The Impact of Tariffs – Are You Prepared?

A lot has been written about the Trump administration’s three (and possibly four) rounds of tariffs on Chinese goods, and how the tariffs are, or will be, impacting our industry. Regardless of whether you take your coffee with red sugar or blue sugar, the massive tariffs ARE impacting how we do business, and very few think the impact will be a positive one on our industry. That said, CJ Schmidt, President of industry-leading supplier Hit Promotional Products, is not buying into the doomsday scenarios. CJ believes that, ultimately, there will be some positive results from the tariffs, primarily around the future of the printed catalog, real-time pricing, and honest conversations around (re)setting expectations with clients.

Promokitchen Chefs Robert Fiveash and CJ Schmidt chat about tariffs and promo

Robert:                 CJ, thanks so much for taking the time out of your busy day to discuss this important topic – I think people will be very interested to hear what you have to say.

CJ:                          My pleasure, and I hope our discussion is informative.

Robert:                 OK, well let’s jump right in. Distributors and suppliers have anticipated these tariffs, but we've (on the distributor side) never really quite understood exactly what they meant to our business, when they'd come, how much, how to talk to our clients about it, etc. So one question is what resources do you all have at Hit, and additionally, the industry, to anticipate these kinds of changes in the US tariff policy? A company as big as yours and others out there, you're making investments way ahead of time in technology, people, your physical plant, etc., and anticipating the next move of the administration is very difficult to do. How do you plan ahead for something like this?

CJ:                          Initially, no planning ahead. It was a shock to the world, and to the US specifically in our business because most of our business is conducted there. It's like when issues with Prop 65 arrived, or when issues with BPA arrived, you have to be able to quickly adapt, and we have a pretty strong team especially in our cost accounting and customs brokerage area. The team put some things together for us to help us make difficult decisions a little bit easier, and what our game plan is going to be for next year and beyond.

I think this is going to be a positive thing for us. At first, it was very chaotic, and we had a bunch of import orders that were open, so we had to make some difficult decisions and have difficult conversations with customers, and likewise probably you to your customers in many of these cases. But most of them were understanding and worked with us. I don't think the impact is as drastic as everybody is making it out to be, too.

We all have to keep in mind, it's an increase on our FOB price, not on your sell price. It's not going to impact the bottom line as much as everybody is making it out to be, although the 25%, if and when that comes into play, is going to hurt some people. But again, I'm spinning this as a positive deal, and I think you have some questions, and I'll go into that later.

Robert:                 Got it, so I guess one angle of that is if it's a very low-priced item, the cost of the printing of it, which still may take place in the US, is not even a part of that. Only a small portion is actually affected?

CJ:                          Right. Or not a small portion, but on a low-end item, absolutely right. You're correct. On a higher-end item it's a little bit more impactful.

Robert:                 Okay. And I had mentioned that we at Brand Fuel had almost lost a really big order. This was maybe four or five months ago. The client was very concerned about it. The tariffs was big in the news. Nobody really knew what was going on. We took it upon ourselves to, when they were announced, to try to find information on the government's website, and it was a several hundred pages long PDF of all the items, and electronics, and wiring, and magnetics, and all this kind of stuff, and it was literally impossible for somebody like me to determine how that might impact my promotional sale to this client.

Do you have any suggestions for the distributor out there? I'm assuming you wouldn't suggest we pour through those sorts of PDFs from the government. What resources do you all have to help us get through this?

CJ: I would hope that, and I know that this doesn't happen on a lot of cases, but in most cases, and you're attesting to this, you're importing through someone like ourselves, I would hope that whoever you're importing with in the US would have some decent amount of knowledge on this, and if not, have their own custom brokerage team in house, have a reliable source that they could say, "Hey, what's going to be the impact here?" And you should be able to get answer within 24 hours without you having to spend all that time going on various websites of our wonderful government. It should be common knowledge to a company that knows what they're doing.

We all have to keep in mind, it's an increase on our FOB price, not on your sell price. It's not going to impact the bottom line as much as everybody is making it out to be, although the 25%, if and when that comes into play, is going to hurt some people. But again, I'm spinning this as a positive deal, and I think you have some questions, and I'll go into that later.

Robert:                 Okay, good. And probably another reason why importing outside of the traditional supply chain just got a little scarier.

