Tariffs Insights every Retail Supplier must Hear!

In this episode of The Savvy Supplier, HRG CEO Boyd Evert and Al Frank discuss the current landscape of tariffs and their implications for suppliers. They explore the shared burden of tariffs among suppliers, retailers, and consumers, and the challenges of forecasting in an uncertain environment. The conversation delves into pricing strategies, inventory management, and the vulnerabilities of supply chains, particularly in consumer electronics. Boyd offers practical advice for suppliers on how to navigate these challenges and emphasizes the importance of communication and partnership with retailers.

Takeaways

• Suppliers, retailers, and consumers will share the burden of tariffs.
• Forecasting is challenging due to the unpredictability of tariffs.
• Pricing changes are risky in the current market.
• Overstocking can lead to significant losses for suppliers.
• Communication with retailers is crucial during volatile times.
• Consumer electronics are particularly vulnerable to supply chain issues.
• Suppliers should explore alternative sourcing options.
• Understanding product components can help mitigate risks.
• Building relationships with retailers can lead to better outcomes.
• Ongoing conversations are more effective than one-time notifications.

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"Wiser Decisions, Fewer Deductions"

Transcript

Tariffs. What suppliers need to know today about the impact of tariffs tomorrow on this episode of the Savvy Supplier. Welcome into the Savvy Supplier where we save you time and money. I'm Al Frank and as always, I'm here with Boyd Evert the CEO and co-founder of HRG. Boyd has decades of experience helping suppliers of all sizes, including Fortune 500s. And Boyd...

This is a good time to get your help because we all know that the stock market doesn't like uncertainty, but retail suppliers might like uncertainty even less, right?

Yeah, this is we live in a very, very uncertain age right now and suppliers, retailers, well, even consumers don't like any sort of uncertainty or mystery in their lives. and I think that this is a difficult time in which you to be a supplier today.

Well, let's start off with this. mean, ultimately, who's going to pay this cost as burden of tariffs? Will it be a shared burden or will that fall mostly the consumers, retailers or suppliers or some combination of the three?

It's a great question. mean, right now it remains to be seen, but I imagine where it will land is somewhere where all three will be sharing in that cost. To me, I can't imagine the consumer not bearing the lion's share of that. Because if you're either a retailer or a supplier, your choice is either passing it entirely onto the consumer and thus reducing demand because as prices go up, the demand drops. Or if you try to eat too much of that tariff,

Boyd Evert (01:44.162)
then your profitability goes down. So your P&L goes into the tank. So there's really no good choice here. So everyone is going to have to find out according to their business, how much do they want to pass on to the consumer? How much can that company push down to their take off their P&L and adjust it accordingly? But it's I think this is going to be probably a constantly changing moving target as we move forward.

Speaking of moving target, if you are trying to do some forecasting, I mean, the problem of forecasting right now for suppliers is how do you do it when you don't know the size and scope of tariffs around the corner? What should they do?

Yeah, that's an excellent question. typically forecasting you already know because you've had previous years of experience. So for example, forecasting an event, let's just say a temporary price reduction, rollback, whatever. You already know from previous years doing promotions of similar items during similar times of the year, you drop your price by

but say high single digits and you expect a lift in sales people to buy more of that product. Let's say again, high single digits, maybe low double digits lift in sales. And so then you, you, you can decide whether or not that event would be profitable to run it again in the current year. We have no baseline for what we're experiencing now. We've had tariffs in the past, but nothing

as sudden and as large as these tariffs that we're seeing right now being floated and actually in place So I we are in uncharted territory. I think The supplier community and the vendor community for for different retailers are all staring the same situation in the face Is we have no historic analog that we can look to or appeal to to say well, this will be like that It's not and so there's going to be a lot of uncertainty. I think going into

Boyd Evert (03:45.56)
going forward this year.

You know, another big uncertainty right now for suppliers is pricing. Many consumers are cutting back on spending at the moment, maybe putting some of those non-essential buys on hold. When a supplier is trying to figure out pricing at the moment, is it a good time to ask for a pricing change or is that a risky thing at this point?

