Logan Ensign: 1:27
Well, an exciting time in the world generally, but especially in the world of CPGs. So had to have a conversation with our resident economist, Joel, here about all things tariffs as we see, an evolving story right and, I think, a lot to unpack, a lot of uncertainty, but excited to kind of dig in a little bit deeper.
Joel Beal 1:50
I think there was a Twitter or X. Now flame war from Elon Musk about how having a PhD in economics makes you less qualified to talk about this. So good news for me I didn't get my PhD. I dropped out.
Logan: 2:02
That's right you can join the ranks, ranks. There you're a true expert as the dropout that's right.
Joel: 2:06
Building real businesses, none of this, this fake academic stuff. Uh, yes, and exciting, I think, is one term you can. You can use for it logan, um, I'm not sure that's how our customers feel about it right now. When we talk to them, I think uh feels a little more like what in the world is going on.
Logan: 2:25
Yes, I mean, it's all about uncertainty and what should we do? So I think we have a unique vantage because we had a lot of conversations late last week to get people's initial reads, but I don't think that we've been able to bring together this is exactly what people should do and what to expect. Bring together this is exactly what people should do and what to expect. So I guess for you, Joel what are we hearing?
Joel: 2:52
What are we seeing, as we've kind of seen these tariffs emerge. Well, I think, first and foremost is nobody knows what is going to happen, right? I mean, it's currently Monday, april 7th. These were announced last Thursday. Obviously, the markets are roiling, but at least, as I've talked to customers, as I've heard what people internally are hearing from customers, everyone kind of says we just don't know and uncertainty just breeds, I guess, a freezing.
Joel: 3:19
I was reading something earlier today and it was saying unlike the financial crisis where there was kind of a race to get liquidity or you know, there are times where it's clear what you're supposed to do. It's not clear right now, really, that there's anything to do. Right, it's not like somebody's going to be moving their manufacturing today. Maybe you're expediting some freight I think we've heard that anecdotally people trying to push things in to beat the tariffs, but nobody knows how long this is going to last. Is it really going to be permanent? Is it all going to go away in a couple of weeks? And so it kind of feels mostly like business as usual, just with this kind of looming problem that people are starting to say, okay, let's at least scenario plan for what do we do? So that is what we've heard is people say, okay, what's going on, and then you know most practically, at least in the world of consumer goods and retail, that gets to all right, if I'm going to have to eat some, if more costs are coming in, who's paying for this?
Logan: 4:39
If more costs are coming in, who's paying for this? Is it me? Is it the retailer, is it the consumer? Think about sort of strategically going after this. I think what we found is most folks are pretty surprised by the comprehensiveness and the magnitude, right, and so, although we say there's a lot of sort of scrambling, there've been conversations really all year about supply chain diversification. How do we think about potentially doing more domestic production diversification how do we think about potentially doing more domestic production? But, to your point, I think we've seen with customers quite a bit of uncertainty and a lot of, to your point, wait and see, right, whether it's super short-term expediting freight, but also adjusting how people are ordering over the next even couple of days or weeks. It'll be fascinating to see how that impacts on-shelf availability and inventory levels and all other sort of downstream impacts on that front.
Joel: 5:29
Yeah, everybody I've talked to is surprised at the magnitude, and you know, I think if it had been more targeted. You know, the writing's been on the wall around China, right, and you're seeing companies diversify away from China. The problem is that they then moved manufacturing to Vietnam and then Vietnam gets smacked. So you know, I think that's what creates a lot of the not knowing what to do. Is you're like what does this even mean? I mean short of well, I mean even reshoring to the United States, which I mean?
Joel: 6:03
Anybody who knows this problem knows this is not something that happens quickly, right, if it's practical at all, does that even help you? All your supplies are tariffed. So you know, and these are again decisions that are made over, you know, people projecting out years, decades, and then this kind of comes in very unexpectedly. Now you know we've been told that there's going to be tariffs for a while. So, again, I don't think it was shocking that something happened. But this magnitude definitely just requires everyone to say, okay, let's try to pick up the pieces. And then you know, see if this is going to be a long-term thing or a short-term thing.
Logan: 6:40
Yeah Well, you mentioned something interesting about who bears the cost, and so I think it is an interesting dynamic when you talk about raw material suppliers, when you talk about manufacturers, importers, retailers, consumers, could you unpack that a little bit more in terms of, okay, if this lasts longer than a couple of days, what that could mean, or likely does mean, from a sort of who shoulders the cost of all this?
