Transcript by Descript:

What is important in order to survive this environment, um, and I, and, and, and, and be able to thrive, is to create agility, right? So that we can, we can pivot regardless of what happens. Um, we are not waiting until.  All of the facts have been announced and finalized before we start thinking about how we move  Retail.

Unwrapped is a weekly podcast hosted by Shelly Cohan from the Robin Report. Each episode dives into the latest trends and developments in the retail industry. Join them as they discuss interesting topics and interview industry leaders keeping you in the loop with everything retail.

Hi everybody, and thanks for joining our weekly podcast. I’m Shelly Cohan and I’m thrilled to welcome Metis Pereira, who is the managing director of PWCs US Customs and International Trade Practice. Oh my God, you must be so busy right now. You have, uh, 30 years experience in customs law and international trade, which is very impressive.

But actually Metis, what I love most about your background is that your experience expands apparel, consumer goods, luxury retail. So welcome.  Thank you, Shelly. Thank you for having me. It’s a pleasure to be here. And I think to say that, um, these are busy times for myself and professionals like me is the understatement of the year.

I literally think Metis, we could sit here for the next eight hours and talk about tariffs. Absolutely. We won’t do that. We’re not gonna close listeners with that. But, um, let’s see what we can get through over the next, you know, 20, 30 minutes or so. But I let, let’s kind of level set and start from the beginning.

So we had these initial expectations of moderate universal tariffs, and now there’s. Been this wave of targeted, there’s been retaliatory tariffs. Can you kind of give us an a bird’s eye view of what’s happening with tariffs and tariffs expectations?  Sure, sure. So everyone, um, was expecting the tariffs in the range of 10 to 20%

And I think, um, for the most part, we got comfortable with that expectation. Um.  Lo and behold, uh, with the advent of the reciprocal tar tariffs that were announced in early April, we saw tariff rates as high as 145%. For Chinese origin goods and even for products from other countries, we saw tariffs as high as the the high 50% ranges, which is absolutely out of the realm of expectation.

Um, because historically we’ve had very low tariffs with very limited exceptions. There have been some product categories that were still subject to some levels of duty, but nothing in the range of what we are experiencing now.  It’s just crazy. In fact, I was just listening to Yeti, you know Yeti.  One of my favorite brands, I was just listening to them and they actually quoted the 145% tariff increase on products that are coming in from China.

So it’s a real problem and when I, when I hear about this, I hear about, you know, retailers either canceling orders, uh, redirecting supply chains, all of that. So I also think it’s very different based on industry. I think it’s hitting the different levels of industry a lot differently. Can you speak a little bit about.

Um, how different industries it’s hitting these different industries and what preparedness is happening within those industries. Sure. I, I, I think you, you, you hit the nail on the head with respect to the differences in levels of preparedness. There are industries within consumer products in retail that really don’t have a lot of familiarity with tariffs.

Tariffs have been around now since 2018, so for many of us. Um, there’s been, there’s been a bit of a history, uh, with respect to tariffs, but the tariffs that were first imposed in 2018 were very targeted and consumer products were specifically excluded from the tranches of tariffs that were imposed back in 2018 and 2019.

Um, and so when we fast forward to the last several months, those consumer product categories, uh, and industries are really being hit with a new reality for which they had no preparation. Whereas other industries have had a time to, uh, an opportunity to create a certain level of, um.  Of playbooks agility with respect to how to deal with the tariffs, how to create strategies that will help them mitigate.

Um, so what we’re seeing is really a spectrum of industries that are navigating the journey, uh, and are at different points in that, in that spectrum in terms of their level of preparedness, the level of impact to their products, um, because. Whilst there is certainly with respect to China, there’s probably no industry that isn’t impacted by the tariffs on Chinese origin goods because there’s so much that we source from China.

Other industries, um, have focused on specific geographies. So for example,  um. A lot of the footwear industry, uh, in recognizing the, the writing on the wall with respect to China and the potential for China to become a difficult.  Location moved a lot of their sourcing to countries like Vietnam. Um, and so Vietnam is a country that has now significant amount of infrastructure and, and, uh, production capacity in the footwear space.

The tariff rate that was, that was announced for Vietnam, which was quite high, um, in the high 40% range, is gonna have a direct impact on the footwear industry because so much of that industry did move in that direction. Right. And when you say that they saw the writing on the wall, you’re not talking, they moved this sourcing years ago, right?