CJ:                          It sure did. Yeah, absolutely. And when January 1 comes around, and once this all comes to fruition, we're on a leveled playing field when you're dealing with an import order, and it's just part of the natural process. It's like the cost of resin going up and impacting your cost in China or in the US or whatnot. It's part of doing a day-to-day business at that point.

Robert:                 Yeah. That makes sense. And you mention the resin. Remember, maybe10 years ago or so, when the cotton prices went through the roof? You all weren't in apparel at the time, but there was a period where apparel companies would not quote cotton prices for t-shirts, and polos, etc. because there was a shortage around the world. And it sounds like we're coming up upon something similar to that, not only because of the tariffs, but also it sounds like oil prices may be moving up, and so that's going to affect the resins, etc.

Tell us a little bit about what your catalog policies are for 2019? We've heard of the imminent demise of the big huge catalog. You all still have a massive catalog - do you see the tariffs as maybe an arbiter towards the final demise of the big catalog? Or what your policy for ‘19?

CJ:                          Absolutely. We are not going to be publishing pricing in our catalog, and we'll just have information such as color, imprint location, standard imprint areas, etc., that type of stuff, and we're only going to be putting out all of our new products, and what we deem is our best-selling products, or quite frankly products that we really want to push. No pricing. You'll go to the web, and we plan on updating the web pricing quarterly. Roughly pricing is good for 90 days.

Robert:                 Okay. Will the pricing that you all have in your web catalog, will there be one price at 10%, and another price if we get to 25%? How will you do that?

CJ:                          For us, that's too challenging. We're going to generalize it. We don't know what inventory - let's say we have 500,000 draw string bags in black, and one of your clients needs 150,000 right away. We eat up a lot of inventory on that specific sku. I don't have a way to say, "Oh, we're going to sell you this one at 10% or this one at 25% and what not." It's going to be a melded general price on the web.

Robert:                 Got it. You had mentioned that you see this as potentially a positive for either Hit or the industry. Can you tell us what you mean by that?

CJ:                          Sure. The first thing is the catalog. I think there's a necessity for a catalog, in that our industry is a little bit different. There's a higher median age and comfort level. And no quarrels whatsoever to that generation and whatnot that still likes to use a catalog, but I haven't personally used one of our own, I haven't even looked at ours outside of the proofing, and a couple of layouts and images, in the past three years.

It enables us to now have a catalyst to start migrating more and more customers to the website, and to use the tools that we've all spent millions and millions of dollars for you all to easily access information. And then hopefully that spurns us to the Promostandards conversation where this stuff is just automatically updated in your system, or on a nanosecond basis.

Robert:                 That's fantastic.

CJ:                          Yeah. And then obviously you get to save a little money on the cost of the catalog, and mailings and such. In fact, we're going to be doing more things like mailings of physical products, and more of the marketing budget outset (which still stays in that marketing basket as far as budget is concerned), can now be used for different marketing avenues for distributors.

Robert:                 Got it, got it. I had a question here in terms of the percentage of your product that comes from China, and then the percentage of the product that is actually impacted by the tariffs. But just the piggyback on that, do you see this as a short-term negotiating tactic or more of a change in the long-term playing field here in terms of you all potentially looking at other manufacturing bases, whether it's India or Mexico or Vietnam or what have you. What does that look like?

CJ:                          Sure. We've been looking at other countries, and importing from other countries outside of China for the past three years, and not in anticipation of this tariff situation, but more of a labor force and increase in pricing across the board, whether it be labor cost or cost of material or just in a growing economy in China, and then the strengthening of the yuan versus our dollar. We've been exploring other options, and I've had some good success and some horror stories.

And I would still say 90% of the product we continue to import in 2019 will be from China.

Robert:                 Got it. And what percentage of that chunk would be impacted by the tariffs?

CJ:                          It impacts all your bags, all your headwear, and anything that is, like you mentioned, a charging device, a wireless charger, power bank, charging cord, etc. If I were to throw a number out there, it would be between 30 and 35%.

Robert:                 Okay. Yeah, I think that's actually a valuable educational piece of info there, because I think people are confused about what it’s really going to look like to them. Am I impacted by the entire line or what have you, so that's a great piece of information.

CJ:                          Yeah. Your drinkware category is not impacted. That's a growing sector for us. We sell a tremendous amount of sunglasses and that's not impacted. There's a lot of areas that are not impacted. It pretty much stays stagnant.

