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Behind the Numbers: an EMARKETER Podcast
Reimagining Retail: The Impact of Tariffs on Retailers – What to Expect & How to Prepare
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- [00:02]
Sara Lebo
Hello, listeners. Today is Wednesday, March 5th. Welcome to behind the Reimagining Retail Emarketer podcast. This is the show where we talk about how retail collides with every part of our lives. I'm your host, Sara Lebo. Today's episode topic is Tariffs impact on retail in the US and abroad. Before we jump into that incredibly simple topic, let's meet today's guests. We've got some new ones on the podcast today, at least for the retail podcast. Joining me for this episode, we have retail podcast regular Rachel Wolf. Hey, Rachel.
- [00:41]
Rachel Wolf
Hey. Great to be back.
- [00:43]
Sara Lebo
Great to have you. And then with us, we have some folks from our international desks. So we have our analyst who covers Latin American retail content, Matteo Cervels. Hi, Mateo.
- [00:54]
Matteo Cervels
Hey, Sarah. Great to be here for the first time, actually, on this part.
- [00:57]
Sara Lebo
Yeah, great to have you. And then an analyst who covers content on our Canadian desk, it's Paul Briggs. Hey, Paul.
- [01:03]
Paul Briggs
Hey, Sarah. I think this is actually my second time in the podcast.
- [01:07]
Sara Lebo
You, me and Susie talked Canada a while ago.
- [01:10]
Paul Briggs
That's right. So it's good to be back.
- [01:11]
Sara Lebo
Great to have you. Okay, so today we're focused on tariffs. We are recording this on Monday, March 3rd. So tariffs on Mexico and Canada will theoretically go into effect tomorrow. That said, President Trump is speaking to Congress tomorrow, so he may be making some changes to that date. We don't actually know what will happen as a result. Still, retailers need to be prepared for tariffs to go into effect. So we'll be discussing some potential outcomes despite or perhaps because of the uncertainty. With that out of the way, let's get into a quick civics class. Rachel, for the US Perspective, can you give us a quick lowdown on what a tariff is and what Trump's proposed tariffs are?
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Rachel Wolf
Sure. So at the most basic level, a tariff is a tax on imported goods.
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Sara Lebo
Right.
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Rachel Wolf
And it's usually paid by the company that's doing the importing. So at the moment, and as we said, this could change at any time, the proposed tariffs are a 25% tariff on all imports from Mexico and Canada and an additional 10% on Chinese goods. And that's on top of 10% that's already gone into effect last month. And that's sort of, I guess, the beginning. You also have a proposed 25% tariff on all EU imports. There is a 25% tariff on steel, aluminum imports from. And that's for all countries. So there's a lot happening tariff wise.
- [02:37]
Matteo Cervels
And even with that, just if that wasn't confusing enough, then we also have Trump is also floating some policy to treat the value added taxes. So VAT taxes, like tariffs. So that he's arguing that, you know, they act as like a, a sort of indirect barrier on US exports, but that'll have implications for more than 175 countries around the world that actually have VAT taxes. So just to add another layer of complex complexity to this already complex environment.
- [03:06]
Paul Briggs
We'Re in, let me add another layer. I have, folks. So I think what we're. One of the other areas of uncertainty is the, is it going to be a sliding scale of percentages over time? Right. So it could start at 25% and if certain conditions are met by the countries, it might slide lower over time based on increased border security or what have you. So there's a lot potentially at play and it could change over time. I think it'll be an administrative nightmare for a lot of border agencies in terms of determining what the actual tariff application will be on on certain goods and what the reciprocal conditions might be as well.
- [03:45]
Sara Lebo
Yeah. I think it's my turn to add one more layer there, which is the reciprocal tariffs. That's our UNO reverse of tariffs. So once the U.S. if the U.S. implements tariffs on goods coming in from these countries, we will likely or perhaps certainly see tariffs on US Goods going into other countries as well.
- [04:02]
Paul Briggs
Yeah. And Canada has announced that it will match those, those reciprocal tariff or enact reciprocal tariffs at the same level and across many of the same goods and services. So that just becomes a trade war and it's probably puts a lot of pressure on economic performance.
