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Tariff Threat Pushes Retailers Toward High Margin Goods

The retail industry is scrambling in preparation for the new merchandise tariffs, which will be implemented on Chinese goods starting Thursday. And although the apparel industry has largely been spared on the American side of tariff negotiations, some warn that the tariffs could deal a devastating blow to the U.S. economy and the retail sector will not be immune.

When the U.S. government announced the plan to hike up tariffs on Chinese goods from 10 percent to 25 percent, the Chinese government responded in kind, placing retaliatory tariffs on an equal amount of American imports—including products used to manufacture apparel such as cotton, yarn and assorted textiles.

In the meantime, the European Union has placed its own retaliatory tariffs on some U.S. goods like apparel and textiles, including T-shirts and jeans. Add to that, NAFTA negotiations are continuing to drag on under the constant threat that the U.S. could pull out entirely. Together, it means there are few safe sourcing channels for retailers to rely on.

Retailers who think they’ll be immune to the impact of recent merchandise tariffs have another thing coming. Ben Hackett, founder of maritime strategy and trade logistics consulting firm Hackett Associates, reports, “July 6 was the beginning of the United States’ trade war. There will be no winners, only losers—particularly consumers—as costs increase.”

In response, some retailers are revising their sourcing strategies. CB Flowers & Crafts manager Stephanie Gow, who exhibited at this month’s ASD Market Week trade show, reported that in the face of recent uncertainties about global trade, retailers need to source products that can be sold at a significant markup.

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“Given the recent taxes on imported goods, retailers need to source higher-margin products to offset these additional expenses and minimize the risk of unpredictable changes to future costs,” Gow said. “Sourcing higher-margin products removes the need to increase prices, helping to retain price-sensitive consumers and maintain customer loyalty.”

Brands across the spectrum are being impacted by the additional tariffs on Chinese merchandise, and footwear is not immune. However, footwear retailers face unique challenges when it comes to sourcing high-margin merchandise.

“Footwear brands tend not to have high margins,” said Kate Blake, owner and buyer at shoo. “You make your money off of brands and not no-name labels that people don’t know. If I could buy more of them [high-margin brands] I would, but most consumers want Sorel, Timberland, Birkenstock…and the mark-up on these brands is keystone.”

“Understandably, retailers are concerned about the recently imposed tariffs on goods coming in from other countries, especially goods imported from China and the EU, and how it will affect their profitability,” said Jonathan D Magasanik, co-founder of Gear Beast, a consumer electronics accessory company. “While retailers can’t control what is happening in the international trade arena, they can control what products they carry in their stores. Now more than ever it is important for retailers to have a good mix of low cost, high margin products to offset shrinking margins on other products in their store.”

Magasanik said it’s simple math: the greater the margin the more room a retailer has to absorb cost increases. In addition to looking for goods that provide that safety net, he advises retailers to also beef up their selection of impulse items to help increase basket size.

For some retailers looking to take action, they’re finding in-person trade shows are a key resource for gaining access to overstocks, over-runs and partnerships with a wide variety of overseas manufacturers that they wouldn’t otherwise encounter.

Jennifer Ramirez, buyer at De Janeiro stores, is finding that shows are allowing her to diversify her supplier base.

“Being an off-price buyer price means everything, especially in NYC,” she said. “Now with Chinese tariffs being implemented, I am left to wonder how I am to structure my business. Do I charge more for the same item that I have been running for years that my customer has come to know me for? I cannot afford to skimp on quality just for price, so I am now being forced to look for goods in new places.”

At this point, whether the present trade war will have far-reaching effects on the apparel retail sector is still speculative. However, for retailers facing an uncertain future in light of current economic discourse, retailers need to be more focused on margins than ever.