Ep 499: Emergency Pod – How Four Sigmatic is Navigating Tariffs Without Losing Customers

Summary

DTC Podcast Episode 499: Emergency Pod – How Four Sigmatic is Navigating Tariffs Without Losing Customers

Release Date: April 14, 2025
Host: Eric Dick, DTC Newsletter and Podcast
Guest: Clifford, Representative from Four Sigmatic

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Introduction to the Tariff Challenge

In this emergency episode, host Eric Dick engages in a candid discussion with Clifford from Four Sigmatic about the immediate challenges posed by the reinstated tariffs, particularly those affecting China. The conversation kicks off with Eric referencing "tariff day," indicating a sudden policy shift that has significant implications for direct-to-consumer (DTC) brands.

Notable Quote:

"Today is tariff day. We were planning this yesterday. Today tariffs have been relinquished in all places but China. How is your 4D chess going?"
— Eric Dick [00:54]

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Four Sigmatic’s Strategic Response to Tariffs

Clifford outlines Four Sigmatic’s proactive approach to handling the volatility introduced by tariffs. Emphasizing the company’s focus on long-standing market trends and regulation, he explains that Four Sigmatic has built a resilient business model capable of weathering such economic shifts.

Key Strategies:

• Dual Sourcing and Redundancies: Maintains multiple suppliers to mitigate risks associated with commodity price fluctuations, especially in coffee and cacao markets.
• Cost Management: Prioritizes adjusting marketing expenditures before altering product prices to maintain product-market fit and pricing elasticity.

Notable Quote:

"We build a business around long standing market trends, regulation and deal with volatility as it comes...We see a ton of commoditized volatility and have levers in place."
— Clifford [01:09]

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Avoiding Price Increases and Preserving Market Position

Clifford advises against immediately raising consumer prices in response to tariffs, highlighting the potential negative impact on marketing efficiency and customer retention. Instead, he suggests optimizing internal cost structures, such as reducing marketing spend, to absorb the increased costs without transferring them to consumers.

Notable Quote:

"If you really are going to change the price, you're probably going to see a drop to some degree in marketing efficiency... So rather than doing that, what I'll first look at is marketing percentage of net sales."
— Clifford [02:10]

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Maintaining Supply Chain Stability

When probed about potential changes to the supply chain, Clifford emphasizes that Four Sigmatic currently does not plan to alter its sourcing strategy. The company’s existing dual sourcing ensures flexibility and stability, allowing them to manage commodity price spikes without significant disruptions.

Notable Quote:

"We've always had an environment of supply chain that has some dual sourcing and redundancies in it... We stay strong and... have levers in place."
— Clifford [03:57]

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Geopolitical Insights and Long-Term Considerations

Clifford delves into the broader geopolitical landscape, discussing the potential motives behind tariff implementations and their long-term economic impacts. He speculates that such measures may aim to correct trade imbalances or refinance national debt, which could have far-reaching consequences beyond immediate tariff effects.

Notable Quote:

"If they're dancing and pushing pressure onto the macroeconomic situation in order to mitigate against something like a sovereign debt spiral, then we should all be more concerned with what that does to consumer confidence long term."
— Clifford [04:42]

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Consumer Behavior Amid Economic Uncertainty

Addressing consumer behavior, Clifford asserts that a solid product-market fit can buffer the effects of a recession. He believes that as long as consumers find value in the product, their purchasing behavior remains relatively stable, even in the face of economic downturns.

Notable Quote:

"If you have solid product market fit and you are working in a growth vehicle that's growing and people are interested and they find value in your product for the price you're offering it at, you should still be fine."
— Clifford [06:02]

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Marketing and Consumer Trust Strategies

Clifford criticizes competitors who list tariff charges directly on their e-commerce platforms as a means to obscure the true cost from consumers. He argues that such practices erode trust and are merely revenue grabs without providing real value to the customer.

Notable Quote:

"By adding tariff charges that are directly taken on by the end consumer, you're eroding trust between the brand and the consumer and ultimately is a distraction again."
— Clifford [17:24]

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Operational Adjustments and Team Alignment

On the operational front, Clifford notes that Four Sigmatic remains calm and focused, holding internal discussions to align the team’s stance on navigating tariff impacts. They prioritize reacting only to changes that directly affect the bottom line, avoiding unnecessary distractions from volatile external factors.