- [04:19]
Sara Lebo
Yeah. All of this is to say the globalized supply chain we've got right now is about to get a lot more expensive, but we don't actually know when it's going to get more expensive. Maybe at the time of this podcast we'll have some idea. But why is it so hard to plan for these tariffs right now?
- [04:34]
Rachel Wolf
I think it's just that nobody knows what's going to happen and when. I mean, we've already had a 30 day reprieve on Mexico and Canadian tariffs and I think everybody's just waiting until the last possible minute to figure out will these actually go into effect? Will they be as broad as the administration has promised or will there be carve outs for certain industries like the auto industry, which desperately needs them. So there's just a lot of questions that companies have.
- [05:01]
Matteo Cervels
Yeah. And even that and just the general nature of the uncertainty. I mean, one minute. You know, even if we zoom back to earlier this month, it was, I Think it was a Saturday tariffs were announced on Mexico, maybe like two hours later. Oh, never mind, they're paused. So I think it's also, you know, even if the tariffs do go into effect, you know, what's to stop them, say a day, a week later from them rolling back or changing again? So it's very hard to plan when you're in such a volatile environment where you don't actually know what will be the final, final end result of it.
- [05:35]
Sara Lebo
Yeah, I think the auto industry is a great microcosm of that. Well, macrocosm, I guess. Even though we don't cover the auto industry all that often on this podcast, I think it sums up what could happen, which is that you have a supply chain that goes back and forth between countries several times before the final product, the car, actually comes onto the market. Which means that tariffs could be potentially like taxing production multiple times. And then you also have huge, massive lobbies at play. So even if the tariffs go into effect, likely the lobbyists will have something to say about it, some power over it. And in particular, one of these, maybe not lobbyists, but people involved. Elon Musk is also advising the president. Is that what we're going to call it? So all of that to say is the tariff polic policy won't be the final action on tariffs. There will be more to come after they're announced.
- [06:33]
Rachel Wolf
Right. And there's also the fact that the administration is using these tariffs as a negotiating tactic.
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Matteo Cervels
Right.
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Rachel Wolf
To get what they want out of other countries. And so for that reason, again, it's difficult to know exactly how it's going to play out. What is it that the US Wants to extract and how are they going to apply the tariffs to get that. But on the auto note, I saw this study that said auto prices could rise as much as $12,000 as a result of the tariffs. And if think about how expensive it already is to buy a car. I mean, that just sounds pretty remarkable.
- [07:04]
Sara Lebo
Yeah, I mean, that's the price of a car, depending on who you're asking, or it's the price of several cars, or it's the price of a fraction of a car, depending on who you're asking.
- [07:13]
Paul Briggs
Yeah, the auto industry is a great example. I think the North American auto industry was basically built on free trade between Canada, Mexico and the US So how they build cars is predicated on the fact that there's no tariffs across borders. So they build supply chains that allow. I think there's estimates that say an average part crosses the US Canadian border Or Mexico crosses a border seven or eight times before it's actually put into final assembly in a car. So that is a supply chain that is completely integrated without a border in place. And I think it would be very crippling if these tariffs came into effect for the auto industry.
- [07:51]
Sara Lebo
Yeah, I mean, let's jump into that supply chain conversation a bit more. We talked about the auto industry, but this is the case across the board. Right. We have a lot of industries where parts or products are crossing borders between the US And Canada and Mexico right now. So how will the supply chain be impacted and how will this weigh on US Retailers?
- [08:09]
Rachel Wolf
Well, one thing I think, you know, just talking about, I guess the Canada and Mexico piece, is that a lot of retailers were in the process of near shoring their supply chains in part to get around tariffs on China. But if imports from Mexico are now going to be taxed, what does that mean for those plants? Does it just become a sunk cost for these companies? You know, and do you have now have to shift out of Mexico again and go either back to China or find to Vietnam or like find another more cost effective solution, near shoring, meaning.
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Sara Lebo
Moving that production to North America, not necessarily to the US but to North America.
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Rachel Wolf
Exactly.
