After Trump imposed tariff changes in May 2019, the retail industry became threatened. Do you know how do tariffs affect companies inventory system? It is believed the amendments came as a result of the trade war between China and the US. When the war trade began, large retailers who had been performing well started witnessing a decrease in sales.
According to research, customer spending is faced by the uncertainty created by the changing tariffs. This uncertainty, also, has made full-price retailers challenged when planning inventories for recent and upcoming tariff changes. The inventory control struggle, however, could mean there is excess inventory in the market which benefits the off-price sector.
How Do Tariffs Affect Companies Inventory Management System
The war between the US and China began in 2018 when Trump imposed tariffs worth $34 billion of goods from China. As a result of this, Beijing imposed their own tariffs. Consequently, the agricultural sector was affected and 27.5 million tons of soybeans were not sold in the US due to the Tariff change.
The trade war has had many effects on the US economy than it has to China’s since the tariffs were imposed. According to a recent study meant to assess the effect of the trade war in the US, the tariffs have already passed the domestic prices and the cost has fallen on importers and domestic consumers instead of the intended foreign exporters.
It is, therefore, unsurprising that the news of further Tariff changes provoked a group of 600 retailers to go and warn President Donald Trump of the consequences they felt the tariffs would have on the US economy. Large retailers like Target Costco and Walmart wrote a letter noting:
“We know firsthand that the addition will have a significant, negative, and long-term impact on American businesses, families, farmers, and the US economy.”
“An escalated trade war is not in the country’s best interest, and both sides will lose.”
The Tariff which made these retailers concerned was implemented on 10th May 2019. On this date, Trump more than doubled the tariff rate on a third of Chinese imports. As a result of the change, $250 billion of shipments from China faced import taxes of 25% from the previous 10%. The newest tariff will impact a variety of products from beauty goods, food products textiles, metal, and electronics.
Impact on Full Price Retailers
On May 5, 2019, Trump tweeted and said “The tariffs paid to the USA have has little impact on product cost, mostly borne in China.” Since the last war trade, however, most companies that were in solid trajectories for the past few years started reposting a reduction in numbers.
An example is the Abercrombie & Fitch Co, sales growth which has been waning over the past few years but saw a 24% drop in the stock price immediately after announcing their quarterly sales in May. Michael Kores sales, on the other hand, fell by 1% in the last quarter as they were trying to clear the excess inventory. Since the decrease in revenue was unexpected the stock values were drastically impacted upon.
With the reduction of revenue and fall of stock prices, there is a prediction that product prices will have to increase. The chief financial officer at Costco, Richard Gallant, prices will have to go up on things even when everything is said and done.
The uncertain rise in costs presents large retailers with a new challenge of controlling their inventories. Businesses will have to evaluate their retail inventory management one more time so that they can account for tariff changes. Despite many companies stocking up on their products as they prepare for tariffs, there will be an overflow of excess stock on the retail market which will move quickly.
Impact on Off-Price Sector
Despite the traditional retail industry experiencing negative consequences due to the imposed tariffs, the market disruptions have been beneficial to off-price brands. The oversupply of inventory and rising prices in the market will force retailers to sell their excess stock to large value retailers like Walmart and off-price stores since, according to people, they will be offering better prices compared to their competitors.
Off-price retailers are also advantaged since they purchase most of their stocks from a range of more diverse countries. Burlington Stores, for example, imports one 6% of its products from China, and only 15% of those are imposed on tariffs.
Brands that want to stave off lower profit margins during such a period will have to optimize inventory control. An accurate forecast of sales can make a huge difference for a brand that does not want a boon of one industry to disadvantage them and one that anticipates tougher times ahead.
To efficiently achieve this, brands should leverage technology that can make an analysis of transaction and inventory data. The analysis can later be used to create an action plan which will give an estimate of how little, or much, supply is needed to fulfill demand. On occasions when brands have more than needed, the right technology will help sellers determine the most efficient and fastest way to recover working capital and move product.
At the moment, it is still early to make a verdict of whether the impact of the most recent tariff change will benefit value retailers or off-price retailers. We can, however, say they will be put in a power position as the increase in prices drive consumers to shops throughout the off-price channel.
Impact on Inventory Value
If your brand has a thousand pieces if product X in your inventory, the total price of that inventory is $1000; the one thousand pieces times the $1 purchase price. Notably, your inventory is not valued at its cost but also the total cost you paid to own it. When counting, import tariffs paid during the purchase are also counted. This is important since your company’s value is based on the value of your inventory as well as its intellectual property, brand value, and capital assets.
Tariffs are vital in driving sudden changes and inventory management in that the tariffs can have unintended consequences on inventory management.