Joel: 7:07
Yeah, so you know, practically speaking, whoever imports the product is the one who's on the hook for it. Okay, so it's, it's pretty clear, whoever owns that. There's lots of different terms when things are being, you know, kind of shipped as to who bears that. But in reality, yes, there's kind of this complex, I think, dance and negotiation that has already started. So if I am a consumer brand you know companies that you and I mostly work with they have to now decide OK, how much of this? Let's assume that my costs go up 25 percent. Well, how much of that can I push onto the retailer? Obviously, my goal is that I can push all of it onto the retailer, but that is a delicate balance because that retailer doesn't want to pay more. The retailer in the middle also has this side of saying well, if I just pass it onto the consumers, or the consumer consumers going to keep buying it.
Logan: 8:09
This price elasticity of demand thing of, I think for most Americans we had all the inflation over a couple of years. People are still annoyed about it, even though inflation's now manageable. We'll see if that lasts. So the idea, idea of having another price, you know, shock is, I think there's a recognition people are not going to take it. Well, right, you could pass things on.
Joel: 8:35
We heard this from customers a couple of years ago. They're like man, it's amazing, I can increase my prices twice a year. It's not impacting sales. I don't think anybody believes that's going to happen now. So the retailer has to sit there and say, well, maybe I'll pay a little more for my inputs, but I can't pass it all on. And of course, there's you and I and all the consumers who are going to say like am I? You know, what am I going to do if prices go up 25 percent? Am I going to substitute something else? Am I just not going to buy so? So that's the dance. Now there's, we've heard, in some cases this immediately goes into a little bit bare knuckle. We've heard examples of retailers changing terms on suppliers immediately and forcing them to pay the tariffs, like changing how things are actually imported. But again, in practice, everybody's got to figure out how they make money in this. Nobody wants to sell things at a loss.
Logan: 9:28
It's not like there's just an enormous margin. There's not an enormous margin on this, yeah, so I feel like at least the consumer brands I've mostly spoken to.
Joel: 9:36
there's, I think, this feeling of we're going to have to eat some of the costs and we're going to have to work with the retailers and pass some of it on. And what those ratios are, I think, is to be determined. I'm sure it's going to vary on the margins for the product, the category, et cetera. We've also heard that retailers they always play, especially the big ones, right, they're always fighting for the consumer. Walmart's always very well known, for we are going to provide the lowest you know cost for our customer. But we've heard that they're recognizing prices are going to go up, right, nobody can eat all this. There's not enough margin, as you said. So, yeah, it feels like for the brands, we're going to pass some of it on. We don't know how much can ultimately be passed on to consumers. So you know we've gotten quotes of like well, this will be an interesting experiment, let's see how it goes. And they're also cutting costs or freezing costs.
Logan: 10:34
So I think you know we're going to we're going to see how much more efficiency you can wring out of this system. It's an interesting take, but I think that's fair that it's going to put a lot of pressure on how do we maintain margin and stay efficient at the same time with increasing costs in some instances, significant increasing costs.
Joel: 10:56
So I guess we're going to see all of them. We're going to see people cutting costs, we're going to see margin compression and we're going to see prices going up. Right, I mean, every side of it is going to take some chunk. None of them are going to take all of it, and you know that's going to be a hard adjustment.
Logan: 11:15
Yeah, well, now we've talked about the uncertainty of what happens with this. Is this a several days, several weeks, several months Maybe, to prognosticate, as we look to, if significant tariffs sort of persist, maybe, what longer term shifts may happen? Do you have a perspective on OK, if these stay where they're at, maybe in the position of a consumer packaged goods company, how they may adjust their supply chain distribution, how consumer behavior might change? Curious, if they do, you know, persist. What might happen from your vantage?
Joel: 11:51
Yeah, it's hard to know what is it that I hope will happen versus what may actually happen, because it's been so unpredictable. It's hard to believe, even with I mean things change by the hour right now that we're not going to see some deals being struck Right. I would just expect that that's the way our government, the American government, is operating right now, or at least has and so I imagine we will start to see a set of countries where agreements are reached Perhaps tariffs aren't eliminated, but at least they're brought down I don't know what they'll be relative to what they were before and then those where there's really a trade war, which is kind of the direction it seems like it's going more with China. So if that happens, I think the first thing that every company is going to think about is is this going to last? They want that predictability.
Logan: 12:53
That's the biggest challenge right now. Everyone's saying it. It's like you need predictability to invest, but I think if that plays out, then you probably will see an acceleration in terms of how supply chains are reorienting, moving towards countries that have friendlier trade relations with the US and away from those where it's not as good and where it's more volatile. I mean, again, I think, just looking at the dynamic with China and this is why people have been moving away from there it's just, even if things are okay, one day, it just always feels like that could shift too quickly. But does that continue to shift to Vietnam or to India, or does it accelerate the move to Mexico, right, or the Americas get it closer? I'm not sure.
