EP6: Tariff Price Increases – From Product Supply Chain to Retail Customers; How to Get Your Price Increase and Become Whole

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. This was then raised from 25% to 30% in recent weeks. 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. Host Luke Peters goes over how to survive these China Trade Tariffs through practical ways from going to your suppliers to helping pass along costs to your buyers. 

Podcast Transcription

Thanks for joining us on the page one podcast. I’m your host, Luke Peters. And today we’re going to be talking about tariffs. And as you know, I’m the CEO and founder of NewAir appliances and we are right in the middle of this tariff situation. So today I thought it would put out this small podcast, but show you guys exactly how we’re handling the tariff situation and hopefully bring you some valuable, insightful information that you can utilize in your own companies. And for those of you that are not having to deal with the tariffs, give you just some better insight of these challenges that the tariffs are creating, which, which are huge today, I’m going to show you how we have a three step process on how we handle tariffs. At NewAir and with our new company Retail Band, you can learn more about hello@retailband.com where we can bring these services to other companies that need that help.

We can show you guys how we handled the process the same way we do it here at new era. So let me just hop right into it. First thing about the tariff is to think about the three areas where you can drive the revenue back to your company. So first you want to renegotiate the factory cost. That’s an obvious one. I’m going to get into actually how we do that and also even talk about results that we’ve seen. Next, you’re going to go into logistics. There’s tons of areas in logistics. We’ll talk about ocean freight and domestic freight and a bunch of examples in between. And then finally you’re going to renegotiate with your retail partners. And that can be tough, sticky, uncomfortable, but it’s something that has to happen. And in this quick podcast, I’m going to jump into all of those. So first before I do let, let’s talk about what everybody is saying and what is reality.

Okay. So if you’re watching the news you’re going to hear that the factories are going to eat the cost and that all the product brands are going to be able to pass this on to the customer. And I can tell you that for the most part, that’s not correct. Some of it is going to get passed onto the customer. It’s going to be delayed and being passed onto the customer. It’s happening right now for a number of reasons, which we’ll go into. But I mean, these, the large retailers, they don’t want these price increases and everybody can understand why and who’s really getting squeezed or the brands themselves because the factories in China are also not taking on this full increase. They’re not able to, PR prices were probably already negotiated down. The RMB hasn’t really moved as much as the, like to make it seem like it’s moved on.

The media move maybe 5% from last year. And I mean, it’s up and down all the time. So just depends on when you listen to this podcast and if you look at the past trend, so you’re able to get a price increase in a factory and the factories definitely are, you know, in a partnership or helping out, but not to the extent that you might, you know, see on CNBC where everything is immediately getting passed onto the customer. So there’s a big difference between what everybody is saying and what is reality. And I’ll give you some specific numbers. I’ve talked to a lot of friends and everybody’s pretty sensitive on, you know, kind of saying how much they’ve been able to get from their factories and also sensitive on saying how much they’re average increase in the retailer end is. So what I’m going to do here is I’m just going to kind of aggregate those together and just give you a general feeling.

And then with your company, hopefully you fall in this range. Okay. So we’re not going to name any names here, but what I’m hearing is on the factory end, and this is probably a sampling of over 10 companies that they’re seeing about five to 12% of a decrease. Okay. Some might see a little bit more than that, but what I’m hearing is about five to 12%. Most people are not getting as much as they thought they were going to get. Okay? That’s just the general feeling is that they’re not getting as much. And a lot of times because they had it, you know, pre tariff, they already had prices negotiated down. Who knows, maybe the factories are better negotiators. It’s hard to say and it does change depending on the type of product. I’ve noticed that for products that are made outside of China as well, that the price decreases more significant.

Meaning if there’s manufacturing capabilities in Southeast Asia Cambodia, Vietnam, I just in those product categories then just a small sampling of companies I’ve been speaking to, I’m seeing a little bit of a larger price decrease. Okay. Now let’s talk about the retailer. And so what we’ve been seeing and just again aggregate because it’s pretty sensitive information, is that most companies are getting about an average of an 8% increase. Now this is going to be totally different across product categories. Okay. And so in the categories we’re just a lot of my friends are in, that’s kind of the increase that we’re seeing now. Some in some areas they might have more control, but we’re talking about if you’re, if you’re passing this on to a big box retailer that’s about the, you know, the extent of the amount that they’re taking. Keep in mind though, 8% on a wholesale price is more than 8% on your cog.