Robert:                 Are there opportunities for suppliers that don't have the same ethics that Hit might have to throw "tariffs" on drinkware and things like that to the unknowing?

CJ:                          I would hope not, but sure. And the fact that it's only on the FOB price, they could be telling you that it could be on the overall price. Yeah, of course. There's the ability of people to do that, and maybe PPAI or ASI or whatever show we're doing, or Reciprocity Road or PromoKitchen, has an educational session on the tariff scenario, and how it's truly going to impact our business and the distributor in general.

Robert:                 Good. Yeah, that would be fantastic. Okay. Let's see here, so in terms of this order that I mentioned that we almost lost - it ended up being an import order that we did through you all, and it turned out great. The client loved it. I did not have at my fingertips all of the definitive tariff info, and honestly, we got lucky. We were able to talk them off the ledge, and we got the order. But I think honestly it was because the tariffs were a bit of a ways away, but they're here now, and I think we were able to just sort of get through it because there just wasn't enough information out there.

There's a lot of information out there now, but most distributors, I would guess, really still don't know how to talk about it to their clients. Do you all have any resources, any sort of guidance documents or how to talk through the issue with particular clients? Or is that something that you're training your traveling reps to discuss at lunch and learns, and things like that? What are you all doing to maybe give us, your extended salesforce, the tools to talk a client off the ledge?

CJ:                          The latter. We've empowered our salesforce with proper information in regards to that. We even have a, I guess, a Promotional Tariffs for Dummies-type book, so to speak, and yeah, they're supposed to be talking about that. Anything they're quoting from an import perspective. Now that could be quoted today as you're quoting with tariff and non-tariffs on an import quote. And that January 1 hits and this gets approved, you're impacted immediately. Now, a distributor that's importing himself or herself, and maybe that container got bumped, and it was supposed to arrive December 27th and now it's arriving January 4th, and you would be on the hook now for that additional monies.

So, yeah, we're trying to teach everybody, but there's not a whole lot to teach. These items are impacted, these aren't impacted. This is the date we believe they will be impacted. The harder part for us is our inventory position, and how much do you buy, and what do you buy. Again, a large quote comes around. You have three different PO's sitting on the shelf, and you have to figure out a melded price that's fair for everyone.

Robert:                 Yeah. And can you imagine scenarios where, we as the distributor, get a quote from you all or someone else, and were quoted something, and the container arrives on 1/1 instead of 12/31. We've already quoted the client. Talk us through how that might work. The shipment gets delayed and all of a sudden there's a 25% tariff instead of 10%, but we've already been quoted 10% from the factory?

CJ:                          We've gone through that kind of already when the 10% went around. There were some delays when the new iPhone came out, we were shipping air, and all the cargo space was taken up by Apple. So there was a delay there, and there were a couple of orders, and they weren't giant, but we just ate it because that's not your fault. But we also can't control when Apple is doing a release on their phones. We've experienced first-hand, and we're large enough to sustain it, and had enough margin in the sale of those specific orders to sustain it, but there are scenarios where it's not going to be that, and we're working on 10 to 15% margins like we do on some of these large jobs together, and that takes your whole profit out of it if we don't plan properly.

Robert:                 Got it. Remind me on your direct import program, do you all have any non-Chinese resources for that piece?

CJ:                          Yes. Specifically, and we're in that category, and this is no secret. There's Vietnam, Cambodia, India. You brought up Mexico, but still most of the raw materials wouldn’t be coming from Mexico, so, in my opinion, that would still be considered cheap value. The product would still be out of China.

Robert:                 So, at least on the headwear side, we could kind of direct ... We could suggest or direct the quote to come from another one of your sources, other than China?

CJ:                          My suggestion is to quote several. I always like to quote several options period, based on the timeframe that you have, and on the cap quality that you'd like - good, better, best. And a lot of times that Vietnam factory is a better quality. But that's just our experience. So yeah, a cap is not really going to be impacted, again because you're paying it on the FOB pricing. You're not impacted that drastically. It's more, to me, I like the higher-end or medium-end bag.

Robert:                 Got it, so winding down here, respectful of your time. One thing that I'm curious about, you mentioned that you see this impacting the future of the printed catalog, which I think there's some segment of the distributor population that would bemoan that, but there are others that would cheer it. I'm trying to think of any other impacts across the industry on the supplier side that these tariffs might have. I think all of us who've been to the big shows are starting to see the direct importers at the shows, and they’re alongside you guys and the traditional folks that we're used to seeing. Do you see any positive or negative impact on the quantity or quality of those folks that we come across because of these tariffs? Or is it kind of a neutral thing?

