Tariffs Threaten Retailers’ Inventory Discipline

Proposed tariffs on Chinese goods are forcing retailers to buy early for the holidays to beat the tax but that could leave them with bloated inventories

By Elizabeth Winkler

Shoppers in a DSW shoe store in Herald Square in New York City. Retailers are weighing how much to buy for the upcoming holiday season in the wake of new tariffs proposed by President Donald Trump. Photo: Richard B. Levine/Zuma Press 

Consumers have months to decide what to buy for Christmas. Retailers are deciding now, so a new round of proposed tariffs on Chinese products couldn’t have come at a worse time.

President Donald Trump has threatened to put tariffs on $200 billion worth of Chinese imports. Retailers have a tough choice—order early to beat the penalties, which the White House says won’t take effect for at least two months, and run the risk of ending up with excess inventory. Or they can wait and risk paying the higher costs if the tariffs do go through. 
The tariffs, as announced, hit a range of consumer products, including luggage, handbags, baseball gloves, furniture, apparel, mattresses, electric lamps and components in telephones and flat panel displays.
Many companies have tried to tamp down anxiety by saying they have been reducing their exposure to China anyway. But they can only shift so much production, especially on short notice. Restoration Hardware , for example, has said 35% of its products are sourced from China.


China's share of total U.S. imports

Source: The Department of Commerce

Relocating supply chains is no easy or inexpensive task. It is certainly hard to imagine it happening in time for the holiday-order rush. Retailers appear to be placing orders early to get them through customs before tariffs hit. “Shippers are definitely shipping early to beat the tariffs,” says an Asia-based shipping-industry executive.

But that carries risks. The biggest is that they lose control of their inventory and wind up with too much on the shelves. That would bring back bad memories of 2015 and 2016, when too many unsold goods forced them to offer steep discounts during the holiday season.

After lots of hard work, retailers kept inventory tighter during the 2017 holiday season and stronger profits followed.

If retailers decide instead to wait and see whether tariffs actually take effect, they will either pass on the higher prices to consumers or eat the cost with lower margins. The effect on retailers won’t be the same across the board, says Simeon Siegel, a retail analyst at Nomura Securities. Some retailers have been raising prices anyway. But those selling mass, lower-priced goods, like Walmart , Kohl’s , and Macy’s , will have a harder time.

Just when retailers thought they had figured things out, Mr. Trump may send them spiraling again.

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