SKU’d Thoughts 33: How are Trump’s trade wars going to affect DTC brands?

Ok, let’s get political, a little bit.

The tariff spat between Trump and Chinese President Xi Jinping has been hard to keep up with. Last week, China announced additional tariffs of 5% or 10% on $75 billion worth of U.S. imports starting on September 1, Trump immediately countered with a promise to raise tariffs on $250 billion in Chinese goods starting in October. The U.S. president went further to threaten raising tariffs across all Chinese imports, the remainder of which are mostly consumer items.

The business implications of this tariff war were immediately evident with the performance of the stock market. The market reacted negatively; the Dow was down 623 points at closing. Trump, in an overreach of power, ordered U.S. companies to find an alternative to China because “we don’t need China”.

Ok, enough politics. How does this affect DTC brands?

China is one of the U.S.’s largest trading partners. Companies import goods from China in part because their lower cost allows higher retail markups. The increase in tariffs will mean retailers must either reduce their profits or pass along the added cost to consumers. This is of course bad business because not all consumers may be capable or willing to pay extra. Large brands, like Nike and Adidas, have urged President Trump to remove their product categories from the list of Chinese products that could be hit with tariffs. Small retail players, like DTC brands, lack the clout to lobby for loosened tariffs and may be locked into contracts with Chinese manufacturers that may be difficult to circumvent.

The Chinese e-commerce market is projected to hit $2.6 trillion in sales by 2021; 2.8 times the size of the U.S. e-commerce market. And according to a KMPG report, Chinese millennials, who are on the lookout for new brands have higher spending power at a young age than their U.S. counterparts. All of this translates to China being a huge opportunity for DTC brands to scale and grow revenue. But with increased tariffs, DTC brands, like Helix, that are manufactured in the U.S., will have to compete for the Chinese consumer at increased prices.

The long-term effects of this trade-war are still unknown. However, this serves as a good lesson for brands to diversify their supply chain beyond any single country.

Cross posted on Medium