Now that the U.S. has instituted broad tariffs worldwide, businesses will be forced to adjust – but the options to cope with the greater-than-expected levies are limited and unpalatable for companies and their customers.
Reuters
U.S. President Donald Trump ramped up his trade war against the globe on Wednesday with tariff rates ranging from 10% to nearly 50%, depending on the country, in a move economists warned would raise costs, threaten jobs, slow growth and isolate the United States from a system of global trade it pioneered and furthered over several decades. Trump says the levies will bring jobs back to the United States – but executives in the immediate aftermath were focused on possibly raising prices, reducing shipments to the world’s largest economy, or just cutting back investment activity outright.
“This is how you sabotage the world’s economic engine while claiming to supercharge it,” said Nigel Green, CEO of global financial advisory deVere Group. “The reality is stark: these tariffs will push prices higher on thousands of everyday goods – from phones to food – and that will fuel inflation at a time when it is already uncomfortably persistent.”
Trump sees tariffs as a way of protecting the domestic economy from unfair global competition and a bargaining chip for better terms for the U.S.
The most common method of dealing with tariffs is to raise prices, passing along the cost to customers for as long as they can stand it. Other companies may try to diversify supply chains, but Trump’s reciprocal 34% tariff on China was accompanied by 46% and 49% tariffs on Vietnam and Cambodia, respectively – all Asian countries where companies had been shifting output.
The effect could be to boost the price of retail goods, evident in the aftermath of the announcement, when retailing giants like Walmart and Target both lost more than 6% in post-market trading, while specialty names like Lululemon dropped more than 10%. Target and Best Buy have warned they will have to raise prices, but their margins are more likely to be squeezed, and Target and Walmart have been trying to negotiate with Chinese suppliers already dealing with a slowed economy.
“The first thing right now – and everyone is doing this – is we’re sending letters to announce we’re going to do price increases,” said Bill Canady, CEO of Arrowhead Engineered Products, a U.S. maker of replacement parts, ahead of the tariff announcement. He said the company is also working with Asian suppliers to see if they will take some of the cost.
Some European companies that primarily serve higher-income consumers were already planning on raising prices even before the 20% tariffs that European Union nations will face. Italian premium coffee maker Illycaffe and Ferrari have both said they will boost prices, something that well-heeled buyers of sports cars can more easily absorb.
The White House says tariffs will encourage more on-shoring, similar to the revamped USMCA trade deal Trump signed during his first term that encouraged manufacturing activity to shift away from China to Mexico or Canada. German fan and motor maker ebm-papst, for example, is currently deciding whether to build a third production plant or expand its existing site in Tennessee. The group’s CEO, Klaus Geissdoerfer, said he had initially thought of a new plant in Mexico, but “some are saying, ‘maybe it’s better to go to the USA after all because we’ll have to pay customs duty in Mexico’.”
Still, some importers may elect not to bring goods to the United States because of the tariffs. The United States is a major importer of automobiles from South Korea, Japan, Germany and other traditional allies as well as high-value technology goods. “The reciprocal tariffs are going to make it fiscally irresponsible for most importers to keep bringing into the U.S.,” said Erik Rosica, sales supervisor at freight logistics company OEC Group New York. “These companies would have to pass on a major cost increase to consumers to make it feasible which, frankly, consumers might not be willing to pay.”
The most severe risk, according to executives interviewed by Reuters, is that businesses will pull back from spending due to uncertainty. Several executives said they had spent the last few months accelerating purchases to bring inventories into the United States from overseas. Automakers, aerospace companies, retailers and industrial names all increased imports – which ballooned the U.S. goods trade deficit to a record $157 billion in January – in advance of the tariffs. Now, they are more likely to hold off on spending plans.
“They’re going to batten down the hatches, not invest, don’t do any deals, and take out costs to try to get ahead of the coming economic whatever-it-is-going-to-be – malaise, or it could be a recession,” said Bill George, former CEO of Medtronic and executive fellow at Harvard Business School.
With Christmas, Valentine’s, Mother’s Day and Eid al-Fitr now in (or almost in) the rearview mirror, the next big spending season in the UK is Easter and GlobalData believes Britain will spend £2.3 billion on celebrating it this year.
Photo: Pexels
That’s based on its research that shows over 40% of UK Easter shoppers have reported that they intend to spend more this year. And with Easter falling on 20 April, three weeks later than last year, retailers should prepare for more outdoor celebrations than last year, even though it looks like the current spell of sunny weather might not last into the four-day weekend.
The analytics company said shoppers are planning to spend an average of £124.75, which is £12.35 more than last year. Food & drink and gifting are expected to dominate spending, accounting for over 70% of shoppers’ Easter budgets.
