trending Market Intelligence /marketintelligence/en/news-insights/trending/MxmWGhXPTVw8u4LLT-eMlw2 content esgSubNav
Log in to other products

 /


Looking for more?

Contact Us
In This List

Experts: Retailers risk losing sales if they hike prices to offset tariffs

Video

Climate Credit Analytics: Linking climate scenarios to financial impacts

Blog

What’s next in Cloud?

Blog

Global M&A Infographic Q1 2021

Blog

COVID-19 Impact & Recovery: Private Equity


Experts: Retailers risk losing sales if they hike prices to offset tariffs

Retailers' sales could take a hit if they raise their prices to offset higher tariffs on Chinese imports, according to industry experts.

Several retailers have warned that they may need to hike prices as they absorb the higher cost of imported goods. But some companies are better positioned than others to withstand the risk of losing some of their business, experts said. Large-scale market leaders like Walmart Inc. are expected to fare better than retailers who are already struggling to stay competitive, such as J. C. Penney Co. Inc., they argued. Meanwhile, off-price retailers such as The TJX Companies Inc. and Ross Stores Inc. are already eyeing ways they can capitalize off the situation by gaining new customers or snapping up other retailers' unsold merchandise.

"The more vulnerable retailers are going to be hit sort of disproportionately. Walmart imports a lot from China but … they have a strong balance sheet, they have great leverage over their supply community, they can weather this much better than somebody like J.C. Penney who is struggling for survival right now," said Neil Stern a senior partner at McMillan Doolittle. He said that tariffs put into effect over the summer would hit retailers in the fourth quarter, comprising the critical holiday shopping season.

The U.S. raised tariffs on $200 billion worth of Chinese imports to 25% from 10% as of May 10. The U.S. has threatened to implement 25% tariff on another $300 billion worth of Chinese imports, including footwear and apparel.

SNL Image

The Footwear Distributors & Retailers of America estimates that this most recent round of proposed tariffs will add $7 billion in additional costs for its customers every single year, according to a May 20 letter footwear companies and retailers including NIKE Inc. and adidas AG sent to President Trump.

Johan Gott, a principal with A.T. Kearney in the consumer goods and retail practice, said the tariff hikes are forcing retailers to raise their prices, which will likely affect their top-line performance.

"Retailers will have no choice but to pass those costs onto the consumer. I think it's a good assumption that it will reduce sales … some consumers will choose to buy less or buy something different," Gott told S&P Global Market Intelligence.

McMillan Doolittle's Stern said the U.S. economy is currently strong enough to absorb some of the impacts of the new tariffs, but he expressed caution about a potential economic slowdown in the future.

"The biggest concern is right now the U.S. economy is doing very well and in a sense, we can absorb some of the tariffs … but if the economy slows down then it will have a ripple effect that hits retail sales," Stern said in an interview.

Underperforming retailers face considerable challenges

Stern said J.C. Penney, Kohl's Corp. and Nordstrom Inc. are some of the retailers most vulnerable to the tariff hike.

During a May 21 call with analysts discussing the retailer’s worse-than-expected fiscal first-quarter loss, J.C. Penney's CEO Jill Soltau said the retailer expects "a more meaningful impact on both [its] private and national brands if the potential fourth tranche of tariffs does go into effect on all Chinese imports." J.C. Penney's net sales dropped 5.6% and comparable sales fell 5.5% year over year in its first quarter of fiscal 2019.

Kohl's on May 21 reported fiscal first-quarter earnings that fell below analysts' expectations and cited increased costs from tariffs as one of the reasons for lowering its fiscal 2019 outlook. Kohl's comparable sales dropped 3.4% in the first quarter of fiscal 2019.

Similarly, Nordstrom's fiscal first-quarter earnings came in below expectations, as its net sales declined 3.5% according to its May 21 earnings release.

Kohl's, J.C. Penney and Nordstrom did not immediately respond to S&P Global Market Intelligence's requests for comment.

Finding ways to cope

Meanwhile, retailers are making various attempts to mitigate the impact of higher tariffs.

SNL Image

On their latest earnings calls, J.C. Penney and Macy's Inc. said they will continue to diversify where they source for products, a process they have been working on for a couple of years.

To offset the impact of existing tariffs, Target Corp., which gets 94% of its imports from China, has reduced its imports of some items from the country. In the three months to April 30, the retailer reduced its imports of furniture by 5.3% year over year and electrical items by 14.9% year over year, according to research by Panjiva, a division of S&P Global Market Intelligence. Apparel makes up 10.3% of the retailer's total imports from China and has remained unchanged year over year, according to the research.

David Zoba, chairman of Global Retail Leasing Board at JLL, said before tariffs came into the picture, retailers were already looking to shift their product sourcing to other countries as labor costs in China grew.

"That process started three or four years ago when China just started to creep up in terms of expense," Zoba said in an interview. He noted that some of China's customers were already starting to look for other sourcing solutions. "I think [the tariffs] will hasten that effect to [China's] detriment," he said.

'Silver lining' for off-price retailers

Some retailers raising prices may lose customers, but off-price merchants are looking at higher tariffs as a business opportunity.

TJX Companies' CEO Ernie Herrman said higher prices at full-price stores could actually benefit his company, which owns the T.J. Maxx and Marshall's banners.

Consumers "looking for better value" on certain product categories could choose to shop at TJX's stores, he said on a May 21 earnings call. He said tariffs could also create sourcing opportunities for off-price retailers.

"Historically, disruptions in the marketplace have created off-price buying opportunities for us," Herrman said.

On a May 23 call with analysts, Michael Hartshorn, Ross Stores' CFO, principal accounting officer and group executive vice president of finance and legal, made similar statements about the potentially positive impact of tariffs for his company.

"The silver lining is we have a flexible business model and can react to the price increases, and disruptions like this historically meant supply opportunities for off-price," Hartshorn said.