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Matteo Cervels
Or closer. Closer to North America. But that also begs the even broader question, then you have what we have, near shoring and then you have reshoring where it's okay. Now Trump wants to lower the corporate tax rate from 21% to 15% as part of this whole, you know, lure to bring manufacturing and bring those manufacturing jobs back into the U.S. but again, then it becomes, you know, a bit of accounting, you know, to see is it more cost effective to pay the higher labor costs in the US by reshoring or do we as a retailer eat the cost or eat the higher costs of near shoring in say a Mexico or another less tariff impacted country in this hemisphere? Or does it still, despite all the tariffs, does it still make sense with the China tariff, with the logistics cost to ship it, is it still more cost effective to manufacture in China or Asia? So there's a lot of, you know, a lot of variables retailers are going to have to weigh and consider to see really what is the most cost effective solution for their operations in this tariff in this basically global trade war, really?
- [09:48]
Rachel Wolf
Yeah. And on that note, it is cheaper for a lot of retailers to just swallow the cost of China tariffs and continue to manufacture in China. And that's also because Chinese manufacturing has dominated the world for a reason. They have capabilities that you know, manufacturers in other countries, including the U.S. just don't have. And so for some retailers, you don't have a choice. You're stuck with, you know, China or maybe Vietnam. But you still have to swallow that cost in some way. And then the question becomes, how much of it do you pass on to the consumer?
- [10:19]
Sara Lebo
Yeah. I mean, so let's talk a little bit about what will happen if tariffs are implemented in countries across North America. And let's go north to south here. How will tariffs impact Canada if they're implemented? Paul?
- [10:33]
Paul Briggs
Yeah, I think it's going to trigger, if it's a 25% tariff starting this week and that doesn't come down, it's going to trigger a recession almost immediately. Obviously, it takes time for a recession to be declared, but two quarters of negative growth. But the bank of Canada expected, before the tariff statements from, from Trump, the Bank of Canada expected Canadian GDP to grow 1.8% in 2025. Their estimates, if these tariffs come in as, as they're presently stipulated, it will lower that by 2.5%. So effectively, what is that point? 0.7% negative growth in the Canadian economy based on the tariffs alone. So that's, that's year one, so year two, it's slightly less. But still, we're looking at two years of really, really hard economic times. Canada is an exporting country. You know, 75 to 80% of what Canada exports goes to the U.S. so it's, that relationship is critical to the economy of Canada. And I think it's going to be very substantially felt across the board in Canada if these tariffs go in as presently stipulated.
- [11:41]
Sara Lebo
Yeah. And Rachel, I'll have you speak to this, but is that a recession that could spread to the US as well? I know. I heard New York Times columnist Jamel Buoy say that feels like the Trump administration is doing all it can to trigger a recession in the U.S. yeah.
- [11:58]
Rachel Wolf
I mean, I don't know that I would go so far to say that it would cause a recession in the US but certainly it's going to create a very difficult environment. Speaking specifically about consumer spending. Right. Like, consumers have been hammered by inflation over the past couple years, and now you have the prospect of even higher prices on grocery items, you know, your avocados, your fruit, your wheat products, all of those things are going to get more expensive. And consumers have already been pulling back spending in anticipation of that happening. So I think it's definitely going to be a very difficult landscape for retailers to navigate. I guess this One stat, the 25% tariffs on Canadian Mexican imports. And this is not taking into account an additional 10% tariff on Chinese imports, but that would add an extra $3,300 or so to annual expenses for a family of four.
- [12:49]
Sara Lebo
Wow.
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Rachel Wolf
So, you know, that's a hefty sum. And when you're faced with that, that means you cut back in other ways. You cut back on discretionary spending, on travel, on all of those things. So it could be a pretty big hit.
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Sara Lebo
Yeah, I mean, that figure you just said like 3,000, that's like 10% of the median family income in the US so that's a lot of money. Yeah, I guess it's probably a little less than 10% if the median income's around 40. But it's still significant for sure. And. Well, we don't have time to get into it right now. But if at the same time you're seeing mass deportation in the US Then you also have a potential labor shortage that is also impacting a lot of the prices on those goods, especially the agricultural ones, like you just mentioned. Matteo, that brings us down to Mexico. What will we see happen there?