Unfortunately, it didn’t break down its prediction for gifting spend. But it said that purchases of luxury Easter eggs will boost gifting sales, with 46% of Easter gifting shoppers planning to buy these items this year.
Aliyah Siddika, associate retail analyst at at GlobalData, said the appeal of luxury Easter eggs really does seem to be growing and called out M&S as one retailer making the most of them.
And of course, one key point to remember is that such items tend to be bought in-store more than online and getting consumers into shops is the battle almost won when it comes to getting them to look at other products on offer.
It may be part of the giant Capri Holdings that reports results quarterly but we rarely hear about Michael Kors’ specific UK performance so the filing of its accounts for the year to March 2024 is certainly illuminating.
Turnover dropped to £70.85 million from £77.17 million and gross profit fell to £23 million from £28.6 million. Operating profit narrowed sharply to £4.96 million from £31.6 million but profit before tax increased to £61.18 million from £40.45 million. And net profit for the financial year rose to £66 million from £39.7 million.
Of course, this doesn’t represent the full picture for the brand in the UK. The business operates as a limited risk distributor for the parent brand on behalf of the MK group under the intercompany distribution agreement with Michael Kors (Switzerland) GmbH. As such, the company is primarily focused on sales and marketing activities while the commercial risks are borne by the Swiss company. Operating expenses are reimbursed based on a mark-up percentage indexed to net sales. Funding and liquidity needed for operating cost is also provided by the Swiss entity.
The UK firm’s drop in revenue came as the cost of living crisis impacted consumer enthusiasm for spending. The company also focused on store consolidation. It planned the shuttering of its concession in London’s Harvey Nichols as well as shops in Newcastle, Milton Keynes and Manchester to take place in the current financial year, as well as closing its Regent Street pop-up while waiting for its relocation to new nearby premises. Its new flagship is planned to open this summer.
As a result, it expects sales for the current year (FY25) to fall by 20%. Additionally, prices are expected to come down in the foreseeable future “in order to better meet consumers’ demand and counter competitors’ strategies on the market”.
The company said that at the same time as it’s consolidating its retail network it has been expanding its e-commerce business and both of these activities will continue in the future with a focus on driving profitability.
The business continues to be a profitable one in Britain even though the company expects consumer spending to carry on being impacted by general macro economic conditions.
The results came several months after fellow Capri holdings business Versace UK had filed its figures for the same period and it too saw turnover falling, in this case from £23.8 million to £19.2 million. Its profit before tax narrowed to just under £113,000 from almost £315,000 although the fall in net profit was smaller. The figure dropped to £382,397 from £398,777.
Rixo’s accounts for the year to last June have just been filed and they show an interruption to the buoyant sales performance it had seen in the previous financial year.
Rixo
For 2023/24, revenue dipped to £18.7 million from £19 million in what the company said was an “uncertain market with subdued consumer spending in a period of difficult trading conditions”.
In the 2022/23 year, the retailer had seen sales growth almost in double digits. Admittedly, it was the first full year without a Covid impact but a sales rise of 9.1% was still impressive.
Gross profit this time dropped to £13.8 million from £14 million and operating profit was down to just over £303,000 from £2.3 million a year earlier. Profit before tax also dropped sharply to £391,000 from £2.3 million and net income for the year was just £251,000, down from £1.8 million.
The company’s administrative expenses also increased from £9.2 million in the previous financial year to £11.2 million this time.
But the fact that profit fell and its admin expenses jumped sharply is a reflection of the company’s investment in future growth. In the year, it said it continued to build brand awareness by investment in digital and brand marketing alongside opening stores. And that’s what drove the short-term reduction in its profits.
Rixo, which celebrates his 10th anniversary this year has built a strong vintage-inspired contemporary women’s world business selling through both wholesale and its own retail stores plus its webstore.
The company, which recently entered homewares, said it has extended the lease on its Marylebone High Street Store but took the decision to close it temporarily to undertake an extensive refurbishment with the goal of enhancing the in-store experience for its customers. That’s an important location and the closure would also have acted as a sales suppressor.
It’s also continuing to focus on its business beyond those who can get to its London stores and that includes investing in its online platform and in wholesale. It has set up subsidiaries in the US and in Ireland to open new stores and develop the wholesale operations further. During the year a store was opened in New York as part of this investment plan and only last month it signed a lease for a unit in Ireland’s Kildare Village.
Profits at the business had fallen in the 202/23 year too — despite the strong sales jump — and for the same reason as this time with the company investing heavily in the growth that should set it up for stronger profits several years down the line. Those investments had included opening stores on London’s King’s Road in Chelsea and on Carnaby Street in the West End.
Entertainment8 years ago