Retailers wrestling with global trade disruptions
HIGH POINT — Just as furniture retailers begin to raise prices on their floors for Chinese imports, along comes the new threat of a 5% tariff on Mexican imports that could climb to 25%, too.
This past week, President Donald Trump announced a 5% tariff on all Mexican imports to the United States would take effect June 10, “until such time as illegal migrants coming through Mexico, and into our country, stop.” He followed with news that this rate would gradually rise to 25% on Oct. 1, should Mexico fail to take “appropriate action.”
UPDATE: Trump backs off Mexico tariffs, posted Saturday, June 8
But if retailers are starting to sweat the widening global trade scenario, few are showing it. Instead they seem of two minds on the escalating trade war between the United States and China, and now Mexico and possibly India. On the one hand, they don’t like tariffs, and several retailers have called the bumped up 25% Chinese tariff weeks away from implementation “a game changer.”
But on the other hand, they say the game really hasn’t changed all that much. They’re still doing business with the Chinese suppliers who have negotiated in good faith and are willing the share the hit. They say they’ll follow the same course of action with Mexico if it comes to that. And some even believe higher prices may actually turn out to be a good thing for an industry that has been stunted by deflation for decades.
Not a game-changer
Jake Jabs, CEO of Englewood, Colo.-based American Furniture Warehouse is among those who said a 25% tariff “definitely changes the ball game.” The 14-store Top 100 company handled the initial 10% tariff on Chinese goods without passing it on to the customer. Suppliers ate part of it, AFW ate part of it, and currency exchange rates also softened the blow.
Jabs said the majority of the Chinese factories he works with are participating again in the new higher rate (some are lowering prices instead of owning part of the tariff expense outright), but AFW will still have to raise prices on some items this time to make up the shortfall.
“We’re doing it right now as we speak,” he said, adding that if he had to throw out a percentage for the average increase on impacted goods, 10% would be close.
But here’s another side of the equation, a side that suggests these tariffs aren’t quite as scary for retailers and possibly consumers as they seem: China only accounts for a small percentage of AFW’s total assortment. None of its bedroom offering comes from the country. Some of its upholstery does, but Jabs said the bulk of the affected business today is mostly small doorbuster items. And if a $20 retail item goes up by 25%, that’s $5 and “probably still a good buy.”
On a recent earnings call, Williams-Sonoma noted it has been aggressively shifting its sourcing away from China and plans to halve again the amount of goods it’s buying from the country by next year. This past week, Reuters reported that Salt Lake City-based RC Willey recently canceled a $300,000, 15-container leather upholstery order from China because the manufacturer wouldn’t help cover the extra tariff cost.
But Jabs pointed to the positive retail angle buried in these kinds of stories, too.
“What’s happened is business in China has slowed for a lot of factories,” he said, adding that there’s probably a fair amount of order cancelling going on. AFW doesn’t cancel orders, “but frankly we did lay low, too,” he said. “We held back to see where it would go.”
And now those Chinese factories are calling AFW, saying they’ve changed their mind and will absorb part of that incremental 15% after all. They’re making deals on canceled shipments.
“It’s case-by-case, and it depends on the relationships,” Jabs said, but there are still values to be had in Chinese goods.
As of this past week, Jabs was hoping the tariff on Mexican imports doesn’t come to pass. AFW currently buys eight case good groups produced in Mexico, primarily the rustic looks the country does so well, he said. But it also brings in some 10 to 15 truckloads of accessories every month.
The 5% percent tariff was Trump’s opening salvo, but it could go to 25%, and “25% is always a game changer,” Jabs said.
Still, AFW’s approach would be the same as it was with China, he added in the next breath. “We’d sit down and negotiate with the factories or raise our prices.”
Bedding could be ‘jolt’
Oscar Miskelly, partner in Jackson, Miss.-based Miskelly Furniture believes most retailers were waiting to pass on a portion of the new Chinese tariff increase to consumers until after the Memorial Day holiday weekend, partly because 25% rate wasn’t in effect yet.