- [13:36]
Matteo Cervels
Yeah, so, I mean, early, I think earlier this year, I read a stat that, you know, if the tariffs went into effect, it would basically shrink the Mexican economy by 1.9%. So there is that definite economic concern on that end. But I'll, I'll flip it, you know, the discussion more for our, more likely our, our listener base right now, US Retailers, US Brands. So the flip side of all of this is, is if you have more expensive, you know, all the governments, Mexico and the like, you know, you put a tariff on us, we're going to clap right back and put a tariff right on you. So that's just political, you know, game theory 101. Here we go. But that means then US brands are going to be inherently more expensive. And consumers in Mexico, consumers in the rest of Latin America, they have options. You know, China's still an option, Europe is still an option. And then you're going to be coming into this, you know, what do you, the consumer value more of your quality, your value, or, you know, or the like. So. And that, I think is the interesting thing we're going to start seeing playing out where at least in the data that surveys we have done, we see that Latin American consumers, when they think of, you know, value like, you know, of the products they purchase from, say, China or the US Consumers, really do value products from China. But Latin American consumers, you know, perceive US Products that be a bit higher quality. So it all goes into that. You know, what is that balance of how much are you going to pass on to the consumer in terms of these costs to make sure that they don't necessarily trade down to a cheaper alternative. And then, you know, how do you underscore that brand loyalty to them, keep consumers in the fold despite these higher costs. So overall it's, it's definitely going to create a new, definitely a more challenging environment for US Brands to remain competitive, especially in Mexico. And we're also seeing in Mexico specifically kind of the boycott on US Products where buy Mexican, buy locally. You know, if you look at Google search, those Google search trends, I mean we did see a massive spike in buying locally local products and you know, this buy Mexican concepts.
- [15:43]
Sara Lebo
Yeah, yeah, that's been across the headlines for Canada as well.
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Matteo Cervels
Right.
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Sara Lebo
We're seeing this uptick in patriotism and an anti US citizen sentiments in Canada. Right Paul?
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Paul Briggs
Yeah, for sure. I think, you know, like there's an app for being able to identify Canadian goods. So sometimes it's hard to tell where something's from. So there's been a few apps that have been launched for that. Retailers are using in store signage to highlight what's from Canada and what's not from Canada. So there's definitely a big sentiment. It's anti US Sentiment, quite frankly. You know, we talked earlier about or on a preparatory call about the fact that there was a big hockey game between Canada and the USA a couple of weeks ago in Montreal and the US Anthem was booed pretty loudly by the, by the crowd. So which is unheard of but is a reflection of, you know, anti US sentiment in Canada right now as a result of these tariffs.
- [16:34]
Sara Lebo
What's so important about these sentiments to me is that these are the impacts that are happening before tariffs are even in place. So we're talking so specific speculatively right now. We don't know what's going to happen, we don't know when it's going to happen, but impacts are already happening. We're seeing the anti US or bi local sentiments in other countries and then in the US we're seeing a ton of anxiety around tariffs. I would guess the average American doesn't necessarily know if or when tariffs have gone into place, but they know that they are being talked about and they are starting to know more and more. I think that they are going to increase prices.
- [17:08]
Rachel Wolf
Yeah, I mean there was a stat, I think 43% of people are already seeing tariff related price increases which you know, is pretty remarkable. Again, it just shows that tariffs are top of mind for all consumers at this point, regardless of your political affiliation.
- [17:22]
Sara Lebo
Yeah, Matteo, you said something that really resonated with themes that we've been talking about on this podcast for months now, which is that I think as a brand you can no longer rely on undercutting your competition and tariffs only underscore that. You need to make sure that you have a loyal customer base or you're trying to have a loyal customer customer base because you're not going to be able to slash prices forever. And especially as you're eating costs of these taxes, you need to make sure that you have customers that are going to be willing to spend a little bit of money with you because you can't undercut forever. I guess that's my question to you. How urgently should brands and retailers be preparing for tariffs and what are some steps they should be considering?
