As the world’s most lucrative apparel market, the US is a prime target for brands looking to accelerate their growth. However, recent regulatory changes have introduced additional costs which impact the profitability and therefore the popularity of selling on the North American market. For example, the imposition of a new 10% tariff on Chinese goods could see some brands’ apparel prices rise by as much as 2% due to the additional costs they will have to bear.1
Below, we explore the potential financial challenges and possible responses for fashion brands looking to successfully navigate the continuously evolving US regulatory landscape.
Understanding the cost of US trade tariffs to brands
One of the most immediate financial impacts of the new trade legislation is the increase in sourcing costs. Remember, new tariff come on top of existing duties on products, making it much more expensive to ship goods originating from China into the US. In addition to the new tariff, the US has suspended the ‘de minimis’ duty exemption for low-value shipments.2 This makes all shipments taxable and especially D2C or B2C fulfilment less profitable.
To mitigate rising costs, many brands are re-evaluating their supply chains by exploring alternative manufacturing locations that are not or less affected by the new tariffs, such as Vietnam, India and Bangladesh. However, shifting production to new locations can be both costly and time-consuming. It requires brands to establish new supplier relationships and adjust their entire logistics set-up. That’s why it’s important to ensure your response to geopolitical change, supply chain constraints and for example acts of god, is as cost-effective as you need it to be.
The rising cost coming from operational adaptations
Beyond sourcing-related costs, the regulations introduce new operational hurdles that could impact brands and consumers alike. The removal of the de minimis exemption means that all shipments are now subjected to a robust customs clearance process regardless of its’ value. This change has often resulted in longer delivery times and administrative delays, which in turn, impact the customer experience and satisfaction without the appropriate adjustments implemented to the existing processes to mitigate.
In addition, more complex logistics frameworks stemming from supply chain diversification have the potential to drive up logistics management costs. For example, brands will need to allocate more resources to ensuring customs compliance, coordinating transportation and managing inventory. It’s also important to consider that your brand is not the only one affected. Meaning that when you are for example looking to adapt by establishing capabilities in different, less affected countries you may be confronted with inflated labor costs, due to the fact that all are looking for that out. Failing to understanding the “Bigger Picture”, can result in increased expenses, potentially harming overall profitability and your brand attractiveness.
How can the tariffs affect the customer experience?
From a financial perspective, the new tariffs and the operational adaptations that they require could put further pressure on brands’ profit margins in an already competitive industry. This means that brands face choosing between either absorbing these costs and seeing margins erode, or passing the costs on to consumers.
However, in an increasingly price-sensitive market,3 brands that raise prices to reflect increased costs risk losing customers. Therefore, to maintain sales (growth) and (gain) market share, brands must approach price increases with caution. Potentially, by balancing profitability with brand loyalty through strategies such as incremental increases or value-added services.
Mitigating the cost of the new US trade tariffs
Adapting to the new trade regulations poses significant financial and operational challenges for fashion brands operating in the US. Of course, the extent of the impact will vary from brand to brand, depending on their reliance on Chinese manufacturing, as well as their size and ability to implement supply chain diversification strategies. And while there are many more possible approaches, from tariff engineering to reshoring, the key to adapting successfully is considering both operational costs and customer experience impact after fully mapping out the implications to all aspects of your business operations for every scenario.
Want to find out more about addressing the costs of trade tariffs to fashion brands? Read more here or get in contact for a free consultation with a Bleckmann expert.
