Your Rolex and Nikes are about to get more expensive
And that’s far from the worst of the pain consumers will feel from Trump’s ‘Liberation Day’ tariffs
EVEN Bernard Arnault couldn’t save European luxury from Donald Trump’s tariffs.
The US president on Wednesday (Apr 2) introduced swingeing levies on European and Swiss goods. The onslaught will hurt exports of Louis Vuitton handbags and Rolex watches, likely making them even pricier for US buyers.
But for the broader fashion and retail industry, the most damaging element of “Liberation Day” will be the heavy duties imposed on Vietnam, Bangladesh, Cambodia and Indonesia, where many apparel, furniture and footwear companies have shifted their production. This is going to hit a wide swathe of consumers as companies on both sides of the Atlantic grapple with the fallout.
Even though the chairman and chief executive officer of LVMH Moet Hennessy Louis Vuitton SE attended Trump’s inauguration back in January, that hasn’t stopped the president from slapping a 20 per cent tariff on imports from the European Union and 31 per cent on Switzerland.
Big luxury is, of course, better off than most other retailers. For a start, they have much fatter profits, giving them more of a cushion to absorb higher costs. The average luxury gross margin – the difference between the price at which a company buys and sells goods – is about 70 per cent, according to analysts at UBS. Compare that with Zara owner Inditex, one of the world’s best retailers, which had a gross margin of 58 per cent last year.
The luxury powerhouses also sell to wealthier customers, who are more able to absorb price increases. And they may have some scope to expand production in the US. LVMH leads here, with Louis Vuitton making handbags and small leather goods at plants in Texas and California.
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However, much fashion and leather goods expertise remains in Europe: It’s hard to see a Hermes Birkin bag carrying a “Made in America” tag. And even the industry giants won’t have an easy time passing inflation onto customers. They’ve already raised prices dramatically over the past five years, alienating many shoppers. The average price of iconic products has risen by 54 per cent since 2019, according to analysts at HSBC. Then there is the negative wealth effect of tumbling equity markets. Luxury goods sales typically rise when people feel wealthy and happy – and there’s not a lot of either around right now.
Mass-market sellers of clothing and sporting goods hard-hit
Even so, the plight of the bling behemoths looks manageable compared with sellers of mass-market clothing and sporting goods, which will soon feel the effects of higher tariffs on Asian nations from China to other manufacturing hubs.
Trump’s initial 10 per cent increase in Chinese tariffs in February was far less than feared. The levy has now ratcheted up, with a further 10 per cent imposed in March, and on Wednesday another 34 per cent, taking China closer to the 60 per cent the president threatened last year.
But the biggest problem is sure to be the hefty duties imposed on other manufacturing countries, including 46 per cent on Vietnam, 49 per cent on Cambodia and 37 per cent on Bangladesh.
As companies have reduced their dependence on China, because of rising labour costs and the vulnerabilities to the supply chain exposed by Covid-19 lockdowns, they’ve moved to these other nations, particularly Vietnam. Since 2010, the percentage of apparel imports to the US from China has almost halved to 21 per cent, while the figure from Vietnam has more than doubled to 19 per cent, according to analysts at Bank of America.
Footwear is particularly dependent on Vietnam. Remember that disruption to Nike and Adidas from factory shutdowns back in 2021? Vietnam accounts for 50 per cent of Nike’s footwear production, compared with 37 per cent in 2010, according to analysts at Bernstein. Adidas sources 39 per cent of its shoes from the country, Bernstein says.
They’re not alone. Vietnam accounts for 40 per cent of Lululemon Athletica’s products, according to Bernstein, while Mary Ross Gilbert of Bloomberg Intelligence points out that the country represents a significant part of the supply chain for other companies including Abercrombie & Fitch, Gap and Victoria’s Secret. Little wonder that shares in Nike, Gap, Abercrombie and Lululemon fell heavily in pre-market trading.
Retailers may have some levers to pull. Asking suppliers to shoulder some of the burden will be the first port of call. But these efforts have so far been met with a mixed response. Last month, Chinese authorities summoned Walmart executives over reports it had asked suppliers to bear the costs. (The company is continuing to push manufacturers for discounts despite the intervention.) If the mighty Walmart is struggling to ease the pain, then there’s even less hope for lesser retailers. Local currencies might also buckle under the new trade regime, since although factories are paid in US dollars, their costs are in their home denominations. Companies can also re-engineer products to make them cheaper – think yoga pants without a pocket for your phone – but that would take some time and likely won’t make enough difference.
The sweeping nature of Trump’s trade war means it will be impossible to offset all of the discomfort. Retailers will either have to take a hit to profits or pass their costs onto customers. The latter won’t be easy. US consumer confidence is already cracking, and price increases on a broad range of goods will squeeze their spending power further. Most companies haven’t spelled out the impact of tariffs so far. Given that the pressure has intensified, they now need to do so – fast.
There may yet be room to negotiate exemptions with the Trump administration. Luxury looks best placed here, too, having Arnault on its side. But it’s a grimmer picture for the rest of retail. Perhaps another top-end executive summed up their plight best: As Gary Friedman, CEO of upmarket furniture retailer Restoration Hardware Holdings, digested the tariffs and the 26 per cent post-market fall in the company’s share price on Wednesday, he responded with “Oh (expletive).”
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