- [18:03]
Matteo Cervels
I mean, definitely it has to be very top of mind, especially in these markets that are, you know, I look at the urgent markets, the Canada, U.S. i mean that's right now, this week. But you know, Europe is on the table as well in the imminent near future. I think the, the vat, the ones with the vat, that's like for early April, so next month, I mean these are all on the horizon and such. So I think for a brand, for a retailer, it's really understanding, but some little bit of introspection on really understanding what is your brand value and how do you highlight those key differentiators that make your brand unique essentially to, you know, prevent your loyal and price sensitive consumers from, you know, finding a cost, a lower cost alternative. Because again, in this globalized world, every product has an equal or cheaper alternative. You know, whether it's your smartphone, your computer, the clothing you wear, no matter where you buy it from, there is another alternative, be it more expensive or cheaper. So it's understanding that and understanding, you know, on the supply side, the planning side, really understand where you as a retailer and a brand are able to optimize those, those key operational portions, whether it's near shoring, whether it's reshoring or whether it's just keeping your operations as it is, as they are. And I think also lastly from navigating the landscape, it's also being aware of what's happening not just in the U.S. but in all these market or all the main markets that you're in and understand trying to identify where are some key markets that you can still get into. Because let's just say, hypothetically, let's just say Mexico gets hit with tariffs, but maybe Argent, you know, I'll use Argentina. You know, their president and Trump are a bit more ideologically the same in terms of that. So. And the Argentine president's trying to open up the economy. So if you US brand aren't able to sell necessarily in Mexico, maybe you'll be able to find a market in Argentina. And that goes really with any of these markets. And we do see those dynamics playing out at the government level, at the presidential level, really where we see, you know, Mexico and the European Union restarting or fast tracking talks to help get some free trade. We see the medical sewer trading bloc in South America. They finalized the trade accord with the EU as well. So there is that possibility. Canada as well. I've been seeing some news floating around, you know, will Canada join the eu apparently or how is Canada looking to Europe or in Europe looking to Canada as a way to kind of just sidestep the US altogether since, you know, Canada and the EU do share several political ideologies and alignment on many things. So it's a very shifting landscape. But I think paying attention to the news, understanding your brand value and evaluating those supply chain flows are really three key areas to hone in on just to really navigate these uncertain times.
- [20:57]
Sara Lebo
Yeah. Anything to add there on what brands can be doing to prepare right now from Paul or Rachel?
- [21:03]
Paul Briggs
Yeah, I think in Canada, what I'm seeing is marketing campaigns and messaging from retailers that it's really aimed at that sentiment in the consumer base right now. So really highlighting Canadian made goods and services. So I think that is smart for retailers is to kind of understand how the consumer base is feeling and designing marketing programs that really speaks to that sentiment. So I think that's one big area that it's already starting, frankly. But I think if this is a prolonged situation, I think that'll be a go to strategy.
- [21:38]
Rachel Wolf
Yeah, I agree. I think, you know, in the US I think a lot of it is going to be dusting off the inflation playbook. Right. For these companies, if prices are going up, then how do you convince people to buy something? How do you convince them of the value? And I think like for example, Chipotle is taking an interesting tact by saying we're not going to raise prices. You know, we're going to hold firm on avocados as long as we can. And you know, that's a great way to get people to stay loyal to your brand if they feel like, yeah, you know, this company is doing all they can to shield me from potential tariffs.
- [22:09]
Sara Lebo
Yeah, I just want to underscore everything you guys just said because I think you just created a great playbook which we have. Introspection on brand value, highlighting differentiators and preventing down trading, understanding where you as a retailer can optimize your supply chain, being aware of what's happening in key markets and where you can still grow. Paying attention to consumer sentiments and marketing that way and looking to previous inflationary plans and being ready to be agile. That's so helpful. Okay, well, that is all we have time for today, but we covered so much. Thank you all for being here. Thank you, Rachel.
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Rachel Wolf
Thank you.
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Sara Lebo
Thanks, Paul.
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Paul Briggs
Thanks Sarah.
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Sara Lebo
And thank you, Mateo.
- [22:46]
Matteo Cervels
Thank you, Sarah.
- [22:47]
Sara Lebo
Thank you to our listeners and to our team that edits the podcast. They are terrific. That's my only tariff pun. I held off for most of the episode.
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Matteo Cervels
Wow. I love it.
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Sara Lebo
We'll be back next Wednesday with another episode of Reimbursement, Imagining Retail and Emarketer Podcast. And on Friday, join Marcus for another episode of the behind the Numbers podcast.