Are Holiday Assortments the Next Victim of the Trade War?

As the 90-day retaliatory tariff pause looms, the apparel industry is still operating on little to no clarity on what will happen next. While uncertainty is always bad for business, it’s particularly damaging when it coincides with what should be a very busy shipping season for holiday merchandise. Trump’s decision to extend the pause, re-instate the tariffs or a mystery third option could make or break critical Q4 balance sheets. Equally devastating is the possibility of empty shelves, so sourcing teams must get creative—and get goods in no matter what happens on July 9.

Doing so will call for an about-face on the current shipping trend.

Rather than the normal surge that happens this time of year, maritime advisory Drewry reported that as of June 26, U.S.-bound freight rates sagged by 9 percent for a second consecutive week on “low demand.” That number was echoed by a similar year-on-year drop in import activity at the Port of Los Angeles. Further, imports to the port were down 17 percent compared to its 5-year running average for May.

While the industry waits to learn whether there will be any sort of resolution next week—let alone a favorable one—the clock continues to tick toward the holiday season.

For sourcing managers, the mandate is clear, get product moving or risk leaving money on the table. For some, that means narrowing assortments to products they can procure from countries with lower tariff impacts or pruning selections of goods with no price elasticity. Either way, all indications are that—barring an escalation of the country’s involvement in the war in the Middle East or another tariff-related shock—U.S. consumers will be ready to spend.

Gauging consumer demand

While consumer sentiment indicators show discrepancies about whether optimism is trending slightly up or down, the common thread seems to be the numbers overall remain positive.

The Conference Board Consumer Confidence Index slipped by 5.4 points in June on tariff and inflation concerns, but ultimately landed at a 93 out of 100 rating, a robust result with a notable exception for big-ticket items like electronics and homes.

Meanwhile, the University of Michigan’s Surveys of Consumers indicated shoppers are shaking off tariff-related fears, though inflation continues to weigh down outlooks. Ultimately, the index gauge for June climbed 16.3 percent over the previous month to 60.7, besting Dow Jones estimates of 54.

Mary Ross Gilbert, senior equity analyst, retail for Bloomberg Intelligence, is bullish on today’s consumer.

“We just completed a consumer survey and what we found is that consumers are really resilient,” Gilbert said. “The No. 1 data point that I focus on when I think about the consumer—and having covered the space for a number of decades—is employment, and we’re at full employment.”

That bodes well for spending, particularly where soft goods are concerned. “When consumers are employed, they feel very good and they want to spend money, and apparel is high on their list,” she said. Gilbert does warn that older shoppers and lower income consumers could pull back on any negative geopolitical news.

So, with consumers ready to spend, it could be a profitable Christmas—but only if retailers find a way to meet that demand.

“Those orders go in the spring. That planning process requires a lot of betting on what you think the consumer is going to be like in holiday, what kind of assortment you need to have. This uncertainty made that very hard,” said Ryan Mulcunry, managing director of retail solutions firm GA Group. “What we expect to have in holiday this year is some people are going to have a lot of inventory, and some people are going to have scarcity. It’s going to be kind of a choppy holiday.”

Ultimately, Mulcunry expects the balance to lean toward inventory scarcity.

At least some of what will be on shelves was produced ahead of schedule, according to Achim Berg, former McKinsey & Company partner and founder and managing director of think tank FashionSights.

“A lot of volume has been pushed in before Liberation Day,” he said. “Some stuff sits in bonded warehouses and is waiting for the right moment for the lowest possible tariff to be moved.”

But even those stockpiles can only last so long.

And subsequent orders have been unpredictable with some slashed, paused or accelerated through new countries of origin as the industry hedges its bets leading up to the end of the pause on retaliatory tariffs.

The uncertainty—even with a (now permanent?) 30 percent tariff on goods from China—raises questions about Q4. 

“It’s not possible to ship all of holiday within that window. So, I think it’s going to be a large amount of holiday which will over spill from July and August, into a new tariff risk,” said Paul Walsh, CEO of sourcing firm Newtimes Development.

Gambling on assortments

The timing of holiday goods is just one factor that might look different this year.

Assortments are also likely to be impacted. Prompted by the worst-case scenario outcomes of the tariff pause and the short-lived, astronomical tariff on goods from China, the industry is updating merchandising plans based on sourcing realities. “What most players were actually doing was making adjustments of, ‘Can we increase volumes of other products that we produce in Vietnam and Bangladesh or other places?’” Berg said.