Notable Quote:

"We'll react in light of change, actual change that impacts our bottom line... We're all on the same page."
— Clifford [11:57]

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Final Thoughts: Stick to Core Fundamentals

In concluding the discussion, Clifford reinforces the importance of adhering to core business fundamentals amidst external economic pressures. He advises against getting sidetracked by temporary distractions, such as political changes or fleeting economic theories, and urges businesses to remain focused on delivering value to their customers.

Notable Quote:

"All of us should be trying to stick to the core fundamentals of what drives a business forward and avoiding shiny objects."
— Clifford [19:41]

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Conclusion

The episode provides a comprehensive look into how a resilient DTC brand like Four Sigmatic navigates sudden tariff changes without compromising customer trust or market position. Clifford’s insights emphasize strategic cost management, supply chain stability, and unwavering focus on product value as key elements in sustaining and scaling a business amidst economic volatility.

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Transcript

[Clifford]

By raising a price to the consumer, you're kind of spitting in the face of either product market fit or pricing elasticity of demand. So if you really are going to change the price, you're probably going to see a drop off to some degree in marketing efficiency. So rather than doing that, what I'll first look at is ultimately even a recession. If you have solid product market fit and you are working in a growth vehicle that's growing and people are interested and they find value in your product for the price you're offering it at, you should still be fine. I would first manipulate the two way levers before the one way doors move the things you can move back quick and that don't impact things long term. It's a news cycle. People like talking about things that are relevant. All of us should be trying to stick to the core fundamentals of what drives business forward and avoiding shiny objects.

[Eric Dick]

Rick friend of the D2C podcast, one of my all time favorite guests, we Today is tariff day. We were planning this yesterday. Today tariffs have been relinquished in all places but China. How is your 4D chess going?

[Clifford]

It's going well. I mean at the end of the day and I think we'll get into it deeper. We build a business around long standing market trends, regulation and deal with volatility as it comes. Right. We operate in a coffee market. We see a ton of commoditized volatility and have levers in place and whatnot. But ultimately with this sort of thing, just have to weather and understand what you do have control of versus what you don't have control of.

[Eric Dick]

Where do you, where does 4 Sig actually source its ingredients from?

[Clifford]

Yeah, so our, our main commodities are coffee and cacao. All of our functional ingredients have a slew of different places that are hit by tariffs and, and are impacted. But ultimately they kind of pale in comparison to the coffee buying that we are doing and that drives the majority of our product costs and our cogs.

[Eric Dick]

So you said, you know, changing that, controlling things you can control. So it's just delicate balance between, you know, knowing that you're building for the long term and, and making adjustments where you can. What are some of the adjustments you're either have made or are considering?

[Clifford]

Yeah. So as like stepping back as a business operator, we understand what we have absolute control over what we are trying to do for our end consumer and what that end consumer is looking for from us. So by raising a price to the consumer, you're kind of spitting in the face of either product market fit or Pricing elasticity of demand. So if you really are going to change the price, you're probably going to see a drop to some degree in marketing efficiency. So rather than doing that on our side because of the variety of places we sell and then facing self competition, if you're higher online and lower in store, cause you can't just go tell a store hey, for the next month, raise the price. So what I'll first look at is marketing percentage of net sales. So how much am I spending on marketing dollars and is there an opportunity to draw some of those funds back and tuck them to the bottom line to absorb some of the macroeconomic pressure that we're seeing and that goes across the board for, for commodity jumps. And we've seen coffee prices go through the roof. The very last thing we do would be to raise prices. And there's a, a ton of other little micro adjustments that are made inside of that. But I, I think their price should not be the first thing to go for. The brands that have put the tariff line item on their shopify stores. Creative. But at the end of the day that's just a money grab because they have not paid those tariffs yet. So they're not accepting them onto the P and L at this point I would assume that no one has because it would be that your ship, your shipment has come in and gone into substantial transformation inside of the last 48 hours, 72 hours. And that's, that's hard for me to understand if that being true.

[Eric Dick]

Are you guys looking at any changes to your supply chain, your supply chain strategy at this point?

[Clifford]

Not right now. We've always had an environment of supply chain that has some dual sourcing and redundancies in it because again we deal with coffee and cacao and those pricing markets have jumped all over the place. Supply chain and relationships and stability inside of those relationships. Hard to go flip out suddenly at our scale and our production size. We stay strong and like I said, I would move all of the numbers on the periphery of the margin profile prior to moving the internal ones that, that deal with that directly.