I mean, I know I’m stating the obvious here, but we have to keep that in perspective. So that may be equivalent to let’s say you know, 12 or 14% on the COGS. So you’re getting a significant part back, but you may not be whole. And that’s the key thing. And, and I think a lot of the retailers think that the brands are whole. They’re not, you know, and I know recently just target, you know, there was an article where they’re not accepting any price increases and and it’s difficult. So, so I just wanted to kind of give an overall feeling of, of what I’m seeing, what I’ve heard and I think hopefully we’ll put some of you guys at ease if you’re not getting the increases and decreases that you would have hoped for. Now on the flip side, one thing I have seen is I’ve seen some companies and they’ve gotten their increases right away.

We’re talking months ago and then others it’s taken longer. I mean, you know, even with my own company, it has taken us longer and it’s a big frustration and we’ll talk about that. So I’m going to get right into all of these details. Okay, cool. So let’s start with the sourcing side. Obviously you’re going to go get factory price reductions. That’s the first thing you’re going to talk about. But there’s a couple of other things that may be less obvious that this is a great time to go communicate to the factories. The first one I’d say is, is probably your net terms, whether you’re getting terms or not from your factories, you can probably get longer, more extended terms and you can kind of just increase your credit or AP by doing that. And while it’s not a price decrease having an increased credit is valuable and you can quantify it some value to that.

I mean, if you’re dealing with the bank or have an ABL or you’re paying a certain interest rate for a line of credit, now you can kind of push some of that, a significant amount actually off to your factory partners. Okay. So that’s the first thing that I would work on. And definitely the feedback I’ve had and in our own personal experiences that you should be able to move the needle pretty good right there. The next thing to look into our volume rebates. So again, maybe you’re able to get a certain distance with a price decrease with a factory, but then you can build in a volume rebate. And this is a great win win. It’s a great partnership idea in the sense that, you know, if you’re doing X million, but now you’re doing, you know, X plus two or whatever it is, you know, 10 20% or 10% increase that there is a rebate and everybody kind of shares in the success.

Their rebates can be huge motivating factor and you know, they can be pretty significant. And a couple additional percentage points right there. Other areas that might not be super obvious is packaging refinement and volume rebates. So depending on how you’re working with your factories and how you’re placing orders and how far out in advance you’re placing them, if you go further out, you can probably expect some volume rebates on that end. There’s a lot more you can do at a factory, but those are the couple of significant items that I wanted to point out. And of course just meeting in person, right? I mean don’t go out there once a year. The more that if you have a team out there that’s even better. But the more you’re joining a dinner together and meet in your factories, you’re going to get further along. So make sure your teams are getting out there.

Now let’s move on to logistics. So we’re going to go through several different categories here and hopefully this will give you guys something to think about and where you can either do some cost cutting or refinements or increase efficiency then your operations. So the first, the biggest one I think is go re-quote your ocean freight. I mean depending on how large your operation is and how many containers you’re bringing across. There’s been a lot of changes recently. There’s new companies, we’ve had some big success there recently and if you email me happy to share kind of suggestion or puts you in touch with who we’re working with right now. Definitely the ocean freight’s a huge one. You can also work in your drayage costs. Even your domestic shipping costs. I mean the, these are just obvious things, but you should always be re quoting these and, and getting the best rates. And then very obvious things is like on the operations side, of course you’re going to go look at all your, your expenses. That’s an obvious one, but how about this? Do you have a metric of efficiency for every single department? Meaning similar or akin to a P&L, but are you measuring efficiency to making sure that just because you were doing things a certain way last year, is that really the best way that you should be doing it? In example, would be this, like in customer service, are you tracking the cost that it takes you to handle every single call and every single email? These things are not that hard to set up. Once you put it together, you can select targets and then you can just make sure that you’re running each department the way it should be and you’re tightening it up. And also at the end of the day, what happens is you end up getting better customer service because you can measure plenty of other things.

I want to go off on a tangent, but that’s a good example right there. Okay. Quickly moving along. Marketing. Are you measuring your ad dollars? When you spend your ad dollars, are you measuring them at the SKU level? Again, sounds obvious, but most people don’t do that. Okay. If, let’s say you’re working with Amazon and you’re spending AMS, I know agencies after a while, you know their feet are up on the desk, you got to make sure that you’re looking right down to the SKU level, not letting it go out too far with the ACOS. Don’t getting tricked into just looking at the, at the TACOS, which is the total advertising spend and making sure that you’re profitable and all that ad spend and I mean that that’s going to go for your Google advertising or any other advertising that you’re doing. And then we’ll quickly move now down to sales. So in sales, obviously this is the items I went through were obviously operational and sometimes people don’t think about those when they think about the tariff increase. And I just wanted to touch on those quickly. But now we’re going down to sales and usually in the tariff conversation it’s just talking about how much can I say from my factories and then how much can I pass on to our retail partners. And again, this model is more of like a, this is the B2B model, so it’s if it’s a direct to consumer, you can just raise your price right away. So this is, you have another partner, another big box partner. They’re valuable to you and hopefully you’re valuable to them. The first thing I would say is none of the big partners want to take a tariff increase.

