Tackling Tariffs in the Beauty Industry
Posted May 15, 2019

On May 9, 2019 the US economy woke up to the reality that the Trump Administration had levied an additional import tax (duty) on Chinese-made goods. The scale of this policy is immense, covering more than US$200 Billion worth of products or roughly 23% of all Chinese goods coming to US shores. Furthermore, the indications are that the Trump Administration is willing to move even more aggressively, threatening duties/tariffs on an additional US$325 Billion of Chinese imports.

What does all this mean?

In the United States, according to the economics department at the University of California, “The latest tariffs will add another $500-$700 a year in costs for the average U.S. household”. It is suggested by the US National Retail Federation that companies won’t immediately increase their prices, as a result of their increased “landed” costs. Alternatively, retailers will try to absorb as much of the costs as possible but they will not be able to endure for long, as large a hit as 25% to their product cost. It is anticipated that some goods and services may become more expensive in the summer, such as back-to-school items. And if the tariffs remain in place throughout the summer months the price of products that will be on shelves for the holiday season will inevitably be a lot more expensive. It is also important to remember that it is not just products made in China that are affected by the tariffs. Many US manufacturers source their raw materials from China and other low cost jurisdictions. This is particularly true in the cosmetics and packaging materials industries. Hence, these tariffs will affect many aspects of the cosmetic sector.

With all the attention on the China trade war what is being overlooked is the fact that the Trump Administration is swinging its protectionist baseball bat at any and all exporters to the USA. Of significant concern is the massive EU-to-US trade relationship in cosmetics. The EU exports 3.2 billion Euros (CAD$5bn) worth of cosmetic products to America. If that relationship is attacked then the entire beauty industry will be in a state of panic.

In Canada, you might think that we are insulated from, or will not be meaningfully affected by, the Trump Administration’s policies. Think again! The vast majority of cosmetic preparations that are in-salon or on retailers’ shelves in Canada either come through the USA or are made in the USA using raw materials from China and other low-cost producing countries. As such Canadians will most definitely face higher costs for cosmetic products and may even experience a double duty scenario (the newly implemented 25% tax on Chinese imports into the USA plus any Canadian tariffs such as those announced in July 2018 by the Trudeau government in retaliation for the countervailing taxes levied by the US government on Canadian steel and aluminum exports). The latter measure involved a 10% import tax on all manicure/pedicure preparations, hair lacquers, pre-shave, shaving or after-shave preparations and organic liquid or cream preparations for washing the skin. To put this into perspective, according to Statistics Canada in 2017 we imported from the USA US$55.8 million worth of manicure/pedicure preparations, US$175m of liquid and cream soap and other skin washing products, plus US$28.3m of shaving, pre-shave and aftershave products. That’s more than $300m (in Canadian dollars) worth of products at cost and a retail value of at least twice that. In combination, Canadian consumers plus producers and distributors have absorbed an additional $60-$100m dollars worth of cost on those cosmetic products alone since July 1, 2018.

What can a beauty professional do to mitigate the potential disruption and painful cost increases associated with the escalating global trade tensions?

The number one item that should be on a professional’s to-do list is to be informed. The best way to do this is to engage with other professionals to understand market dynamics, identify novel coping strategies and to learn best practices. Your suppliers should be a rich resource for such information and if they are not willing or able to share then, dare I say, get new ones. Industry associations are also an important resource at all times but especially during tumultuous times.

In terms of the relationship with your supply channel, there are a number of concepts worth considering. Paying attention to and understanding the price drivers with respect to the products you buy is very important. Fulfillment efficiencies are a key component in pricing, hence buying in reasonable quantities and especially case sizes can manifest in significant savings for your supplier which in turn, should be passed on to you. A good example of this would be gloves which invariably come in 10 boxes per case. Buying a full case makes it easy for your supplier vis-à-vis picking, packing and shipping – therefore a price concession should be realized by you.

Another aspect of your supply channel that is important, is that of knowing the origin of the products you buy. As an example, the vast majority of mani/pedi files and buffers are manufactured in China. But did you know that some come from the EU and even Canada? Two such examples are PediPro and Gouni. Both of these brands utilize a stainless steel paddle and replaceable pads (which come in multiple grits). Neither of these brands have been impacted by the aforementioned trade wars and corresponding duties because of their trade-friendly point of origin.

Buying well-known global brands is another way in which you can insulate yourself from price volatility and inflation. Larger brands have the financial wherewithal and longer term perspective to undertake strategies to minimize inflation for their advocates. Smaller, niche brands do not have the buying power nor the financial resources to assist their client-base during difficult market circumstances and over the longer term. This same dynamic applies to your distributors. Dealing with distributors who have a global reach, strong brand relationships and financial capacity is wise always, but particularly in volatile markets such as we are experiencing now.

And finally, it is always a good idea to invest time and energy into business planning with your supply channel. Being well informed about inflationary trends, pricing policy changes, new product introductions, supply disruptions, quantity discounts, contract pricing opportunities and other key considerations in your relationship is always a good idea.

“Work smart, stay informed, never give up, and great things will happen.” Ziad K. Abdelnour, author Economic warfare.

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