Podcast Summary: Odd Lots – "A US Clothing Brand On the Existential Threat From the Tariffs"

Introduction

In this episode of Bloomberg's Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway delve into the profound impacts of tariffs on the clothing and textile industry. Focusing on real-world experiences, they bring in Sarah LaFleur, founder and CEO of MM LaFleur, to discuss the existential threats tariffs pose to her business and the broader implications for small apparel companies.

1. Setting the Stage: Tariffs Across Industries

Tracy Alloway initiates the conversation by highlighting the inadvertent series they've been conducting on tariffs and their varied impacts across numerous sectors. She notes:

"Joe, we've been inadvertently doing a tariff series basically on what the trade restrictions mean for a bunch of different industries."
[01:31]

Joe Weisenthal echoes this sentiment, emphasizing the complexity and pervasive nature of tariffs:

"There's actually, it's impossible. You know, every industry is gonna be affected by tariffs a different way."
[01:39]

The hosts acknowledge the challenge of addressing the multifaceted effects of tariffs, pointing out that virtually every sector within GDP could reveal new insights under such trade restrictions.

2. Introducing MM LaFleur: Founder’s Background and Company Vision

Tracy Alloway introduces their guest, Sarah LaFleur, providing a personal connection and a brief overview of MM LaFleur:

"She started her own clothing company. And I was involved at the very beginning doing product testing and caveat... I have a lot of their clothes."
[03:25]

Laura recounts her transition from management consulting and private equity to founding MM LaFleur in 2013, driven by a gap in the market for high-quality, stylish professional women's clothing. She explains her inspiration:

"I always struggled to find good, well-made, appropriate, but still very stylish professional women's clothing... that's what I'm going to wear when I grow up and I'm a working woman."
[05:02]

Sarah emphasizes that MM LaFleur operates primarily as an e-commerce business, supplemented by eight physical stores and wholesale partnerships.

3. Unpacking the Supply Chain: From Design to Consumer

The discussion shifts to the intricate supply chain of MM LaFleur. Sarah outlines the design and manufacturing process:

"We are all designed in New York City... so much of fashion is really led by the fabric and textile industry."
[06:09]

She details how fabric selection inspires design, followed by sketching and pattern making. The garments are then manufactured overseas, predominantly in China, ensuring high quality and competitive pricing. Sarah explains:

"Different companies do different things, but if you are working with a fab factory overseas, then oftentimes you will send the pattern overseas to the factory."
[07:00]

Notably, MM LaFleur emphasizes sourcing both synthetic and natural fibers, valuing machine washability and wrinkle resistance, critical for workwear.

4. The Tariff Shock: Immediate Business Impacts

The core of the episode revolves around the sudden imposition of tariffs and their debilitating effects on MM LaFleur. Sarah recounts the critical day tariffs were announced:

"I was sitting in my office... the numbers were kind of beyond, I think, what any one of us expected."
[18:53]

The tariffs resulted in a staggering increase—54% on top of an initial 30%—forcing Sarah to take drastic measures:

"I had to cancel 50% of my May collection because they were all from China."
[21:33]

She describes the chaos at ports and the logistical nightmare of securing shipping amidst the sudden spike in tariffs, severely disrupting their supply chain and inventory management.

5. Navigating Manufacturing Challenges: The Impracticality of Moving Back

Tracy raises concerns about relocating manufacturing to the U.S., prompting Sarah to elaborate on the insurmountable challenges:

"The American consumer does not want to spend that much on clothing as prices have gone up in every single other category."
[24:40]

Sarah points out the lack of infrastructure and skilled labor in the U.S. garment industry, making it unfeasible to shift production domestically. She highlights:

"It's just kind of preposterous to imagine that that's a future."
[29:43]

The discussion underscores that maintaining production quality and meeting demand while relocating is beyond the current capabilities of MM LaFleur.

6. Pricing Strategies and Customer Transparency

Addressing pricing adjustments due to increased costs from tariffs, Sarah considers the delicate balance between transparency and maintaining customer trust:

"I'm getting my margins squeezed. We're looking at our August collection... making serious trade-offs."
[24:53]

She debates the potential of displaying pre- and post-tariff prices but fears it might deter customers during an impending recession.

7. Cash Flow and Financial Strain

The hosts explore the immediate financial burdens imposed by tariffs, particularly the requirement to pay fees upon goods entering U.S. territory, irrespective of sales timelines. Sarah elaborates on the cash flow issues:

"You're bringing in these goods in not knowing actually if your customer is willing to eat the price hike. So again, it's a gamble."
[39:46]

This unpredictability severely strains the company's finances, compelling them to adopt stringent cost-cutting measures to survive.

8. Digital Marketing Hurdles

Sarah discusses the escalating costs of digital advertising, especially on platforms like Facebook, and the limited effectiveness of newer channels like Instagram Shopping for their higher-priced items:

"We could acquire customers for $13... now it's about $250. That's probably understating it."
[36:17]

She notes the challenge of converting high-value prospective customers through impulse-driven platforms, which are more suited to lower-priced items.

9. Future Outlook: Recession Fears and Strategic Adjustments

Sarah expresses a grim outlook, citing recent economic upheavals and the need for conservative forecasting:

"I've become significantly more conservative in all of my predictions and forecasting."
[34:23]

She reveals ongoing efforts to cut costs amidst uncertainty, acknowledging that many small businesses might not survive the current economic climate exacerbated by tariffs.

10. Broader Implications: Small Businesses vs. Giants

The conversation highlights the disparity between small apparel brands like MM LaFleur and larger corporations. Sarah asserts:

"A lot of us won't make it. The big businesses will be fine."
[37:56]

She contrasts the resilience of large retailers who can absorb increased costs with the dire straits of small businesses that lack substantial financial buffers.

Conclusion: Reflecting on the Tariff Impact and Future Steps

Tracy Alloway and Joe Weisenthal reflect on the insights shared by Sarah, emphasizing the tangible challenges tariffs impose on businesses beyond theoretical economic models. They highlight the critical need for understanding the nuanced realities faced by entrepreneurs in the apparel industry.

Sarah offers a practical takeaway for consumers:

"Buy your silk now for Christmas because you're not gonna see it for a while."
[43:22]

This serves as both a caution and a call to action amidst the ongoing tariff-induced turmoil.

Notable Quotes with Timestamps

• Tracy Alloway: "Joe, we've been inadvertently doing a tariff series basically on what the trade restrictions mean for a bunch of different industries."
  [01:31]

• Joe Weisenthal: "There's actually, it's impossible. You know, every industry is gonna be affected by tariffs a different way."
  [01:39]

• Sarah LaFleur: "I always struggled to find good, well-made, appropriate, but still very stylish professional women's clothing... that's what I'm going to wear when I grow up and I'm a working woman."
  [05:02]

• Sarah LaFleur: "I had to cancel 50% of my May collection because they were all from China."
  [21:33]

• Sarah LaFleur: "It's just kind of preposterous to imagine that that's a future."
  [29:43]

• Sarah LaFleur: "A lot of us won't make it. The big businesses will be fine."
  [37:56]

Final Thoughts

This episode of Odd Lots offers a sobering glimpse into the operational and financial struggles faced by small clothing brands amidst rising tariffs. Through Sarah LaFleur's firsthand experiences, listeners gain a deeper understanding of the intricate balance between maintaining quality, managing costs, and sustaining a business in a volatile economic landscape. The discussion underscores the broader implications for small businesses navigating government-imposed trade barriers and highlights the resilience required to survive in such challenging times.