Joel: 13:36
Yeah, no. One of the things I was mulling on over the weekend is how these companies may think about the international consumer. Differently, I think, in terms of product development and where we kind of start with a small CPG to kind of expand. You start in the Americas, in the US. My expectation is global consumers may become more relevant for products because we're going to have to make sure that that demand can kind of carry the weight of maybe increased costs and deflated demand here domestically. So you know, trying to expand to global markets may happen sooner. The emphasis in terms of what we're going to produce and how we're going to kind of distribute it may go more global. So that I think will be interesting to follow too.
Logan: 14:20
So I think that's certainly possible. I just don't know how possible that is in the short term. I mean, if you look at markets, it's just the Chinese and the US market are so much bigger than any others. I mean, you know the EU market's obviously very big but it's more fragmented. You know it's a lot of countries. There's a lot more complexity of selling there than there is selling into the States and you know, look from a traditional economics viewpoint, tariff wars are just going to make economics viewpoint.
Joel: 14:57
tariff wars are just going to make Americans poorer, right, I mean, that's the long term. If this were to continue, we, as in, americans, will become less well off right, and so I could see a shift over time as other markets become relatively more important and take more of those products. But in the short term, it's a huge market, it's a market nobody can ignore and again, that's a little bit. I think the gamesmanship that's going on is saying you can't ignore this market. So even if we make it very hard to do business here, you've got to figure it out.
Logan: 15:30
Yeah, yeah. Well, maybe one more question, joel, for you. If, if, you could provide some advice. What should brands kind of do in the context right now, and what should they be thinking about?
Joel: 15:43
Well, I think I have a lot of sympathy because you know running our own business, right, there's there's a lot of uncertainty right now and I don't think I don't want to make any big changes and I wouldn't recommend any brand. Does that right now? Right, that just seems ill-advised to respond, you know, to something like this. But I do think they're thinking about the right things. I mean, what we were talking about is you do need a plan for higher costs Like it seems like that's coming in one form or another and start working with your partners on how you're going to deal with that, and I think it is starting to test. What is that? How are consumers going to respond? And you know so I think it starts with looking at anywhere you can shave your own costs. There's also Logan. I guess we didn't get into this.
Logan: 16:35
There are, I think, some tricks that we've been hearing about how you can change some of your invoicing with your manufacturing to be very clear about what constitutes cost of goods sold, what constitutes all of my brokers, fees, logistics, et cetera. Sometimes those things get packaged together in that invoice. You're only getting charged the tariff on the cog. So you know, there there are things you can do to make sure you're minimizing your tariff liability If you want. We're going to tax season, right, we minimize their tax liability.
Joel: 17:08
Here's another form of taxes. What can I do on that front? That's not going to solve the problem, but it might make it a little better for you. Where can I cut my own costs, minimize what I have to pass on, and then we're in a new world and let's see how consumers respond to that. So I think people are doing the right things, but I wouldn't be making massive shifts to my supply chain. That might be completely different a couple of weeks from now if we have a lot more clarity where you need to make some of those bigger strategic decisions Makes sense Makes sense.
Logan: 17:44
So a bit of wait and see. Uh, explore cost cutting or at least identify those. Understand your consumer right and how sensitive have they been to price historically and monitor that really closely as we look over the next few days and weeks.
Joel: 17:57
Yeah, and Logan, I'm laughing. My family has a trip to Japan here in two months and my twin boys really want. Nintendo announced the Switch 2. And so they were excited about it. For those who followed this, the had the unfortunate timing of announcing it. I can't remember if it was the day of yeah, I think it was the day the tariffs were announced later in the afternoon well, they put some pre-orders.
Joel: 18:22
They put in pre-orders, um, and then you know, subsequently of course had to say, okay, we're, we're pausing pre-orders. We're not even sure what this price is going to be. But my sons were like, well, we're going to japan, let's just go buy it and we'll pay in yen. But then I was reading about how, apparently, that's actually even a little bit tricky. So you know, again, maybe there are some workarounds here, but at the end of the day they're not as simple as they sometimes seem Exactly.
Logan: 18:49
Exactly Well. Excellent, joel. Really appreciate your insight and the conversation.
Joel: 18:55
Hopefully we get more details and understanding over the next few days that's right, because all this advice a week from now will make probably no sense because it will be a different world.