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Trade Uncertainty Gives Back-To-School a Rattle

Back-to-school may be the next season rife with uncertainty thanks to the trade fallout.

While President Trump has tabled the latest round of apparel tariffs, manufacturers and retailers of the already price-sensitive children’s wear category are monitoring the truce with caution and taking what steps they can to mitigate potential impacts.

Not one of the children’s apparel executives Sourcing Journal spoke with expressed certainty that this was the end of the saga, although some chose to remain optimistic.

“Our president is the type of person who portrays the fact that he made a good deal,” Eric Adjmi, CEO of Beluga division at Adjmi Apparel, said to Sourcing Journal following the meeting between Trump and China’s President Xi Jinping at the G-20 Summit last month. “With his re-election looming, he was going to want to portray that he cut a deal and didn’t screw the American public, and it was in China’s interest to make nice as well.”

This ambiguity is motivating some retailers to stock up on inventory, said Carol Lapidus, partner and national leader, consumer products industry, at RSM US, an audit, tax and consultancy firm.

“But they can only carry so much,” she noted. “The early purchasing is putting a strain on their cash flow, and in many cases affecting debt levels. They are betting on consumers to shop sooner rather than later for back-to-school purchases to minimize the financial effect of their early inventory buys.”

Other retailers are taking a wait-and-see approach, said Adjmi, which manages private brands for several retailers. “I know some [retailers] have made a 100 percent shift out of China in their direct imports, and I know another retailer that has not moved product and was crossing its fingers.”

It’s the most savvy companies, however, that are taking a multi-pronged approach, said Lapidus, by seeking price cuts from their China suppliers, diversifying their sourcing outside of China, and revisiting their supply chain and logistic costs to see where cuts can be made.

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“Walmart is asking suppliers to submit cost differences,” she said, “so they are prepping for increases in prices from their suppliers.”

And even if the new tariffs never see the light of day, the industry can thank the Butterfly Effect for the consequences already put in motion. Abe Mamiye, global sourcing VP at Mamiye Brothers, said that in searching for alternatives to China in Bangladesh, Indonesia, El Salvador and Cambodia, the apparel manufacturer had renewed old relationships and uncovered opportunities with needlework that were more advantageous than being in China, even without additional tariffs.

Much debate surrounds the threshold at which companies will stop absorbing a cost increase and pass it along to the consumer; as expected, most of the executives we spoke with envisioned a much different situation should a 10 percent tariff be enacted vs. one that’s 25 percent.

“If the tariffs on the fourth list are enacted at 25 percent, the consumer will have to pay a portion of the increase, sharing the cost with the retailer, supplier and factory,” said Lapidus. “If they are passed at 10 percent, we may not see increased prices for the consumer.”

But, noting that there’s no definitive line, consumers could still potentially see price increases from fashion brands with their own retail locations that buy directly from Chinese factories.

Mamiye anticipated his company would likely still do a great deal of business in China and would be able to sustain 10 percent tariffs. At 25 percent, however, it would create a lot of disruption to retail pricing—and not just for goods coming out of China thanks to a potential mass migration. “I think the pricing in other countries would climb substantially,” he said.

“You can’t necessarily pass [costs] along,” Adjmi noted, citing competition in the market. “I know importers like myself—in different categories of business—that were hit by the first wave of tariff increase. They were a Walmart vendor, and Walmart was not going to pay an increase in the cost of goods. Their supplier got hit with additional tariffs because there would always be someone behind them that would take the business at a loss or break-even to win the business when the tariffs issue was settled.”

While he declined to provide a specific figure, Maimye said his company negotiated partnership agreements with its China suppliers to share in costs—negating the need to pass them along to the consumer and avoiding supply chain disruption.

“It takes time to build new vendors—you can’t move everything overnight. It doesn’t work that way,” he said. “So instead of doing that, [we said] let’s work together in the event that there are tariffs, and let’s come up with some kind of formula to share in the costs.”