I’m going to use a loosely analogous reference here to a classic game theory thought experiment known as the Prisoner’s Dilemma. In a nutshell, the Dilemma demonstrates that, in a set of adversarial or confrontational circumstances, everyone involved benefits from a mutually agreeable outcome, or not.
There is urgency for every buyer to make plans now and deal with an arbitrary crisis of the moment. Our buyers will likely need to raise their retail prices immediately whether the threatened tariffs are ever actually imposed or turn out to be mere bluffs. As for future planning, depending on production cycle realities – the time it takes from the commitment of merchandise to availability of sale at retail – where time frames typically range from months to over a year, our buyers are in a real bind.
The Buyer’s Dilemma
Consider that a buyer or procurer of merchandise to be sold at retail faces an ongoing challenge when dealing with a counterparty from whom that merchandise has been bought. If both parties, buyer and seller, can mutually agree upon terms and conditions that satisfy each of their need to be successful financially, then their relationship is likely to continue. But now, consider the sudden presence of an abruptly imposed tariff placed upon the merchandise that has already been bought for resale at retail from the country of origin that manufactured it that is now being encumbered by a tariff. This now becomes a Buyer’s Dilemma.
For the record, whether the buyer is an owner or an employee of a retail enterprise — small, medium, large or over-large — they invariably engage in an organized planning process necessary to carry out their duties. That process entails examining past performance of merchandise regarding sales and profitability as a steppingstone to future inventory investment. A knowledgeable and experienced buyer purportedly would have a well-honed point of view about, not only customers’ needs and wants but pricing that is acceptable to customers and the relationship that pricing has on sales volume. Suddenly, the merchandise that the buyer has committed to is likely to be arbitrarily inflated in price due to a tariff being added to that merchandise’s cost.
What should a buyer do? Ergo, the Buyer’s Dilemma. Should they just accept that their profitability will be diminished by the effect of the tariff? That’s not particularly workable as profitability in a retail enterprise as most other businesses represents a non-negotiable mandate. Should the buyer go back to their overseas manufacturer counterparty and insist on a cost reduction to offset the effect of a
tariff? That might work in the very short run because that manufacturer doesn’t want to face a cancellation or loss of a customer. But that manufacturer has their own profitability requirements.
So, as has occurred in my own experience over many years of procurement, that manufacturer will either inflate the cost of ongoing future orders or take some features, benefits or quality considerations out of future goods to make up for the differences at issue. This, in a nutshell, is the Buyer’s Dilemma.” If two parties cooperate, mutual benefits accrue. If not, at least one party likely will suffer at the hands of the other.
Today, in the face of highly publicized aggressive, unprecedented and threatened across-the board-tariffs on merchandise procured from Mexico, Canada, China and now even the EU, whether a bluff or actually imposed, buyers faced with soon to be received, and potentially tariffed merchandise have only one viable decision before them. And that is to raise the retail prices of these incoming tariffed goods to offset this burden. This, of course, sets off a cascade of potentially suboptimal outcomes; like Sir Isaac Newton’s Law of Gravity, higher prices lead to lower sales volumes.
Future Price Proofing
As for future commitments, this issue poses a whole raft of future Buyers’ Dilemmas. Should a buyer knowingly “cheapen” the merchandise they are procuring to protect a historical retail price point? I can tell you from experience that is a fool’s errand. Customers are not stupid and readily see through that kind of nonsense. Should a buyer seek future merchandise from another country of origin that is not threatened by tariffs? That’s a more intelligent course of action but fraught with risk. First off, a new country of origin may eventually be swept into this tariff mania, and, more importantly, new production in a new country of origin may very well be more expensive and less efficient than where merchandise has historically been procured from. This assumes new production is even available in the first place. Once again, anything that results in higher costs, whether driven by tariffs or more expensive and less efficient production, inevitably winds up causing retail prices to rise.
Made in America, Not
As for reshoring, seeking domestic manufacturing to replace merchandise procured overseas may be the ultimate dilemma. Let’s get right to the heart of this fantasy that is being bantered about by our president, various government leaders and some pundits, none of whom have ever likely held a buyer’s job of any sort. It’s just not a realistic decision in many cases for our actual beleaguered retail buyers.
First off, merchandise manufactured domestically is, with few exceptions, almost always far, far more expensive than merchandise manufactured overseas which, then results in significantly higher retail prices. That’s why so many categories of manufactured merchandise have moved overseas in the first place. And then there is the time, cost and complication of creating new production facilities and the reintroduction of production expertise that has been absent here at home for decades.
Gameplan Deadline
There is urgency for every buyer to make plans now and deal with an arbitrary crisis of the moment. Our buyer will likely need to raise their retail prices immediately whether the threatened tariffs are ever actually imposed or turn out to be mere bluffs. As for future planning, depending on production cycle realities – the time it takes from the commitment of merchandise to availability of sale at retail – where time frames typically range from months to over a year, our buyers are in a real bind. Just when Covid-driven inflationary pricing and customers’ lifestyle needs and wants have begun to be more manageable, here’s an upcoming tsunami of issues to be confronted somehow.
The Customer Decides
When all is said and done, consumer uncertainty has already reared its ugly head just based upon the hysteria that the president has fomented. In light of inevitable new price spikes in finished merchandise or merchandise componentry, that may now be subject to tariffs, plus increasingly visible employment reductions in force, both driven by normal industry performance rationalization, and “abnormal” federal government actions being taken daily, as Bette Davis once famously said, “We need to fasten our seat belts, it’s going to be a bumpy night.” Truly a Prisoner’s Dilemma.
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The Robin Report provides insights and opinion on major topics in the retail apparel and related consumer product industries. It delivers provocative, unbiased analysis on retail, brands and consumer products, and covers industry-wide issues, trends and consumer behavior throughout the retail-related industries. TRR is delivered exclusively on TheRobinReport.com. Additionally, TRR produces executive briefings and industry events.
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