This isn’t something correct. We just kind of pivoted to They saw this coming a couple years ago, right? Correct. Yeah. We saw, we saw the footwear industry start to move.  I would say in the early two thousands, starting to understand that, um, also a lot of the efficiencies, a lot of the attractive characters, traits that resulted in the move to China were starting to wane.

Um, the cost of labor in China was increasing. Um, there’s greater difficulty, uh, in, in being able to operate in China. The costs. Of moving the goods of freight, um, from China. We saw some of the challenges that we had, uh, during Covid. Um, that certainly gave an indication that, um, it was a challenge for retailers to have supply so far away.

Um, so there were, and, and, and all within one location, right? So completely captive to China. So we’ve seen going back as early I would say. It’s two, the 2000 tens, um, that particular industries were, uh, recognizing the need to diversify, not necessarily leaving China altogether, but the need to diversify so that they could create resilience in their supply chains.

Yeah,  and it makes sense. ’cause you know, when we went through the pandemic. You know, we thought, wow, we really have to think about supply chain differently. And we’ve always talked about supply chain, and I don’t know if you view it this way, but it’s, it shouldn’t really be a supply chain quote unquote, with links.

So when the link breaks, everything else falls down. It should be a supply ecosystem. Exactly. So a lot of, a lot of, uh, brands and manufacturers have kind of pivoted towards that. Um, but I wanna go back to something you said about this, um, idea that tariffs were not. Really common in some industries. So I, I just would love your perspective going into 2025, where, you know, apparel industry, we’ve been dealing this with for years, you know, furniture industry years, but these other industries coming into 2025, was this like a complete shock?

Was it something they knew was coming? Like, can you get, put some color around what happened with those industries and what they’re now trying to do to cope with this? Sure. Yeah. For many industries it has been a complete shock, um, because. They were not subject to tariffs or duties, um, in, in their history.

And even if they were, there were some duties. The duties have always been pretty static, not a significant amount of change. Um, and it’s been considered really just a cost of doing business. Um, and so now fast forward to 2025, it is not only a significant. Element in the,  the procurement costs, but it’s also very unstable.

And I think that is part of the concern that many companies are coming to grips with, is not fully having an appreciation of where we’re gonna land. And that is very uncomfortable when you’re planning a year in advance, when you’re planning, um, and, and procurement, right? Planning your supply chain requires you to think.

Ahead and to make decisions with respect to what you’re going to, where you’re going to procure, and what you’re going to procure, and the pricing at which you’re going to procure next year on the basis of the information that you have today. Um, and unfortunately, we are operating in a world very fluid information with respect to the current tariff environment.

Yeah. And I don’t know if you have any specific examples you can share with us, um, in terms of, you know, what, what’s now happening based on what you just said. So, if I heard you correctly, we placed orders a year ago in that contract or purchase order agreement. There’s nothing that talks about tariff increases.

So now as the orders are beginning to ship, bang, here come the tariffs. Right? Exactly, exactly. We have a number of clients who are looking back at their agreements to see who’s. Who ultimately is responsible for these tariffs? Because no one thought about, um, necessarily having to account for, is there, is there language in our purchase agreements that allow us to negotiate on, uh, with respect to the impact of tariffs, right?

Can we ob abs, can we share in the absorbing of the pain? Those are considerations that haven’t for. For some of the industries that had never had any of that muscle, Mary, that had never had those experiences with tariffs dating back,  there was never a need to think about these things, and therefore those considerations are not there.

And now we’re trying to figure them out.  Wow. So there is no, have you been able to find any instances where there’s something in that contract, that purchase order, that then puts the onus on the.  Producing country. We, we have found instances where there’s been, um, contracts that have been written with significant foresight,  um, and there has been language, um, that either.

Requires that the parties to the contract reach some agreement, um, or that the supplier, uh, agrees to reimburse the, the, the US buyer for a portion of those costs so that they’re sharing in the pain. Uh, but it’s never a consistent position. It’s, it’s really, uh, once in, in a while that we find a contract where there’s been that a forethought to consider.

These issues. And I think in those instances it’s really not been as much consideration of the tariffs, but rather a, an additional consideration.  What was likely driving those clauses was really the, the increase in the, in the cost of freight,  um, companies became very sensitive. To the cost of freight coming out of the, the challenges that we had around the pandemic, right?

So that’s what created awareness, less the expectation that we would be in the moment that we are today, but sort of a broader awareness that there were these ancillary costs associated with the supply chain that could.  Ex expand tremendously, um, beyond our wildest expectations. And I think Metis, and I know you’re an expert in this, so, um, if this is like a simple question that’s easily answered, great.