[Eric Dick]

We don't normally talk about this and you can say no comment, but do you have any commentary on this as like a geopolitical strategy?

[Clifford]

Yeah, I mean, I think I know, I think I understand what they're trying to do. Whether it works or not is a whole different ball game. Inside of that there's a ton of risk outside of the tariffs that this kind of bubbles up to the top with our current debt standing and what that means and if they are actually trying to lower yields in order to refinance debt, and if they can't lower yields and they have to refinance debt at the current rates, it could trigger something larger than a recession. So if they're dancing and pushing pressure onto the macroeconomic situation in order to mitigate against something like a sovereign debt spiral, then we should all be more concerned with what that does to consumer confidence long term than what it does to tariffs and short term commodity pricing.

[Eric Dick]

I think in Canada, it's easy. There's so many people that are just like, yeah, you know, he's a madman, he doesn't know what he's doing. But it's, I also look at the geopolitical trends or the economic trends of the last like 50 years and specifically in the last 10 years, it's like, it's like, I don't think that the neo, again, the neoliberals behind the previous economic order were necessarily playing 4D chess either. So there's this sense that like, something probably had to be done at some point and there's a bit of like medicine taking at this point.

[Clifford]

Yeah, Trump is like, you can say what you want about him. He's had the same rhetoric for like 30 years where you could see talk show stuff. He's wanted to go restructure the tariff schedule across the world in the global trade markets since he started talking about the macroeconomic impact that he would like to make. So I don't think that's surprising. The tariffs that he put on when he was last in office, a lot of them stayed in place via the Biden administration. There's an acknowledgment of keeping them in place. If you look back in time, most administrations took some sort of page out of this playbook and have put pressure onto trade partners in order to either shore up better trade agreements or flip the script. And in the past four years, trade imbalance has shifted towards China. So I think there was a, maybe a secondary attempt outside of yields and trade and all these other things to try to push the, the trade imbalance back in our favor. You know, at the end of the day, that all really short term affects the equities market. Equities market could leach into the bond market. And if the bond market and Treasuries start to go south, then maybe we feel consumer issues. Right. And then, and then as an E commerce operator, we need to adjust. But ultimately even a recession to the degree that we're talking about right now, if you have solid product market fit and you are working in a growth vehicle that's growing and people are interested and they find value in your product for the price you're offering it at, you should still be fine. You just need to reinvent the wheel a little bit and get crafty. But ultimately the recession affects what a recession is the correction in the stock market below a certain degree. So most of our consumers are not that exposed at the end of the day. And if you think they are, then they're exposed. Maybe from an emotional mental standpoint. But true exposure on spendable income, unless they're very over allocated should not impact buying behavior beyond a certain cohort that is fearful of spending money and trying to pack away pennies. But then, you know, and that happens at the very beginning of a recession and then it starts to balance out even though the market hasn't caught up.

[Eric Dick]

Did you see, I was just talking with the meta team and they were seeing across the board they saw a couple things. They saw a bit of a bump in like before these announcements were made like people were making purchases before volatility. They also were seeing huge amount of more traffic on the auction because of the amount of people that are like doom scrolling right now. What are you seeing some of the, have you seen any of these bumps or are people now sort of like is there now the we're so back spending happening? Are you seeing any of these effects?

[Clifford]

We're pretty stable right now. Stable in a good way. I can't say that I've seen anything. And I'm also not going out and searching for to be fair, right? Like I'm not going out and be like what, what tariff impact has hit like you know, these certain KPIs and then, and that goes back to understanding what's a distraction and what's a core needle mover for the business. And ultimately if you're making adjustments on the fly because of legislation and news that comes out and you're changing supply chains and there are some, in fairness, some businesses that probably should react immediately but dude, like we gotta keep doing what we do and tariffs almost always are increased significantly short term and then balanced out somewhere long term. So if you're going to go off and restructure supply off of the calculation of what 125% tariff to China will do to your supply chain, ultimately at some point you're going to be spending too much in an investment that won't be needed within a certain time frame. We don't have any confidence that after this administration all of this will Stay in and we have even less confidence that any of the short term pushes in tariff pressure will then be stay forever. Right? Like this 125% is a, it's a tactic, it's not sustainable, especially across the board. And if you go then to segmented tariffs, then it all changes. So if you're building a warehouse or a new supply chain in sourced, you need to have some sort of confidence that that investment will last beyond five years. And we don't even know that it'll last before five weeks. Right. So how could you go and convince your board to let you insure and take on substantial costs risk with new relationships and just the time and effort and change management of the team? To me that's all massive distraction. The same thing on a positive side, when AI comes out, it's like, yeah, leverage it. But don't get too distracted because most of that stuff is not really helping us move the needle.

