Dive Brief:

• This week J.C. Penney and Macy's, among scores of other businesses, implored the U.S. Trade Representative to pull numerous apparel and footwear products from a vast product list slated for new 25% tariffs, according to letters filed by the department stores.
• An attorney for Penney noted in the retailer's letter that the proposed tariffs would hurt Penney's core customer: middle-class females who shop for their families on a "marginally" higher household income than the U.S. median. The retailer also pointed out that apparel and footwear tariffs are already high relative to other products, and the costs of the new duties would inevitably fall on U.S. shoppers.
• Both Penney and Macy's noted the difficulty in shifting supply chains away from Chinese manufacturers. Both also pointed out that only 2% of shoes sold in the U.S. are made domestically, and there are no sweater manufacturers to either retailer's knowledge.

Dive Insight:

While past rounds of tariffs have had limited impact on the retail industry, the fourth round (known as tranche four) is a sweeping list that would encompass the vast majority of products made in China. Analysts and retailers have noted that even the most diversified retailers would feel the impact.

Analysts with UBS have estimated the tariffs could put $40 billion in sales and 12,000 stores at risk. J.P. Morgan analysts have noted the tariffs could eat up 20% to 40% of the operating margin of a wide swath of retailers, including BJ's Wholesale, Michael's, Walmart, Target and Costco. They could also send prices up 10% to 21%, the analysts estimated.

Retailers have only a few broad options, some more palatable and realistic than others. They can eat the tariffs, paying for them out of their own margins. They can shift the costs to suppliers (although they might be on contracts that don't allow price changes in the near-term). They can change suppliers, perhaps sourcing from Vietnam, Cambodia or another major source country for apparel and shoes. But capacity is limited in those countries and, as Penney and Macy's noted, shifting a supply chain can't be done overnight or even over several months.

Retailers and brands are already reviewing their options and preparing. According to the National Retail Federation, they are ramping up imports to stock up ahead of the installment of the tranche four tariffs. But many prominent retailers, Walmart among them, have signaled that price increases on consumers are inevitable.

Penney pointed out the special impact on women shoppers. "Though surely inadvertent, the disproportionate impact of the proposed List 4 tariffs on women is striking," the letter stated, noting that 13 of the 19 priority items J.C. Penney flagged in the tariff lists are products for women or girls.  

The department store chain also noted that women often oversee spending for entire families. That means not only do tariffs on womenswear affect women, but so do tariffs on home goods, school supplies, boys apparel and other products. Penney said lower income shoppers would also be disproportionally hurt, as they pay a larger share of their income on apparel and footwear. 

Even holiday festivities could be affected with Christmas ornaments on the tariff list. "One wouldn't think the Administration would seek to emulate the Grinch, who left little Cindy-Lou Who with walls devoid of ornaments and 'nothing but hooks and some wire,'" Penney told the trade representative.