A step-by-step guide to surviving the China Tariffs
This past May, the U.S. raised tariffs from 10% to 25% on $200 billion of Chinese goods and Chinese businesses aren’t the only ones feeling the pain. If you manufacture your products—or even just components of your products— in China, the new tariffs will hit you square in the bottom line.
Fortunately, there are ways you can spread around the costs to keep your margins healthy. This guide will show you a step-by-step process that will help you combat rising tariffs.
How Does a 25% Tariff Affect You?
The tariff is a cost you will pay before your retail partners buy the goods. If your margins look like our example, you could lose over 40% of your profits.
The biggest mistake everyone makes is to try to push the whole price increase onto big-box retailers like Walmart and Home Depot.
Why shouldn’t your retail partners take on some of that burden? They have deep pockets and you’re the little guy, right?
Wrong.
Retailers will not accept the increase if your retail prices haven’t changed. Though it seems like a no-brainer, you simply will not be able to recoup the entire tariff by adjusting your wholesale prices alone. Instead, we recommend a three-pronged approach:
- Negotiate savings from your suppliers and factories
- Find additional savings from your supply chain and ocean shipping
- Push a small, fair increase across to retailers
Three Steps to Success
The following approach will help you solve your profit margin problems while keeping your retail partners happy. It’s a win for everyone, but you’ll need to keep several balls in the air to make it work for you.
Step One: Renegotiate Pricing with Your Factory
Did you know that China subsidizes its factories? The Chinese government typically helps factories by funding 3% of their sales. Use this knowledge as leverage to discuss a reduction in your manufacturing cost. Since tariffs are partially calculated based on Freight on Board, a newly negotiated price has the potential to decrease FOB by 5%, which will, in turn, reduce the total amount you pay in tariffs.
When negotiating with the factory, you should also revisit your currency exchange rates. If you’re paying suppliers in yuans (RMB) based on a rate negotiated a few years ago, you could be paying too much. Updating your exchange rate could save you another 5%.
Finally, consider lobbying for better terms from your factory. If you can raise the Net on your invoice from Net 30 to Net 60, or even to Net 90, you’ll be giving your business a better cushion for repayment. This tip is especially important because it gives you more financial wiggle room while you talk to your retail partners about the potential price changes on their end.
Step Two: Renegotiate Logistics Costs
With a 25% tariff hanging over your head, everything should be on the table when it comes to cutting costs. Don’t neglect to take advantage of some low-hanging fruit.
For starters, negotiate your ocean freight costs with your shippers. If they’re not willing to budge, it’s time to research new carriers who are willing to play ball and give you the pricing you need.
It’s also a good idea to investigate new packaging costs and designs. Can you get a better price on materials and production? Can you redesign packages to take up less space and lower your shipping costs that way? Reworking your logistics costs can save you another 3%.
Step Three: Renegotiate With Your Retail Partners
Let’s pause for a moment to review the math. If you really worked the process in Step One and Step Two, you could save up to 15%. The harder you work the factory, the better off you’ll be, because paying lower FOB means being charged less in tariffs overall. For example, lowering your factory costs by 10% helps reduce your tariff amount by about 2.5%.
Now you will only need to pass about an 8% increase to your retail partners in order to cover tariffs. That’s going to be a lot easier to do—but it still requires some finesse.
To get big retailers like Lowe’s and Wayfair on board, you need to make sure to focus on customer profitability — that means raising retailer prices across the board.
Start by focusing on your major retailers. Go to them with your new plan. It will be way more attractive than what others are doing (namely, trying to push through a straight 25% markup). So, you’re already at an advantage when you’re presenting a markup closer to 8%.
Prepare for Pushback
Once you’ve gone through the 3-step process, you will have a better deal to provide to retailers, however, you still may experience pushback. Here’s what to expect:
- Delays. A 60- to 90-day delay on a price increase is standard policy for most retailers.
- Pressure. Retailers will want to raise the retail price for consumers before accepting an increase on their end.
- Silence. Many retailers will ignore you to avoid changes to current costs.
- Negotiation. Your initial proposal will get negotiated down by retailers.
How to Handle Retailer Obstacles
Obstacle: A 60- to 90-day delay until the price increase is active may be hard to swallow. Plus, retailers assume you have pre-tariff inventory to work with.
Solution: To protect yourself in the future, make sure to add a clause stating that if the tariffs are lifted, you also have 60 to 90 days before returning to the old price.
Obstacle: Raising retail prices for consumers can be tricky. Raising prices for one means you must do it for everyone. No one wants to go first.
Solution: Start with your strongest buyer relationship. If you can get an agreement with one of your big partners, you can use that as credibility to move everyone else forward.
(Pro Tip: While you’re working on these negotiations, stop all promotions so retail prices naturally drift higher.)
Obstacle: It’s hard to have a super-strong relationship with every retailer, and the ones you aren’t tight with will likely just delete your emails.
Solution: Stay persistent! However, if you don’t hear back, your only option might be to pull inventory EDI feeds. This will zero out their inventory levels and force them to react. Once you have their attention, then you can follow the process above for handling pricing pressure.
Obstacle: It’s important to be a strong partner, so make sure your price increase happens at the SKU level.
Solution: Take the time to look at individual SKU margins and make a fair price increase based on what your retail partner can accept and what the market can bear. The more thought into each price increase, the better your odds of getting them approved. Your buyers will appreciate your partnership.
The Bottom Line on Tariff Price Increases
The last thing you want to do is react to the China Tariffs without a detailed plan of attack. Trying to push a 25% increase onto your retail partners is a recipe for disaster. The main thing to note is that everyone will be feeling the effects of the tariff: the supply chain, retailers, and end consumers.
The three-pronged approach works because we’ve done it. These three steps take time, but it’s a tried-and-true way to get your price increase accepted so you can move forward and profit.
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