[Eric Dick]

No, but there's stuff, right? There's stuff. What stuff?

[Clifford]

Like stuff you can do that. Like little stuff that I think does matter and is worth distraction, like understanding what it does to consumer sentiment and understanding the broader impact of where you're exposed and what products could be exposed. And if you can make merchandising switches, that wouldn't really impact the bottom line because there's certain products that don't have the exposure or volatility of others. Like moving stuff around like that stuff may be healthy, but if you have a winning product, don't go changing the product, don't go changing the strategy just because of legislation 100%.

[Eric Dick]

That being said, I'm just curious from like an operational standpoint, like what has your week looked like? Are you guys having like all hands meetings? Are you, are you sort of like really looking? Are you trying. I know everyone's just trying to stay as calm as possible, but when it comes to things like forecasting or scenario planning, is there something your team is doing around this volatility?

[Clifford]

We'll react in light of change, actual change that impacts our bottom line. But right now we talked about it once and kind of all got together on what our stance is and we're all on the same page. Like I said, we are mostly driven by coffee prices and kind of around the same time coffee prices went down and we've been fighting against crazy high coffee prices. So that decrease in the commodity market, on sea market and coffee, that helped offset a bunch of what we're feeling short term, what it fleshes out to long term. We'll react to and take into account. But ultimately we'll change the things that can. You know, I would first manipulate the two way levers before the one way levers, the one way doors. You know, it's move the things you can move back quick and that don't impact things long term before you touch anything that's established working and only would be changed because of legislation.

[Eric Dick]

And have you, have you pulled any levers on the ad spend side of things? Have you put increased pressure on Clifford, for instance?

[Clifford]

Every opportunity I have, I put increased pressure on Clifford. So if there's a way I could put them farther under my thumb, I do, but nice. Ultimately, like I said, man, this is. Most of these conversations that I've had are with friends that are financial professionals and not internal or because of business pressure. It's a news cycle. People like talking about things that are relevant. People like to learn about things. And there's a lot of information out there that doesn't line up with how the macroeconomic situation will play out or like should play out because of the changes that are happening. So you sit back and you wait and you understand what you are good at, what you do know and understand the risk and the pressure that could come from it. Right. I think from my standpoint, more of the fear should be around. Does this make people not want to buy something because they're scared of what it will do to the broader economy?

[Eric Dick]

I had a really interesting chat with Clifford off air and he's got some interesting takes around what this means sort of geopolitically for the US and he was sort of talking about the US is like, you know, military imprint around the world and all the, you know, the things that, you know, the CIA may be doing over here and this and that, it's like, it's almost like this. The way that they're like repositioning America as this sort of economic power, it sort of like precedes the need to have those kind of like cloak and dagger operations a little bit less because you literally, you're trying to put everyone on an economic playing field where the US will have even more just overt power when it comes to this kind of thing. I think long term it's going to be a good thing for, for the US And I'm just really interested to see the way Canada plays it because Canada's talking tough right now, which I don't really feel like is the smart play when it comes to dealing with the behemoth.

[Clifford]

If any of us, Clifford included, start to pretend that we're experts in macroeconomic influence and change, then we're not spending enough time finding new keywords like, that's, that's the bottom line. There will always be agendas behind the scenes in government, social, political climate that we aren't read in on. We don't fully understand. And there's moves being made that we do see that we're not being explained because if they were explained, they wouldn't get the outcome they need. I can't imagine anyone would be successful trying to game those to get better e commerce success. Like, I don't understand how that's possible. And ultimately, so what I guess is kind of the takeaway. Like, what do we do? Like, so sure, sure, sure. Like the CIA is trying to create a global trade imbalance that puts America on top and gets US Goods in more hands and cheaper production for US Goods. Like, okay, what president hasn't tried to do that? And like, and then, and, and world leader of sovereign nation hasn't tried to do that to some degree. So then what?