It's extremely risky because the lion's share of items that are out there in the marketplace, there's elasticity to the price, meaning that the higher the price is, the demand is impacted. So you're looking at a situation where they don't know where the tipping point is in passing on a price increase, which won't impact negatively.

more in the direction of demand, right? So you've also got inventory right now out there that's already been pushed out. We're heading and we're getting ready to head into the summertime. And so there may be already some, some items that have been, or maybe on the water right now from importers where they're going to be coming into a situation where they're sitting on inventory, inventory, excuse me, where they're sitting on inventory and where they're looking to say,

How are we going to sell through this? Right. And so even with items that are in stock at the stores, let's say like TVs or household appliances, there's typically promotions throughout the year. And if you're sitting on that inventory and it's a larger ticket item, let's say it's a let's say your TV is starting to go out in this situation, you might be weighing it. Well, we might want to just buy that bigger ticket item or buy that automobile or what have you.

Boyd Evert (05:32.15)
because people are going to say, I don't know if it's going to be twice the cost. Whereas I think the mid-size to smaller items, you might have more, you might have more, you might have more consumers sitting on the sidelines waiting to see how it plays out because these are items that would be nice to have, but they don't really don't need them. But it's those other items where again, like a kitchen blender or whatever that it's maybe

they're deciding whether or not they want to spend that extra money. They may do that before the tariffs take place, I'm sorry, before the tariffs hit and suddenly now they're faced with a blender that's maybe 30, 40 % higher than they anticipated. there's so many variables here. It's very difficult to see.

past next week where the pricing is going to be and also where the forecasting is going to land.

Well, that makes me wonder if you think that suppliers might simply back out on orders if they have concerns that they're going to lose money if they fulfill their agreement or not.

Right, and that's two different strategies right now are the retailers are going to be more cautious and they're going to pump the brakes and say we're not going to run as many promotions. We want to be cautious. And then there's there's always the brinksmanship that takes place sometimes within a retailer itself or sometimes within certain categories. And sometimes if you've been driven by the nature of the buyer, the buyer might be more risk taking, in which case.

Boyd Evert (07:10.862)
We've seen this in the past where there's let's in 2017 there were some components, electronic components that were short and was forcing the price up on consumer electronics. And it was a situation normally in electronics, you start out at one price and there's a series of price declines until the end of the life of that product. And then another product's rolled out. Rarely do they go up and they only go up when you have shortages like components.

Well, in that situation, it will change the dynamic, right? So in the, in 2017, I remember working with some consumer electronics companies where they were sorting through what is the right amount, right? And in one case that the buyer was pushing, I ordered this number of items and I expect to get those items at this cost. And so even though the, the, supplier was communicating that we can't build that

that that TV or that item for that that cost that we quoted you. And so there's some brinksmanship where I could see in this case in this environment, where the buyer would let the product get on the water and not have any conversations or maybe just vague conversations until it hits hits the dock and they're unloading it and the tariffs kick in. Then they might say, well, if in order for us to receive that order, you know, you're going to have to take half of that tariff or three quarters.

So I can see that as being one strategy, the other strategy would be starting to cut orders, but we're seeing both right now. We're seeing some orders being cut. We're seeing others where they're saying, no, we're fine. We're going to continue with those orders that we've placed.

Well, obviously there's going to be some supply chain challenges at the moment and maybe the for the near future. Do you think suppliers should be concerned about overstocking at all? And if so, how can they go about pumping the brakes?

Boyd Evert (09:07.0)
Great question. that that's sort of a great question that ties in with forecasting. So the reason you do forecasting is you don't want to have a lot of remnant inventory after a promotion, particularly if you don't have a home for it on the shelf. And so if you push in a lot of product and you don't have the sell through, you are going to own those those clearance items and those markdown items. Every retailer has their own strategy, but

Almost all of them rely heavily on the supplier funding it. So for example, if you are giving a lower cost to an item, expecting a lift in sales, meaning more quantities being sold during that event, and you don't get that lift, one, the event hasn't been as profitable for you, but two, you are now going to have to pay for those markdowns and clearance items

where you've already given them a deep discount. And so you can see, I could easily envision where some suppliers for certain items are going to be upside down, where they have taken a loss on those items. A few years ago, we were dealing with a supplier that was in a warehouse club situation where the previous buyer had pushed in, deliberately pushed in more pallets of items than the

supplier wanted and then the supplier was cautioning the buyer say you know we don't think this these these warehouses or these clubs really merit that that heavy of inventory but they insisted then that buyer left the retailer new buyer comes in and and says no i i'm sure you convinced the previous buyer to push in all that inventory so now we're going to have you fund all of these clearance items

And if you don't play the loaded gun that's on the table in this situation is if you don't take it, if you don't give us funding, we're going to force you to take this back, the returns, which is always expensive and always painful. So that's how they have the supplier over the barrel in those situations where you're having inventory, right? And just to look at the other side of the coin.

