate the new round of tariffs.

  1. Check your customer value proposition: are you a top choice for your customers?

The tariffs will further intensify the divide between the haves and have-nots in retail by shrinking the customer’s buying power which, according to a recent report, will cost a family of four $767. The smaller pot will sharpen elbows and box out poor performing retailers. So, what do we know won’t change? A customer’s love for a brand or retailer. If a consumer is an avid shopper today, he or she will remain loyal, assuming the retailer can maintain and improve the brand promise. If a customer enjoys buying from Nordstrom or Target or Starbucks that won’t change in the near-term which is a strength that needs to be leveraged. Retailers that are struggling – and it’s critical for leaders to be honest about this – should first consider how to improve the customer experience because tariffs will accelerate any decline (per the UBS report) as consumer prices increase.

2. Bring additional discipline to the buying process to ensure optimal outcomes

During Macy’s Q1 2019 earnings call last week, CEO, Jeff Gennette, talked about the impact of the tariffs to the business and how they are looking to manage the effects:

“[W]hat I’d say on that is that looking at all those categories and those brands that are included, it is hard to do the math to find a path that gets you to a place where you don’t have a customer impact…The bigger piece is really our negotiations with our national brand partners. And we’re very working very closely with them on the potential impact to our shared customers. So, at Macy’s fortunately we operate at a scale. We feel like we’re going to be able to come up with solutions that work best for us and our brand partners.”

While we have disagreed with some of the strategic decisions at Macy’s in the past, we believe that Mr. Gennette hits the nail on the head in terms of how to work through the impact of tariffs with suppliers.

Situational strategy: How to stop tariffs from tariff-ying your customers 1
Impact of tariffs will be felt among all three stakeholders in product merchandising

Bringing additional discipline to the buying process with vendors can curb the impact of tariffs and distribute the burden of increased prices across the three key stakeholders in retail: the customer, the retailer, and the supplier. We have seen small, dedicated teams – many times, third parties – have an outsized impact on these negotiations by supporting buyers with preparation via research, setting an aspirational but realistic narrative, as well as deploy the right tactics at the table.

3. Consider operational support in the short-term and retooling for the long-run

Many retailers have been preparing for months for the additional round of tariffs. We know of one retailer that had a dedicated team to understand the impact of the first round of tariffs in the fall which included building detailed financial models with decision trees to understand the financial ramifications. In that same vein, Laura Alber (CEO of Williams-Sonoma), noted in an interview this week that the company has adjusted its operations over the last year in anticipation of the new round of tariffs by hiring more US workers, along with renegotiating contracts with its suppliers.

While it would be our wish that all retail leaders foresaw this, like Mrs. Alber, many may not have planned for the latest round of increases. In such instances, creating a dedicated crack-team can help mitigate long-term missteps. A small team with the right skillset to analyze the cost impacts, help with vendor negotiations, and in the long-run, identify operational improvements is the most effective way to adjust course today. Negotiations with suppliers – as mentioned above – is a start but retailers also need to rethink their supply chain and how to shift internal operations such over the long-run to protect their interests as well as those of their customers. In many ways, the need to shift supply chain operations presents new opportunities such as considerations for sustainability. The latest round of tariffs will have implications for retailers and consumers, but also presents a significant opportunity for leaders to reshape their organizational operations to be better positioned for the future.

Interested in learning more about how you can turn the tariffs into an opportunity for your business? Shoot us a note at carlos@thenaviogroup.com for a free consultation.

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