While the potential costs of tariffs gets all the attention, the countless steps being taken to mitigate tariffs and planning around the uncertainties created by them could be having an even bigger impact on the outdoor industry, executives said at a session at 2019 Outdoor Retailer Summer Market.
“I think what’s affected us the most is the amount of energy it draws away from our other businesses,” said Sara Bowersox, global manager, compliance at Keen Footwear. Rather than trade, Keen’s team wants to focus on innovation and coming up with new products or initiatives such as the brand’s Live Monumental campaign that raises support for protecting national monuments and “fun things” like its Keenfest events that celebrate the outdoors with an eco-message.
“We want to encourage people to go outside and play, but we can’t focus on that if we’re worrying about managing our costs,” said Bowersox. She added, “Tariffs kind of suck the air out of the room.”
Peter Bragdon, EVP, chief administrative officer and general counsel at Columbia Sportswear, likewise lamented how Columbia’s management is investing significant amounts of time on trade instead of core aspects of the business.
“I had three calls on this yesterday,” Bragdon told attendees at the session. “So instead of taking in the first day of Outdoor Retailer, I’m on conference calls with 16 other people. So there’s a real cost that no one’s tallying, but it’s ultimately going to show up across the country with so many people spending time that way.”
Uncertainty Stifling Investments
Beyond any loss of time, however, Patricia Rojas-Ungar, VP of government affairs for the Outdoor Industry Association (OIA), said the tariffs have caused so much unpredictability for outdoor companies that many have had to slow or cancel job-creating investments.
Bragdon admitted that the “tremendous uncertainty” has caused Columbia to put some projects on hold until the outcome of the negotiations between the U.S. and China becomes clearer. He added, “Uncertainty is the enemy of investment.”
Steps to address tariffs include working with stakeholders across the supply chain to mitigate existing and the potential impact of tariffs as well as lobbying legislators to repeal existing or prevent threatened tariffs.
In many cases, executives are being asked to take on assignments that are far outside their areas of expertise. For Columbia, the lobbying steps have included talking to members of Congress, taking trips to Washington D.C., sending letters to legislators and speaking to the media.
“Even though Columbia is a very large company, there is no one that has the word ‘government’ in their job description,” said Bragdon. “We have a lot of people who are not government affairs people spending time with government industry associations. So we’re spending less time on customers and things like that.”
Kay Martin, CEO of Boco Gear, the Boulder-based headwear specialist, now believes her title translates to “chief everything officer” with her category directly hit by the tariffs.
Headwear was impacted last fall by a 10 percent tariff that landed on the List 3 group of $200 billion in Chinese imports. On May 10, the tariffs on List 3 products increased from 10 percent to 25 percent.
With about 90 percent of its product sourced from China, Boco Gear has worked with the OIA, customs officials and has had conversations with its factories to attempt the mitigate the impact of tariffs. The conversations with factories have been particularly painful because Boco Gear has an exclusive relationship with one factory in China and Martin refers to the owner as her “brother from another mother’ and part of the Boca family. She said, “This has hurt him and all of his workers as well as us here in the states.”
Boco Gear chose to absorb as much as the initial 10-percent tariff “as much we could” to avoid impacting the customer but she wonders how much prices can be raised to offset the 25 percent tariff without making her brand less competitive in the marketplace.
Overall, Martin agreed said the “distraction” of dealing with tariffs has been the biggest impact since her company has been seeing “really, really fast” growth over the last four years. She added, “This is profit taken from us that we would be investing in new people and innovation. That was something that was really hard for us being a small company on a super-sharp growth curve.”
Potential $1.5 billion In Extra Tariffs Per Month
The costs of the tariffs were laid at the start of the session when Rojas-Ungar revealed OIA’s first comprehensive look at the impact of new tariffs on the U.S. outdoor industry. The data was compiled in a partnership with Tariffs Hurt the Heartland, the national campaign against tariffs supported by more than 150 trade associations representing retail, tech, manufacturing and agriculture.
Among the findings:
- From September 2018 through April 2019, outdoor companies paid an extra $1.1 billion in tariffs on List 3 products compared to the tariffs on the same products a year earlier. The tariffs rose from over $650 million to over $1.7 billion in a year. The impacted List 3 categories include: backpacks, camp stoves, camp chairs, hats and bikes.
- The move to raise tariffs on List 3 products from 10 percent to 25 percent, effective May 10, are expected to more than double the tariff burden for the outdoor industry in the months to come.
- Any move to place a 25 percent tariff on a “List 4” group of products, which includes apparel and footwear, would result in a “massive expansion” of new tariffs for outdoor companies. From September to April 2018, imports of outdoor products on List 4 totaled $61 billion compared to about $14 billion in imports of products on List 3 products.
