Target leans on vendors in trade war

Discussion
Photo: RetailWire
Aug 30, 2019
Tom Ryan

Target has sent a letter to suppliers insisting they absorb any costs related to increased tariffs on Chinese-made product.

“We have delivered on this guest-centric plan with your cooperation, hard work and partnership and appreciate the work we’ve done, together,” wrote Mark Tritton, Target’s EVP and chief merchandising officer, in a letter dated August 27.

Mr. Tritton added, “As we look forward, Target will continue to keep guests at the heart of our strategy and continue to rely on your help and cooperation as tariff changes continue and uncertainty remains. Target will not accept any new cost increases related to tariffs on goods imported from China. Our expectation is that you will develop the appropriate contingency plans so that we don’t have to pass price increases along to our guests.”

News of the letter was first reported by Oregon Public Broadcasting (OPB). A Target spokesperson confirmed the letter but wouldn’t say the guidelines were standard policy or intended for select vendors.

Several analyst reports in recent weeks have assessed that larger retailers are better positioned to manage tariffs. According to a Barron’s, Telsey Advisory Group’s Joseph Feldman wrote in a mid-August note, “These megaretailers should be able to manage tariffs more effectively, given their wider product base and global sourcing capabilities.”

With the latest round of tariffs set to arrive in two phases, Sept. 1 and Dec. 15, they are expected to have a bigger impact in 2020, although suppliers could ask for some price concessions this year. Retailers on a recent quarterly conference call indicated discussions with vendors over mitigation strategies and pricing changes are ongoing.

“In most cases, the big retailer will have the power, but sometimes the supplier has the power, too, if they have a monopoly in a category or their brand is super strong,” Bruce Winder, co-founder and partner at the Retail Advisors Network, told Adweek.

Even smaller niche stores, however, have leverage they can use against a vendor reliant on their shelf space.

DISCUSSION QUESTIONS: Is Target making a wise move in insisting that suppliers absorb costs tied to the tariff war? What advice would you have for any retailer — large or small — on using their leverage to offset price increases tied to extraordinary forces such as tariffs?

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"The increased cost of the goods is everyone’s problem and if the goal is to have the same retail price then each should absorb some of the cost."

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13 Comments on "Target leans on vendors in trade war"


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Mark Ryski
BrainTrust

Target is trying to maintain their margins and low prices for their shoppers – a wise move on their part. This same scenario is playing out, though less publically with most other retailers. However, this kind of leverage is substantially in favor of the retailers that have leverage with suppliers – many retailers don’t have this degree of leverage, so their ability to influence supplier costs will be limited. I’d advise all retailers to work closely with their suppliers to minimize tariff impact, but it’s going to be painful for some retailers and categories. The shoe category is a good example, since the vast majority of shoes are manufactured in China.

Neil Saunders
BrainTrust

The bottom line is that Target does not want to increases prices for its customers and, in that regard, it is in the same position as many other retailers. Target inevitably has a great deal of buying power and can, to some extent, force suppliers to absorb tariff related charges. I am not entirely sure if this is a good thing for long-term supplier relations, but it is the easiest way for a retailer to try and deal with the problem of rising costs.

Zach Zalowitz
BrainTrust

Should Target absorb the entire hit for the tariff increase? No. Like others have noted, it’s a game of leverage. The concern I have with this is the ripple effect it will have on U.S. and global economies. Target is, in essence, spreading the pain and the bullwhip will come back to bite us if other major retailers do the same. What’s worse, the consumer’s cost going up 5 percent or a series of medium/small business going belly-up because they were passed the cost by all the retailers they sell to and couldn’t see through to the other end of the tunnel?

Gene Detroyer
BrainTrust

It is a matter of leverage, and small vendors have none. In the meantime, the large CPG companies will not accept Target’s dictates and Target will accept whatever the large CPGs give them. Those companies without the leverage will be very badly hurt.

Gene Detroyer
BrainTrust

This brings back nightmares for me. My company’s two biggest customers were Walmart and Target. Walmart was the most straightforward, transparent and compliant customer we had. Target was just the opposite.

