What the Tariff-Fueled Exodus from China Means for Apparel

29 Dec,2018

The apparel industry got a little breathing room in early December, when the Administration announced it had reached a truce in the trade war with China. While not out of the woods yet, it at least gives brands and retailers more time to plan should President Trump decide to put tariffs on the remaining goods coming out 

of China.

On the other hand, the reprieve also means the uncertainty that has hung over the industry will continue—keeping apparel executives in their war rooms, plotting contingencies.

With each new tranche, soft goods brands and retailers have been anxiously waiting to hear if their products were spared. Though apparel and footwear have been primarily been left off thus far, there’s little question that another round of tariffs would include these goods.

While the world leaders plot their next steps, others are totaling the economic impact.

If all tariffs—current and promised—go into effect, the impact of the trade war is estimated to be $915 per person in 2019 or $2,357 per household, according to a new report from Impact Econ. It also said expect lower wages, higher joblessness. Ultimately, report authors Terrie Walmsley and Peter Minor say, “All countries, except the U.S. and China, gain from U.S. trade actions and responses and increase GDP.”

Keeping options open

Two countries that stand to be winners are Vietnam and Cambodia, as brands like Vera Bradley increase production there to reduce exposure to the volatility in China.

Like most retailers, China tariffs continue to be a concern for us,” said Robert Wallstrom, president and CEO of Vera Bradley. “While companies have been given a two-month reprieve until March 1st on the increased 25 percent, we have been aggressively working to mitigate the potential impact.”

Ultimately, he expects production in China to drop from 57 percent this year to 25 percent in 2019. And the accessory company isn’t alone in its exodus out of China. Searching for new production options seems to be the industry’s leading solution to the Trump-Xi war.

Abercrombie & Fitch is also prepared to leverage sourcing partners in any of the 17 countries the retailer currently works in to reduce its exposure, according to CFO Scott Lipesky. The mall-based retailer said it currently imports 25 percent of its goods from China.

Todd Vogensen, Chico’s CFO, said his company has already reduced production in China from more than 50 percent of goods to 40 percent or lower. Ultimately, though, Vogensen is realistic about the future, which, he said, includes China.“We will always have a fair chunk of receipts that come out of China, just based on the nature of the types of things that are manufactured in China for the entire 

industry or the types of things that fit the quality that we’re looking for, but [we are] continuing to mitigate that impact and diversify our overall mix,” he said on the company’s Q3 call.

Calculating costs

Currently, 40 percent of U.S. apparel and and 70 percent of footwear is imported from China. Should tariffs on apparel and footwear be put into place, costs will rise on the goods that continue to be produced in China. The result would be higher prices for consumers, according to Steve Lamar, executive vice president of the American Apparel and Footwear Association.

Lamar estimates that a 25 percent tariff would result in anywhere from a 15 percent to 25 percent increase in retail prices over time, a hike that would cost shoppers $500 for a family of four. Already, brands like Carter’s have said the tariffs would translate into price increases, and that along with reduced spending is what would help the children’s wear powerhouse weather the impact.

Currently, Carter’s sources less than 30 percent of its total units from China. Chairman and CEO Michael Casey said higher costs in the region already had the company shifting goods, and if tariffs go into effect, it will work with suppliers with operations in Vietnam, Bangladesh and Indonesia.

“That’s the beauty of doing business in Asia over the past 20 years. We’ve developed these deep relationships with great suppliers that can handle the unit volume for our company. And we’ve been working with them this past year to explore other places if need be to source our product,” he said in October on the company’s earning’s call.

GIII Apparel Group, which counts brands like Calvin Klein, DKNY, Kensie, Tommy Hilfiger and Karl Lagerfeld Paris as part of its portfolio, is already dealing with price pressure due to tariffs. The impact has been to the company’s handbags and leather outerwear business, which represents approximately 7 percent of its total net sales. In response, it too is diversifying out of China but it’s also hoping the strength of its brand names means it can “selectively increase” prices.

I’ve spent, alongside of the key senior executives in our company, the last few months traveling all over the world to find suitable substitutions for what we’re doing in China,” said chairman and CEO Morris Goldfarb, listing Indonesia, Cambodia, Vietnam and India as go-tos. “So, it was a great exercise, whether tariffs come or not, we have found competitive countries to produce in that are going to enhance our margins.”

Further, Goldfarb said the company’s partners in China are eager to find ways to maintain GIII’s business. “All of our vendors are not sure of what the future looks like and have assured us that they will share in the problem. They do not want us to walk away, he said, adding they’ve offered to help the company recoup lost margins, if necessary. And he said some retailers have “agreed to share in the increases that we might impose on pricing.”

Goldfarb said the industry is looking at how to handle the potential tariffs as a “partnership situation. ”According to Manny Chirico, CEO and chairman of PVC Corporation, if apparel and footwear tariffs materialize, prices are going up no matter where companies shift production. “If tariffs come, it’s going to do two things. It will pressure cost and create inflation on the goods from China but we also have to be realistic,” he said. “It will also create inflation globally for 

products coming into the United States because if Vietnam is now more in demand, there’s going to be cost increases coming through as we start to place production there.”

For PVH, 25 percent tariffs would total $75 million of tariff impact, he said. That number would have been significantly higher years ago. Today, PVH places about 17 percent or 18 percent of its production in China. Three years ago, it was more than 40 percent. The company, like others, had already been seeking out lower cost countries long before Trump came into office.

Chirico said while his team is actively working on sourcing, he’s seeing another threat to his business related to the protracted trade war. On PVH’s earnings call in November, he noted a slowdown in traffic to its stores in China that had been on the upswing.

“What I’m concerned about is Calvin Klein and Tommy Hilfiger are two great American brands, and if there is tensions in different parts of the world about America, it’s position in the world, I think in and of itself, it does create some pause,” he said.

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