- In total, the data found that 25 percent across-the-board tariffs on both List 3 and List 4 could result in $1.5 billion in extra tariffs per month on outdoor products from China in the coming months.
Makers of apparel and footwear are being already impacted by the tariffs even though their core categories haven’t been hit.
For instance, Bragdon noted that earlier moves to place tariffs on steel and aluminum has caused prices on manikins to go up. Those tariffs also impacted decisions around lighting, store buildouts and campus expansions. Said Bragdon, “It causes you to revisit everything and we’re going to now give a chunk of it to the government instead of the store and employees.”
Bowersox said footwear sole molds have been impacted by tariffs enacted last year, forcing Keen to shift sourcing for most of those items to Thailand.
Keen also recently absorbed a $4,000 additional duty on its Newport sandal key chains, which it hands out for free to support point-of-purchase or as swag for industry partners. She said, “Those items were ordered a year in advance and were on a regular fulfillment cycle so our merchandising team had to absorb that additional cost that we weren’t expecting.”
Mitigation Efforts Require Some Scrambling
As far as mitigation strategies, Matthew Anderson, COO and president, at Charter Brokerage, which specializes in customs compliance, said suppliers should be exploring tactics such as duty drawbacks, foreign trade zones (FTZs) and in-bond, zone-to-zone transfers.
But Anderson said its’s challenging to develop the mitigation strategies given the timeframe of impending tariffs and the long-term nature of trade contracts. He said, “The time is so condensed that it really is quite difficult for those of you that have other jobs besides just playing around with the 301 tariffs.”
Keen’s Bowersox also noted that talked-about moves to bring in goods on an airplane or a ship before any tariffs may become effective has also become much harder. She said, “Everybody and their brother is trying to get out ahead of these deadlines.”
Beyond talking to factories and stores and working with organizations such as the OIA, Bowersox suggests reaching out to other supply chain partners, such as freight forwarders, customers brokers or other third party logistics partners, that might offer mitigation solutions.
While compliance professionals “have their hair on fire” helping multitudes of firms, they can be helpful, although persistence is required. Bowersox said, “You may have to stand up and wave your arms and jump up and down a little bit to get attention, especially if you’re a smaller brand. But don’t shy away from it because those resources are there and you can use them and there might be some options that are really, really helpful to you.”
Factory partners further might help a company find a way to have goods applied for tariffs at a lower cost or might be open to sharing the pain.
“Have open discussions with folks in your supply chain about the fact that we’re all going to get hit with this but let’s pull together and see if we can get through it,” Bowersox advises. “Hopefully, it’s not as bad as we think. But if there’s one positive we can get out of this, it’s really activating the supply chain, making sure you know all your partners and really cementing those relationships so that everybody can come out alive.”
Bragdon described the current tariff actions as “Herbert Hoover’s policies on steroids.” He said that apparel and footwear industry already faces heavy tariffs with Columbia’s highest tariff at 37.5 percent. If a 25 percent tariff is enacted, “you’ve got a product that very quickly can’t be sold at a profit and consumers aren’t going to pay the price or not get the product.”
Longer term, he hopes the experience will cause legislators to rethink how tariffs are applied as a trade tool, even if it has a legitimate goal such as protecting intellectual property rights. With trade policy “being made on a week to week basis and sometimes on a daily basis,” planning ahead is nearly impossible, according to Bragdon.
For instance, a tariff may cause a company to raise prices, but it would be extremely difficult to adjust prices two months later with another change. He said, “It’s not easy changing prices, just changing the tags would be tough.”
A sudden and unexpected tariff on another country, such as Vietnam or Mexico, a few days later would create a need for another radical shift for a company.
“There’s a reason trade policy historically is developed over the course of years and decades and involves stakeholders and allies,” said Bragdon. “It’s so people can plan around it and benefit from that certainty…We’re doing the best that we can to react, but it’s reacting. We need to have a broader message about that certainty and what the rules are going to be and when these things can be imposed and the sort of time frames.”
Representatives from the OIA and other industries have been attending hearings with the U.S. Trade Representative (USTR) beginning on June 17 on the impacts of the threatened List 4 tariffs. The hearings will end early next week.
Bowersox noted that 321 companies across organizations will be testifying, and almost all of them will testify in opposition to the tariffs. She noted that on the first day, of the 50 brands that testified, only one was for tariffs.
Many more companies have submitted comments to the USTR. But Bowersox said it’s still important to be heard because the general public should know that the tariffs are being paid for by U.S. companies and the result will likely be higher prices. Some of the messaging in the media, she contends, is wrongly implying that Chinese companies are taking a hit.
She further said that with the average duty in footwear at about 17.5 percent, an additional 25 percent tariff would be a high hurdle to offset. She said, “These are really big numbers and the public in general and many smaller brands aren’t aware of it. So it’s just getting the message out there.”
Photo courtesy Outdoor Industry Association