If Target did a price check at Walmart stores and found that Walmart was retailing our product at, say, 25 cents less, Target would deduct that amount on every unit on the invoice. The fact always was that we never sold Walmart at a lower price than Target. Every invoice would be a battle. Target did not take responsibility for their own inefficiencies then and it sounds as if they have no interest in doing it now.

I love the comment in the letter about working together. Which means Mr. Vendor, you take the hit, I am not interested in dealing with it. The tariffs are simply a tax on products. The end user, it doesn’t matter if it is a manufacturing company or a consumer, should be paying a tax.

Steve Montgomery
BrainTrust

I find it ironic that the letter refers to the partnership between Target and its suppliers but then assumes their partners should absorb all the cost associated with the tariffs. The increased cost of the goods is everyone’s problem and if the goal is to have the same retail price then each should absorb some of the cost. That being said, the public is aware of the tariff impact on cost and passing some portion on to them may not be as negative as Target seems to perceive.

Lee Peterson
BrainTrust

So agree with Steve. Just as the partnership served dual benefits between China and the US, the same is true for Target and its vendors. If anyone thinks that China was the only one benefiting from doing business with the US, they should take a look at Walmart’s profits, just to name one beneficiary (Walmart’s customers being another). Putting everything on your vendors is a very 1980’s way of thinking IMO. What they’re saying is, “that’s your problem,” when, just as Steve is saying, it’s obviously not, it’s a mutual problem.

Shikha Jain
BrainTrust

Keeping prices low is Target’s value proposition so the move makes sense for maintaining Target’s advantage here. While on the surface they likely have blanket buyer power, it’s not that black and white. Target provides household brands at great prices and those brands are important to drive traffic to the store and that’s when certain suppliers counterbalance the buying power. There is enough demand for their products across many channels. To achieve success, Target might have to take a more balanced commercial and trade terms strategy to win with customers and suppliers.

Dick Seesel
BrainTrust

Target has leverage in this situation with its smaller vendors, and it’s understandable that it doesn’t want to sacrifice market share — or margins, either. But its approach is peremptory despite its claim of “partnership.” Even those smaller vendors have options (Walmart and Amazon) if they find Target’s approach too heavy-handed.

James Tenser
BrainTrust

Retailers have a long tradition of pressuring suppliers to absorb external cost increases. I recall a past incident when the price of sugar surged (in the 90s?), retailers pushed back on accepting increased candy prices.

The current tariff wars present a scenario where retailers have reason to put pressure not just on their U.S. based importers, but on their overseas manufacturers, especially in China. Forcing factories to share the pain is one way to spread the consequences across all parties. A tough stance, but perhaps the hue and cry will help push the governments in question to back off the insanity.

Craig Sundstrom
Guest

The answer is largely dependent upon the rate (10% vs 25% vs ?) and duration: smaller rates and shorter periods can be absorbed, at least partly.

But if Target thinks some supplier can absorb a 35-30% increase in costs for any long duration, then either they must think the supplier has an extraordinary margin to begin with, or they’re mistaken. No company is going to drive itself into bankruptcy, no matter how important a customer Target may be for them.

LAURA RAMIREZ
Guest

Everyone seems to want to speak to the margins and logistics of this “ask” rather than the psychology of it and that is makes Target look like a bit of a bully throwing their weight around for not bearing a SHARE of the burden. Many supplier clients of mine are negotiating with their factories and have been met, mostly, with an amenable response to share some of the burden. I just feel badly for those retailers who do not have that same leverage (which most of you also mentioned).

Cooperation is key.

Scott Benedict
Guest

I think this approach is not only unrealistic, but damaging to the longer-term relationship with suppliers. Working together to mitigate the impact, seeking to move production to other markets, or sharing insights on other alternatives is the type of partnership with builds business relationships in the longer term.

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"The increased cost of the goods is everyone’s problem and if the goal is to have the same retail price then each should absorb some of the cost."

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