But so when you think about it, should we be telling like, uh, retailers and brands, uh, when they’re doing these contracts that they have to have, um.  You know, clauses in there that discuss, for example, if all of a sudden the port fees increase because there’s less ships coming into a port, is that quote unquote a tariff or tax?

Is that something else? Then you have the cost of goods or production. What if the cost of goods goes up? Um, so there should there be more clauses in these agreements that  help mitigate the, you know, significant cost outcome.  I definitely think that retailers should start thinking about the implications to their inbound supply chains that go beyond the cost of the product, right?

I, I think the cost of the product has been, um, the primary focus in, in those agreements, and it’s important. History has, has taught us that it’s important to consider the ancillary considerations that feed into the landed cost because the FOB cost of a of a product is, becomes somewhat irrelevant if the landed cost.

Explodes by virtue of these other considerations. That’s right. And I think most buyers, and you could correct me uh, if I’m wrong here, but I believe most buyers, so a buyer for a retailer is really scolded an expert in negotiating, you know, price for product. They understand cost of goods. I would even say that in the apparel manufacturing, um, and furniture manufacturing accessories.

Uh, and. You know, all the kind of fashion categories. Mm-hmm. They have a, you know, an understanding of, of what tariffs might, uh, be loaded in there. But I don’t believe buyers, uh, as a, you know, job function are actually trained on tariff taxes and customs. Yeah. Is,  and, and, and that I think that that becomes certainly in the, in the apparel, in the fashion industry, um, there is a sensitivity because.

Additional duty rates on fashion, on apparel products and on footwear have always been historically high. So when we talk about, um, the tariffs, the tariffs are imposed on top of standard duties. Standard duties, which have always been in place are. Generally quite low for the vast majority of products and vast majority of industries.

I would say the range is somewhere between two to 4%.  Okay. Um, which is a nominal, uh, it’s a tax, but it’s a nominal tax. Right.  In the, in the apparel categories and in the footwear categories, that  range of standard duties is 18 to 24%.  So it’s already a significant. Element of your landed value. Now, if you take that 18 to 24% and you add to it the 145%, if the goods are coming from China,  that is a huge consideration on the cost of your goods.

Your landed cost is easily. Twice as much, um, as your purchase price for the goods. And that doesn’t even account for freight and insurance and all of the other costs that, that are, uh, weighed into landed cost. Yeah, that’s amazing. Um, let’s swift shift gears here for a second. So I understand grocery has been completely caught off guard.

Um, can you talk a little bit about grocery and maybe if you have any like specific Sure.  Sure. So, so grocery is definitely an industry, um, that has been completely caught off guard because  that industry was, was very intentionally excluded from the tariffs. Historically in 2018,  um, they are products that are subject to very, very low rate of duties, um, generally standard duties.

And they are now experiencing not only the potential for direct tariffs when the grocery products are imported, but also the costs of those grocery products even when they’re, when they’re, um.  Domestically sourced  are being impacted by the tariffs because we also have tariffs on aluminum and steel products.

And when you walk down the grocery aisle, how many of the products are in aluminum cans? Right,  right. So that is an industry that it’s almost a bit of a perfect storm. Not only were they not prepared for the challenge of tariffs because they have no prior experience, they have no prior experience in.

Mitigating or devising strategies to mitigate the cost of duties and tariffs. But in addition to that, they’re, they’re being hit by two alternative waves of tariffs, the tariffs that hit them directly, and then the tariffs that are hitting the inputs into the products that they, that they sell, like the packaging.

Like the packaging. Yeah. That’s crazy. Alright, so now I wanna ask you about, so let’s talk about the tariff impact based on business segments. So we have, you know, superstore, we have discount, we have off price, we have, you know, specialty store. Can you. Give us some, uh, maybe information about how the tariffs are hitting the different segments and what that means.

Sure, sure. I, I think the bottom line when we talk about business segments is that size matters. Um, so the superstores, um, have a better ability first to absorb the tariffs. Secondly, to negotiate. With their suppliers, with respect to the tariffs, they also have broader selections of products, so they’re diversified by definition.

Right? When we talk about the discount retailers, they’re more limited across all those fronts. Right, because they, they, they don’t have the, the vast volume. Um, they’re from a supply perspective always are going to be, um, lesser positioned in negotiations than the Walmarts of the world. Um, and those negotiations often end up.