Boyd Evert (11:29.646)
The retailer is also looking at the situation. We don't want you to give us a projection, give us a forecast for an item where we're stuck with all this inventory. We don't have a home for it, right? So you need to partner with us to get rid of it. So, I mean, there's two sides to, you know, to every story. So I don't want to just say that this is just a one-sided problem with the supplier. It's a problem for the retailer as well. And that's why these things are always negotiated. But in this situation, in this environment,

These negotiations are really difficult because we are really in uncharted waters.

probably have some suppliers right now who rely in some way on China manufacturing there, whether in full or in part. And they're vulnerable right now, aren't they? What industries do you think are probably the most vulnerable and are there any adjustments they can make right now?

Great question. Obviously consumer electronics simply because a lot of the chips are made in China, Taiwan and South Korea and that whole area. And there's only so much the other countries can absorb that aren't ;absorbing the work that's already done in China. But you also have to think of it from a component standpoint. Getting back to the 2017 shortage of chips,

Part of that was driven by the uptick in electric vehicles, right? And I think Tesla was one of them that was creating this demand and suddenly there wasn't enough chips to build the TVs out, right? So I would say that obviously the consumer electronics, then there's going to be kitchen appliances that are going to be impacted. There's going to be, well, automotive as well, right? Because there's a lot of computer parts, right? But then also too, clothing, right? Footwear.

Boyd Evert (13:16.398)
These are things where it is not easy for a company to spin up a new facility to build these things. And China has been so optimized to take this workload off of companies that it's going to be hard to replace that. So it's really the big unknown here is I'm sure there's people that are involved in the selling of this merchandise and the purchasing of the merchandise. They don't know what's inside each item. They don't know what's inside each product.

the obvious things like shoes and t-shirts and clothing. That's pretty easy to understand. once you get into other items where, for example, one of our clients during COVID, they were able to really work with the supply chain and get the ingredients to make the product that they were selling.

But the one thing they were missing was labels. You would think, now that's going to be a slam dunk. No, because the ink that was needed to make the labels for the branding and the colors for that label, that was sourced out of one of the countries where they had a lockdown. So sometimes you won't know until the problem is presenting itself. And so I think maybe one of the things I would encourage

suppliers to do as well as retailers is to try to get a better line of sight into, you know, where, where are the, where the, where the, ingredients, the parts, what have you that, that make up your product and try to anticipate where there might be some shortages and try to start looking at alternate means of sourcing.

We probably have decision makers at various suppliers listening. Can you speak directly to them a little bit here? They're trying to make decisions right now with not having all the facts, obviously. Any advice to them about how they should go about their business?

Boyd Evert (15:22.016)
Well, the first thing I would tell them is to communicate to the retailers and resellers of their product that given the advent of tariffs, that there will be price increases coming along that wouldn't be easily anticipated, much less the 60 day notification that most retailers have. So one is to communicate the volatility is coming 2 maybe also part of that communication could be we

don't want to pass on price increases because it's going to reduce the demand for the product. So we want to partner with you to find ways in which we can go to market strategically as partners and figure out a way that we can pass on the lowest possible cost to the consumer, right? And the means of a partnership, right? There's sharing of information. And I think a lot of times when

when you enter into those agreements and helping your customer understand your customer, meaning the retailer in this case, understand some of the demands that are going to be placed on you. And as they evolve is to be able to continue to have that conversation. So I think it's going to be more of an ongoing conversation versus typically what suppliers have done in the past is they have a form letter. They push out, here's the stated terms and conditions of, of, of

for this current year, this is our position on X. It's really gonna need to be almost an ongoing conversation and trying to build that relationship to have those conversations.

Well, thank you, Boyd This has been great. You've given a lot of great advice and a very timely topic to talk about with tariffs today. And I'd like to remind suppliers that the experts at HRG are able to take a look at your particular situation and to help you get a clearer picture of what you need to do right now to prevent invalid deductions later on. So let me share a couple of easy ways for you to contact us. You can go to the HRG website.

Al Frank (17:32.686)
at HRG-Audit.com. That's HRG-Audit.com. Or you can call HRG at 479-616-1600. Or you can email us if you prefer at info at HRG-Audit.com. All these ways to contact us are there in the show notes for you. So don't hesitate to reach out to HRG to schedule a free call. It's a crucial time for you, we know. But HRG is here to help you.

Our wish for you is this, wiser decisions, fewer deductions. See you next time on The Savvy Supplier.