“So we’re just starting to do price adjustments on goods we will be receiving in mid-June and going forward,” he said.
Miskelly has estimated the average bump up the retailer is incurring on the 20% to 25% of its lineup impacted by the tariff is about 5% to 7%. The increase on adjustable bases for mattresses — ranging from 10% to 20% — is more of a concern, he said.
The retailer current is supplied with Chinese-made bases by Tempur Sealy International, and recently was informed that prices are going up June 23 by $50 to $100 per base, said Alan Vonder Haar, Miskelly’s director of strategic development and growth. That’s a big enough jolt to make the company rethink its sourcing strategy.
“That actually will be a focus for us at the July Las Vegas Market,” Vonder Haar said. “We will be looking for potential other source to remain competitive in the category.”
A tariff on Mexican goods would throw yet another wrench into the works. Like AFW, Miskelly buys a lot of rustic case goods from Mexican producers. Oscar Miskelly estimated roughly half of its bedroom assortment comes from the country. Its key supplier said it won’t raise prices even with a 5% tariff, “but if it goes higher, they will,” said Miskelly.
“This is an interesting time we’re dealing with, but we’re trying to be flexible,” he said. In general, Miskelly said he doesn’t believe tariffs will hurt business unless the overall health of the economy and the consumer is affected by them. He’s more concerned about the availability of goods these days and a container shortage that may exacerbate the issue.
But when it comes to pricing, the furniture industry has been stalled in a deflationary mode for years, he said, so adding dollars to the same unit volume may actually turn into a healthy thing for retailers.
Put in perspective
Tamarac, Fla.-based City Furniture is another not rushing into wholesale assortment changes despite rising tariff pressures.
“Since all of our vendors we have asked for assistance have cooperated, we will continue to support them and, with several new stores recently or soon to open, our overall orders are increasing substantially,” said CEO Keith Koenig.
“Let’s keep this in perspective,” he said. “Retail prices for furniture have increased very little, if at all, over the past 25 years.”
Koenig has repeatedly noted how City’s starting sofa price ($299) is the same today as it was in 1994 when the furniture store was born. The big differences today: These promotional sofas are better values, and there are more of them on the floor. City still has the same starting price point in dining. Its starting price on a leather match motion sofa is $200 less than it was that day it opened 25 years ago.
Even at the higher end of the retailer’s price spectrum, “our Bernhardt friends remind us that their dining and bedroom sets often cost more 25 years ago than they do today,” he said.
“We do not want them, but tariffs won’t kill furniture sales.”
But Sam Zavary, CEO of Houston-based Exclusive Furniture, thinks some retailers are underestimating the potential disruption of the trade war and maybe even the scope of the impact of Chinese tariffs — perhaps forgetting to factor in the Chinese-produced materials for product assembled in the United States.
When he adds all that up, Zavary estimates about 60% of the Exclusive’s total mix has been impacted to some degree. Among other things, a good portion of its dining room, entertainment furniture and upholstery offering currently come from China. The retailer started raising its prices this past Monday by an average of about 15% on the impacted goods, he estimated.
Nearly 10% of Exclusive’s sales come from Mexican imports, mostly rustic case goods, but he expects that percentage to increase significantly thanks to a custom-order upholstery program just implemented with Sofa Master.
“And now I’ve got this,” Zavary said. “We just need to stop these tariffs.”
It’s not just the price increases on furniture and whether or not the consumer will really notice that’s at issue, he argued. It’s the price increase on everything impacted by tariffs — backpacks, clothing, maybe even avocadoes from Mexico now — that ultimately will cut into furniture purchases, he said.
“Say customer had $1,000 in discretionary money,” he said. “All of a sudden that just went down by 25%.” They’re paying more when they shop Amazon and Walmart, where they’ll continue to shop regardless.
“And that means less money to buy furniture.”
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