CJ:                          No. Like I said, our challenge is going to be more about our blank goods on the shelf right now. It's very easy to quote these import jobs. The challenge right now is can you get it in before the end of the year, before these tariffs potentially go into play? But January 1 comes around, we know the delivery is past that date, we're on a level playing field with the importer that's quoting against us in these scenarios.

Robert:                 Got it. Any other thoughts along these lines?

CJ:                          Just between this, and I don't know how knowledgeable everyone is on all these new Prop 65 regulations, but the two of these, there are going to be price increases, and we just have to all be very cognizant of that, and it's going to be hard for the distributor to extend pricing to the end user for a lengthy period of time that they're used to it, and I would say 90 days is going to be the norm in that regard, and then hopefully we can all abide by that.

Robert:                 Prop 65, oil prices and the tariffs, it's like a triple whammy.

CJ:                          Yeah. You brought up a really interesting point. The cotton industry, the apparel industry, did this a long time ago, and to a certain degree continues to do it. Most wholesalers give you a week price list, right? And some of the bigger distributors get longer periods of time than that, right? But it's accepted in the apparel world - what makes the hard goods world so different?

Robert:                 Yeah. That makes sense.

CJ:                          And it's about time.

Robert:                 Yeah, it makes sense. So, one last question, how do you think most end users will react to the conversation about higher prices due to these tariffs? How can we get them to relate to the situation?

CJ:                          Yeah, so my pitch as a distributor salesperson to my end user customer would be that, in a lot of cases, you’re (the client) in industries where the promotional products might be the low man on the totem pole when it comes to what you’re importing or purchasing (steel, electronics, etc.), and your business is experiencing quite possibly higher tariffs, or different products that are going to be tariffed higher than the ones that we're looking at in promotional products. Always bring that up. Again, it's a level playing field for everybody. It is what it is.

Robert:                 I think you're right, and that’s a great point. I think sometimes the clients are so used to prices staying basically the same forever, or even coming further down as our supply chains shrink, or we find cheaper ways to make it or more efficient ways to make it or source it, and I think they're used to prices always staying the same, and I think we're past the time of just sort of sitting back and taking it when the client complains about pricing. I think it's a really good point in terms of they're feeling it on all other of their sides of their business - why would their branded merchandise be any different?

CJ:                          That's exactly right.

Robert:                 Good. Well, CJ, thanks again so much for your time today. I really appreciate it.

CJ                            You’re welcome, and thanks for the opportunity to discuss the tariffs today – hope it was helpful.

Most knowledgeable industry observers agree that the tariffs will, at least in the short-term:

·         Slow down the US economy, as consumers pay more for goods imported from China

·         Decrease industry profits in 2019, as both suppliers and distributors eat margin to maintain sales

·         Have some clients move from promo to other forms of advertising that aren’t impacted by tariffs

·         Have some clients focus, more than usual, on lower-priced items

·         Have suppliers look to other countries for production (in the small number of cases where that makes sense/is possible)

·         Decrease the ability of suppliers and distributors to plan and make large investments in their businesses

·         Potentially reduce M&A activity

·         Hasten the demise of the printed catalog

·         Hasten the demise of year-long pricing

All that said, could the tariffs be a well-planned, thoughtful initiative to get China back to the negotiating table, a short-term scare tactic to force a discussion about the overall trade imbalance and the very real issues of intellectual property theft and open markets? It’s certainly possible, and let’s hope the Administration focuses its efforts where the US’s long-term interests lie. Your laptop is made in China because YOU prefer to buy a laptop for $900 instead of $2,000. Until we’re all willing to pay substantially more for the goods we use every day (an enormous percentage of which is made in China), it’s hard to complain too much about the trade deficit with China. But let’s hope the tariffs do open up honest discussion about intellectual property and open markets – if progress is made on those two fronts, perhaps the short-term pain that most in the industry suspect the tariffs will inflict on this industry will have been worth it.

See Christopher Ruvo’s comprehensive article in Counselor on October 19th entitled “Tariffs: Impact & Advice for the Promo Industry” for a more in-depth discussion of this important topic.