With reductions in the category, the basket of products that they have available. So now not only are they in a lesser position to absorb the tariffs in a lesser position to negotiate the tariffs, um, but also are left with less of a basket of products to offer the consumer that is, um. Also being impacted by the tariffs and being more, um, conservative in, in its, um, discretionary spending.

So when you say discount retailers, can you gimme a few examples of name plates that you consider discount? That  I would including like the Walmarts and the Targets, I think. Right. So the Walmarts and the Targets, I would think are the Superstore. Um, I discounts, I’m talking about the Dollar Generals, um Right, the dollar stores.

And those are the, I think the, the retailers that will have the most difficult time, they’re already operating on razor thin margins. That’s right. Not in a position to absorb, um, these extraordinary tariffs. They’re already operating in a procurement model that is heavily reliant on China because the, that is where you get the lower priced supply.

Um, and obviously they already have a clientele that is less able. To absorb price increases to, to account for the tariffs.  Yeah, that’s, yeah. And that’s a tough segment for sure. I mean, I think they’re running like on 10 to 15% margins. 15 being generous. Yeah. If you’re tacking on a 12, 15, 18%, you know, tariff, tariff on top of that, uh, that model just doesn’t work.

It doesn’t work. It’s not sustainable. So what are companies doing? Maybe you can, if you could kind of put it in terms for us, um, what short term things, uh, are you seeing being done that maybe other retailers and brands can benefit? What are some medium term measures and long term, what should we be thinking about?

Yeah. So in, in terms of short term measures, and we’ve seen a lot of this already, um, the retailers are bringing up, uh, purchasing, right? We are right now, at least with re respect to rest of world, we are in a, in a, within the 90 day. Uh, suspension of the, the, um, reciprocal tariffs, right? So we’re just on the baseline.

10% tariffs as opposed to whenever may apply to the particular countries. And so we are definitely seeing that retailers are taking this opportunity to bring forward supplies to, to the extent. Possible whether that means, um, you know, buying more than they anticipate they’re going to need, um, or just advancing orders to get ahead of when the tariffs hit in July, when the new tariffs are advanced are, um, announced in July.

Um, we’re also seeing retailers that are going back to their supply base and negotiating. Um. With varying degrees of success. And there again, that’s where we see that, uh, all retailers are not, retailers are not created equal and are not experiencing the same level of success. Um, we are seeing clients starting to think about diversifying, where they’re, what they’re purchasing supply chain looks like.

And right now. I say think about because it’s not necessarily the greatest time to be making decisions as to what your future state supply chain looks like because we don’t have enough information yet. Right. Um, but starting to think. That capacity is very powerful because what is important in order to survive this environment, um, and I, and, and, and be able to thrive, is to create agility, right, so that we can, we can pivot regardless of what happens.

Um, we’re not waiting until.  All of the facts have been announced and finalized before we start thinking about how we move. I don’t think that’s gonna happen anytime soon, so, yeah. Yeah. So the, so, so, so we are seeing companies that are taking those preparatory steps, um, from a short-term perspective to enable the medium and and long-term perspective.

Sometimes for some categories of products, it’s actually looking for different sources of supply, um, and understanding that there may be.  Other, uh, sources of supply that may come out of this experience being the better option.  Um, not withstanding that it may not be the better price point today.  Right.

And are you seeing, like companies looking at shortening the supply chain, is that a tactic that would be useful in this type of scenario? Absolutely. Absolutely.  The other thing that I think it’s important and we’re seeing companies recognize more and more is that there is not one single solution to surviving the tariff environment.

This really is about layering on  differing mitigation  levers  and then calibrating to find what is the right set of strategies to implement. And understanding that at any point things can and likely will change and we have to be ready to pivot.  That’s great. I’m gonna ask you one last question if you’re okay with this, but can is artificial intelligence, is there anything out there that artificial intelligence can kind of help and get us to solve this problem?

Are you seeing anything? Uh,  absolutely. Uh, there’s many things in development, um, across and, and we at pwc have invested tremendously in developing tools. Technology is an absolute necessity to help companies navigate. The unchartered waters that we are entering. Um, there is so much information that needs to be absorbed, ingested in order to be able to make valid data-driven decisions as to how to proceed and how to create that agility that I talked about.

It’s, it’s virtually impossible to do so without. Leveraging AI and other technologies. No, that’s great. Thank you so much. I really appreciate you having on the podcast. You were a wealth of information and uh, I’m sure we’ll have you back again because this is an ongoing conversation probably for the rest of this year at least.

Indeed. Thank you, Shelly. It was a pleasure to be here. Thank you for having me.

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