[Eric Dick]

Yeah, I know. I would argue that Canada's probably hasn't over the last 10 years, but that's a whole other topic. I will tell Clifford to stop theorizing and, and get back on the keywords because I think, I think that's probably best use of our time.

[Clifford]

Canada is in a unique position because of leverage from an energy standpoint, and we don't have many options as a country to replace that short term. So we have to bite the bullet to some degree. So I would assume there's an acknowledgment of that from both sides. Canada trying to figure out where the top level of tolerance is in order to get the best deal possible so they don't get run over. And you guys are in between leaders right now. So I'm not sure that there's going to be real political decision making going on until the true change in power happens. So there might just be a posturing with an acknowledgment of we're looking tougher than the previous administration and we're going to come out of this on top and then in typical Trump fashion, everyone will be a winner and he's the biggest winner and it's going to be how it plays out to a degree.

[Eric Dick]

Fingers crossed on that. Are there any. I think I know the answer to this, but I was just chatting with Avery on our team and she was talking about for a couple brands where we're actually, there's actually like some creative messaging around, meeting customers at this moment, around their unsurity, around like literally referencing, you know, comfort versus uncomfort playing into that. Is there anything going on on the creative side with you guys? How you about how you're messaging.

[Clifford]

The moment we put a messaging in the cart and in the checkout about no tariff charges.

[Eric Dick]

Nice.

[Clifford]

So like I said, like take advantage of the fact that there's people like looking for that stuff and some of the brands are putting it in there. And I was like, let's go the opposite way and take advantage of it. It was actually an idea of our CEO. Him and I chatted about it this morning, thought about what would we want to do in light of all of this. By adding tariff charges that are directly taken on by the end consumer, you're eroding trust between the brand and the consumer and ultimately is a distraction again. But truly I don't like the way it looks from a brand standpoint. Right. Like it's, it's kind of, it's a revenue grab. At the end of the day, you're not actually paying that tariff. There's no tax bill that's hitting you right now that you're like, oof. If we don't, you know, take into these account these tariffs and ultimately long term, I don't even know what the legality of it is because you're collecting what's considered a federal tax and then not having to pay that full amount to the government would probably get gray and you'd, I would assume that you would have to then refund if you didn't actually pay that full amount. So do we want to deal with that? Like absolutely not.

[Eric Dick]

No. Are there any conversations? One of the. I just saw a message from someone in one of my message groups today that their, their manufacturer has agreed to take on all the, all costs of additional tariffs. And, and I'm curious, have you had any conversations with any of your sourcing partners or any pieces of your supply chain to negotiate for, for better rates?

[Clifford]

We are always negotiating for better rates kind of consistently. To be completely honest, I'm not in those convos, different departments. So I haven't heard any wind of it. Rasmus, who runs our ops, is constantly in contact with all of our suppliers and constantly negotiating because of coffee and cacao and all different the markets themselves. I would assume there's some sort of talk happening about what we would do in the case that this is permanent, but I haven't gotten wind of any of that.

[Eric Dick]

Interesting. So we view this. There's a temporary squeeze happening here that likely will result in some long term changes. And I guess that's above our pay grade to forecast what those long term changes might look like. Any final thoughts on this moment for our listeners?

[Clifford]

No. I mean, all of us should be trying to stick to the core fundamentals of what drives a business forward and avoiding shiny objects. Whether that's a new toy, a new app, or legislation in a news cycle. Something that's mainly impacting financial systems at this point, you know, and things change rapidly. So if you change just as rapidly, you're gonna spend your time changing and becoming like more wrapped up in the politics than you are and selling more of your customers on your product.

[Eric Dick]

Stop doom scrolling. Yeah, start selling.

[Clifford]

Get back to work.

[Eric Dick]

Get back to work.

[Clifford]

Get back to work.

[Eric Dick]

Let's go. Nice. Well, this is great. It's just straight, all killer. No filler to the point. Thanks for jumping on today. I know you're at an off site. Really appreciate it.

[Clifford]

Love it. Thanks, Eric.

[Eric Dick]

Thanks so much for listening to today's episode. If you're not a subscriber to our newsletter, you can do that right now at directtoconsumeralloneword co. I'm Eric Dick and this has been the DTC podcast. We'll see you next time.