But brands and retailers’ ability to pivot away from China and other targeted nations is constrained by the capacities and capabilities in these new production destinations. For many popular holiday gift items, alternatives are plentiful. But some categories are more difficult to uproot. Chief among them: sneakers and sweaters.

Sweaters, in particular, have been a hot item for a few years so it’s already been tough to find capacity, particularly for buyers looking to avoid China, Walsh said. “Because it’s such a short window in production for sweaters, it’s really not a category which is easy to flex capacity during peak season,” he explained, noting it’s true even as factories in countries like Cambodia have expanded capacities. “It’s the hardest to pivot.”

When it comes to categories like this, selection may be limited this year, according to David Swartz, senior equity analyst, consumer equity research at financial services firm Morningstar.

“We may see some shortages of some products,” he said. Of particular concern are goods that only a few factories have expertise in or are concentrated in only a couple of countries. While brands like Nike and Adidas have a sourcing advantage because of their scale and the redundancies built into their supply chains, footwear is a bit of an Achilles’ heel. “In athletic shoes, there’s much less flexibility because they’re difficult to make. And Nike and other companies have invested significant amounts of capital in the factories, so they maybe have less flexibility there. There may be some SKUs that are dropped.”

Rather than attempting to rework supply chains or risk empty shelves, some retailers are turning to brands with production outside the eye of the storm in places like Jordan and Honduras, Swartz said. “It’s hard to say that anybody really benefits from tariffs but Hanes brands, which primarily imports from Latin America, said they’ve been approached by retailers that they do business with to replace Chinese-made products.”

Calculating price hikes

The reality is retailers won’t be able to mitigate all cost impacts through savvy sourcing. Whether it’s the 10 percent base tariff or the imposition of the retaliatory tariffs, the cost of doing business is going up. The question is, how much of that will consumers be forced to shoulder?

“The issue on retail pricing is a multi-layered one. It’s not so simple as an increase of x means y,” said Walsh. “Some customers will take a more nuanced, ramp up approach, starting to price increase in June or July in a smaller way, and sort of gradually ramping those prices up through fall and the holiday. In other cases, we have customers being very selective on what they increase retails on.”

The high-end of the market likely has the most flexibility here, according to Mulcunry.

“Sales and margin matter the most, and so with high fashion, you feel like the consumer could absorb increased pricing and demand would not decrease as much as it does in the lower demographic,” he said, adding for that reason, goods at that tier have even more runway for order decision making. “I also think you’re going to have, in the high fashion space, a bit more flying in of inventory, potentially.”

Beyond luxury, Swartz said retailers are coming up with strategies to inflict the least amount of pain, particularly for the most price sensitive shopper. For that reason, he suspects kids’ shoes and value priced items won’t see much change. “There isn’t much ability to really raise prices without potentially affecting demand,” he said, adding it’s not lost on brands that some retailers are struggling. “Kohl’s is not in a position right now where it can impose price increases realistically, even if its costs are going higher, and its vendors understand that too.”

For goods that will carry higher price tags, the increase should be manageable, Swartz said. For instance, he points to a pair of sneakers that exits a factory in Vietnam at $20 to $30. “For the end consumer, it could be a $5 to $10 increase on a pair of shoes. That’s probably not going to be noticeable, and it’s not going to be for every pair of shoes,” he said.

As prices go up, so will the price burden, according to Gilbert.

She said labels that operate on a full-price model at a higher price point like a Lilly Pulitzer and Tommy Bahama are better positioned to slip in a price increase. “They see opportunities to be able to raise prices on select items that tend to be higher price points. Say a $600 dress may be $650,” Gilbert said. “They’re able to do it very methodically, and it might be less noticeable to the consumer who’s spending that much.”

But even the highly promotional mid-tier players need to find a way to recoup tariff costs. In this case, she said, companies like Gap, which entices shoppers with seemingly permanent discounts, are relying on specific product categories to protect margins. “Everything is always on sale but there are certain items that it’ll exclude [like] their collaborations and Gap Studio,” she said. “That’s the way they can put forth price increases.”

Ultimately, at the 10 percent level, Swartz said the tariffs are “manageable,” particularly for those brands and retailers employing a multiprong strategy.

“They’re going to take some margin hit. They’re going to raise prices. And they’re also going to negotiate with their suppliers, and they’re going to move some production around,” he said, adding tariffs could lose their sting over time. “In theory, they could become more manageable, because people will become accustomed to a little bit higher prices.”