Black Friday, the day after Thanksgiving.
“Black” does not mean that day is bad; quite the contrary, the “Black” refers to the traditional understanding that on that day retailers begin to make a profit for the year, i.e., that the ledgers for a retailer turn from “Red” (deficit) to “Black” (profit).
How will the global economy handle this year’s Christmas Holiday season?
(In this discussion I will focus on Christmas, but the same holds true for other holidays like Halloween and Valentine’s Day. Also, I will focus on China, but the same holds true for other countries like Vietnam, India, Bangladesh, Thailand, etc.)
WHAT IS SOLD ON CHRISTMAS?
Christmas purchases include not only toys, but artificial Xmas trees, ornaments, indoor and outdoor decorative lights, stockings, clothing, gift cards, and books. The majority of these items are produced offshore.
Let’s dive down a little on how these products make it from the manufacturer, through the importer/distributor, to the retailer, and finally to the consumer. (Again, this is a simplification since some of the large box retailers act as their own import agents for many of the products they sell, but the logistics remain comparable).
WHEN ARE PRODUCTS COMMITTED?
Retailers need to order their inventory from the factories that produce the items. The first step is the Xmas Retail Shows where they see the new merchandise and issue purchase orders. The Toys and Hobby shows are held in April in advance of the coming holiday season. The Wholesale Floral shows in which silk flowers and Xmas trees are sold are held in early January. The major gift shows are held in June and July.
Orders placed at these shows are scheduled for delivery to the retailer in late fall so that the retailer can warehouse their inventories in anticipation of the seasonal demands. Some retailers order their products to be delivered even earlier as they begin their Christmas sales promotions as early as Halloween.
HOW ARE PRODUCTS SCHEDULED FOR PRODUCTION?
The ordering process allows the producers and the importers to calculate their production needs in advance of the coming season. If the goods are coming from overseas, the importer needs to communicate those needs to the manufacturers in foreign countries so that they can determine their production schedules, coordinate their shipping with the sea freight companies, and reserve sufficient shipping containers for delivery to the US.
Since it takes about a month for a container to be loaded in China and shipped to a US port, and since Customs will need at least a week to clear that container through the US port (assuming that there is sufficient inspection staff and no labor issues, weather or other factor to delay the process), another few days to have the container delivered to the importer’s warehouse, and a few days to unload, catalog and store the goods received, you can see that the logistics for getting Christmas merchandise into the importer’s possession needs to be carefully scheduled. Add to this the fact that if you are importing hundreds of containers of goods, you cannot receive them all on the same day, or even the same week as your facility will simply have insufficient loading docks and warehouse staff to accept them.
The manufacturer is also facing inventory problems. He cannot produce an entire order and warehouse merchandise to fill your order in total. He needs to offload product and ship it out as quickly as he can to minimize the warehouse space buffering production against shipments.
Therefore, the logistics of receiving Christmas merchandise needs to be arranged over several months so that you can ship the products to fill the purchase orders you received at the Trade Shows.
HOW DOES THE IMPORTER RECEIVE MERCHANDISE?
As the flow of containers crosses the ocean and arrives at the US port, Customs will collect the tariffs due on those goods. Sometimes, in order to accelerate Customs clearance, the importer may pay the tariffs while the goods are still on the water. When this is done, the tariffs paid are those in force at the time of payment.
Imagine you are a toy importer, receiving hundreds of containers of toys between August and October. You have a stream of these coming on a string of freighters, all orchestrated to arrive in your warehouse in a manageable order.
HOW DOES THE IMPORTER PRICE THEIR MERCHANDISE?
How do you adjust your purchases from the manufacturer based on your calculations on how price increases due to tariffs will affect the amount of merchandise your retail customers can move? How will this affect your relationship with the foreign manufacturer? If your price was discounted because of the volume that you committed to in the past years, how will your new prices change due to your decreased anticipated needs? Will the manufacturer, who now has excess capacity due to your decreased needs, increase his per part price to offset those losses that he will anticipate, or will he choose to move the sales of his products to other countries in which there are less trade barriers? Will that decrease the amount of product that you can actually get shipped to you and make available to your customers?
Which customers will you service? The ones who pay the highest price? The ones who ordered first? The ones who are large companies whose business you absolutely need in the future and who you are fearful of disappointing because they can move their purchasing elsewhere? Will this put smaller retailers at a deep disadvantage?
How do you plan for your pricing when the tariffs for one container may be at 100%, another at 145%, another at 65%, etc.? When you wrote the purchase orders for your customers in January, or in July, what prices did you place on those orders? If you priced your toys to the retailer assuming a tariff of 20%, and now your tariffs are 100%, what do you do? Are you obligated to invoice your customer at the price on the purchase order? What if you assumed a tariff or 145%, and half of your containers came in with a tariff of only 25%? Do you hold your initial price and try to recoup your losses from the early containers? Does a competitor now undercut you because he held off delivery until the tariffs dropped and now has a price advantage over you?
WHAT WILL THE RETAILER DO?
The retailer probably planned his Xmas sales based on the prices he had contracted with you. How does he readjust the pricing up or down based on the tariffs that are in effect, the ones that he anticipates will be in effect when he receives his shipment, or the ones that will be in effect if the trade war heats up a second time? Does he use FIFO (First in, First out) to price his toys or will the daily price in his store fluctuate based on the costs at the time of purchase, or at the time of new inventory replacements?
How does the retailer decide what inventory to hold? How will the increased prices affect his sales? Can he anticipate what those increased prices will be and how much inventory he needs to have? No retailer wants to be stuck with excess inventory that needs to be sold at steep discounts to recoup the capital investment made. Will the retailer require the importer to take back the excess inventory and refund the amount paid? How will this affect the importer, his employees, his banks, and his investors?
THE OVERALL EFFECTS OF THIS COST VOLITILITY
The logistics of ordering, receiving, shipping, pricing, and addressing invoice obligations will make this Christmas season not only challenging but perhaps devastating for consumers. One can only assume that the pressures outlined above will have some guaranteed effects – decreased retail inventory, shortages and high prices.
Any negotiations that may or may not occur between China and the US will certainly take months and extend well past the points at issue in this discussion. The American consumer will bear the brunt of this tariff uncertainty. And the worst hit will be the lower income families who have less access to retail locations, lower credit, and a higher sensitivity to increased prices.
And what will happen to financial data? It is quite possible that retail sales, in dollars, may remain +/- in 2025 as compared to 2024. The consumer may spend a similar amount of dollars, although they will be purchasing less units. For example, because the price of pajamas went up, they might choose to defer purchases of new Christmas Lights for their house, or they might give their children only 2 gifts rather than the 5 they would have normally given them. So, if you look only at the purchases this season, you may not see significant drops, but the consumer will feel the high prices, decreased selection, shortages of popular items, etc.
The tariff uncertainty cannot and will not be relieved prior to the mechanics of import purchasing for the upcoming holidays. We can see this punch coming and there is little we can do to avoid being hit by it.