It’s a challenge for everybody. The second thing I would say is you might have to stop shipments if they’re not going to work with you. I mean you just going to have to look at your profitability and often they’re not going to react well unless you show them how important it is to you that you have to pass this tariff increase along. And we’ve seen this with experience and it’s in all of the different businesses and friends that I’ve talked to. It’s the same exact thing. So you can probably expect delays in getting that increase in. And this is another thing that isn’t talked about on the news. You know, they, the tariff increases go in and immediately, you know, they’re advertising that they consumer prices are gonna go up right away. Now it doesn’t work that way. Usually the brands eating that cost for months as it’s trying to move it across to the retail partners. So anyways, I think that’s one thing I, I just wanted to say is that this stuff, it can take a long time and it can take just a lot of back and forth a lot more than you might even expect. So whoever’s managing the team is going to have to expect multiple calls and meetings sometimes with retailers, because I’m just, what we’ve seen our end is, you know, they say the price increases in and then you go and you check your actual POs and it’s not, and so you have to go back where is the price increase? And then, you know, usually get a story about how, you know, there was something wrong with one of their systems and they got to go do it again. And this happens two or three times before you actually see it on your end. I don’t know what the answer is on their end.

I don’t know why it’s not going through the first time, but this is just the experience and the experience of multiple people. So I guess it’s just that stickiness of making sure you go back. A couple of things is in order to get the increased through, remember these guys are your partners. They have to be making money and the retail prices have to go up. So you may have to pull promotions along. The way you may have to submit new MSRPs to retailers. A lot of this has to happen in concert. So what it might look like is that you’re going to have to find a way to get your retails up. You’re going to have to make sure that the bad actors aren’t lowering the prices. You’re going to have to probably hold off on promotions. And then through that you can make sure that your partners are making money, which trust me is very important because they’re going to come back to you if they’re not. And then hopefully you can get that price increase along the way. So, and the other thing is no one’s going to accept the 25% it’s, I know the tariffs had been happening in a while, and hopefully this is obvious to most of you guys, but it’s funny how when they first came out, you know, some people want to just pass on the full 25 no one’s going to accept that it’s never going to happen. And that’s why what a lot of brands are doing is they are creating new products. They’re creating more valuable products for the consumer with, you know, extra features and, and other value adds like that. And then bringing a new product into the market. And when they do that, obviously they can factor in that extra cost and the tariff. And I think pretty much every single brand is doing that same thing.

And so we’re gonna see a lot of new innovation, new products. I mean, this’ll be good for everybody. Unfortunately, they’re going to have a 25% increase in the back end, but there is no way to get around that. Okay. And then, and then just to kind of finish off here, just a couple of things, is that the buyers are smart enough to know exactly how much tariff you should be passing on. Remember, they’re dealing with so many brands, they’re getting these calls all the time. They can compare how much your competition is increasing the price. And I think that’s why it is really important to partner with them and understand where the individual per skew margins are for you and for them. And then create that Excel spreadsheet yourself, put that together, and then you know how large the tariff increase is going to be as you pass it on. So at the end of the day, they have a P and L that they’re going to be managing all of their lines by. So they still have to be profitable. And of course, that’s why it’s called the partnership. So everybody’s gotta be profitable at the end of the day and you can’t pass it all on. But hopefully kind of these strategies that I talked about and a mix of ideas from the different companies that I’ve talked to interviewed will help you guys kind of understand different strategies you can utilize in your companies. And while most of these are, some of these might be obvious in the big picture, I think when you get down to the skew level or you get down to the different operational ideas, hopefully you got one or two ideas out of here that’s gonna save you some money. And I guess what we’re all for is that by the end of the year, these tariffs are gone.

But I can tell you personally that we’re just planning that they’re not going to go away and who knows how long it’s going to go on for. But that’s how we have to run the business so that we’re still in business in a couple of years from now. Anyways, hopefully this podcast was helpful and these ideas are helpful. We’d love to hear back because it’s such a fluid topic, so it would be awesome to get some feedback on this in, in what’s worked for you. Anyways, thanks for joining the Page One Podcast. Again, if you guys need help on your product launches, influencer marketing, growing B2B retailers like Wayfair or Home Depot or any of those other big box retailers, that’s exactly what we do. We focused down at the SKU level and we can help you get speed to sale where you launch a product and you have reviews and influencers talking about it and you have sales in philosophy a lot quicker than you normally would with the traditional ways of putting products up there and kind of waiting for them to sell. Thanks again, have a great day.