Reimagining Retail: Tariffs Are Here: Consumer Shifts, Surprising Outcomes, and Must-Watch Metrics

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Sara Lebow (00:00):

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(00:20):

Hello, listeners. Today is Wednesday, April 23rd. Welcome to Behind the Numbers: Reimagining Retail, an EMARKETER podcast made possible by Kinective Media by United Airlines. This is the show where we talk about how retail collides with every part of our lives.

(00:34):

I'm your host, Sara Lebow. Today's episode topic is once again tariffs, one way that retail is colliding with most of our lives. Before we jump into that, let's meet today's guests. Joining me for this episode, we have two members of our briefing desk. First up is Rachel Wolff. Hey, Rachel.

Rachel Wolff (00:59):

Hey. Thanks for having me.

Sara Lebow (01:00):

Thanks for being here. Also with us is Zak Stambor. Hey, Zak.

Zak Stambor (01:04):

Hey, Sara. Hey, Rachel.

Sara Lebow (01:05):

Hello. Okay, let's recap real quick what happened with tariffs in April. This is a super high level overview. On April 2nd, a 10% tariff was applied to all nations importing goods to the US, unless a tariff has already been announced on that product. On April 4th, China announced a 34% tariff on imports from the US. Then April 9th, this was the day that the markets got all confused.

(01:31):

At first, a bunch of extra tariffs took effect, including a 104% tariff on China, but then Trump backed down on some reciprocal tariffs bringing them back to 10%. Then Trump announced the tariffs on China were actually 125%. And the next day it was clarified that they were 145%. But not all Chinese goods are being taxed evenly. On some goods, tariffs are as high as 245%.

(01:56):

So you can see how this topic is confusing. And along the way, consumers are confused too, with consumer sentiment falling once again in April. That's a lot of me talking. Zak, Rachel, how are tariffs impacting consumer behavior?

Rachel Wolff (02:11):

I think pretty much everybody is worried about tariffs at this point and worried about prices going up, worried about how they're going to affect their jobs and the economy and potentially cause a recession. So I would say there's basically two camps of consumers. One camp is like, "I need to get ahead of the tariffs. I need to buy my car now before it becomes exponentially more expensive in the coming months."

(02:36):

But then you have the other camp that's saying, "Well, I'm not so sure about that. I'm going to hold my cards close to the chest for the moment and hunker down and wait to see how bad things get."

Zak Stambor (02:47):

And I think those consumers, they might be the same consumer. In one bucket, you need a new car, and so you've got to get it now because you know that the price will go up in a few months. On the other hand, you might not need a new pair of shoes. You would like to have them, but you don't need them. And so you just decide, I'll hold off. So I think people are weighing every single purchase decision that they make in a way that they probably weren't just a few months ago.

Sara Lebow (03:21):

Yeah, and that especially makes sense for cars and consumer electronics. I feel like that's where we're seeing the most behavior changes right now. Other categories aren't necessarily being touched as much yet. I think that will change in the coming months. But right now, just looking at sales data, we're not seeing huge changes in every category, are we?

Zak Stambor (03:41):

It kind of depends. There are the categories where people are very clear that there will be an effect from tariffs. So in March we saw retail sales in the furniture category shoot up, sales in apparel shoot up, and then auto drove, pun intended, right up into the right. But yeah, in other categories, it's a bit less pronounced. But there's a lot of categories where a whole lot of the goods that we buy are imported and will surely be affected by these tariffs.

Sara Lebow (04:20):

Something we were talking about is categories that you might not be thinking of immediately as something that tariffs are impacting. What are some categories that stand out to you guys there?

Zak Stambor (04:31):

Well, it's just like there are so many tariffs. Just as you mapped out at the top of the show, there's just so many going on that it's hard to keep track of everything. And so a category like beer is seeing a huge effect. Constellation Brands, the parent company of Modelo, Corona, and Pacifico, their whole portfolio of beer are Mexican brands. So they're imported beers. And so they're going to be hit or are being hit with the tariffs on imported canned beer.

Sara Lebow (05:07):

And the cans themselves are also imported, right?

Zak Stambor (05:10):

Yes. The cans are being tariffed. You have the steel that is used to produce the kegs being tariffed. And so expenses are just shooting right up and it's hitting this company really hard. I mean, Constellation Brands was growing really well and they just slashed their outlook because of the tariffs and then some other things going on as well. Because like I said, their entire beer portfolio are these Mexican brands and they're seeing some weakness among Hispanic consumers as well for a range of reasons.

Rachel Wolff (05:48):

I mean, the other thing that I think is interesting is that a lot of brands that we associate as being American are manufactured abroad. I was reading about Pepsi today, and most of their concentrate is made in Ireland, so that would make...

Sara Lebow (06:00):

Didn't know that.

Rachel Wolff (06:01):

Yeah, me neither until this morning. So yeah, even the price of soda is going up purely as a result of these new tariffs. So I think basically there is no sector that is left untouched.

Zak Stambor (06:16):

The point is we have a global supply chain that has very deep roots. And so to uproot it all at once is jarring. It will have a ripple effect across a whole range of sectors. And so while it's easy to see the impact on furniture, if you buy stuff from Ikea, you know that it is not produced here. But when you buy a two liter bottle of Pepsi, you don't really think about where that concentrate is coming from.

Sara Lebow (06:55):

And that ripple effect extends beyond just retail. As someone who writes about marketing as well, we're going to see ripple effects obviously or not obviously in advertising. So social media in particular, Temu and Shein have been huge bolsters for Meta. Now they're cutting way back. And as a result, we've updated our forecast to show that depending on how heavy tariffs are, social media's ad spend growth could really be limited.

(07:23):

And that weight could be as much as 10% or $10 billion in the impact depending on how heavy tariffs are. Obviously, if social media gets impacted, then the entire ad sector could be impacted as well. So yeah, tariffs are clearly extending beyond retail.

Zak Stambor (07:39):

For sure. And to take a step back, I think it's worth noting, as we modeled out the impact of these tariffs, we had to do it in a few different ways because things are very dynamic. And so we both took the baseline pre-tariff environment. We have that in place now. If you go to our website and you look at our forecast, that is what is currently there. If you want to see the current environment, we modeled what we are calling a moderate tariff environment, moderate being a...

Sara Lebow (08:20):

In terms of what's proposed.

Zak Stambor (08:21):

Yes. As opposed to the very heavy Liberation Day tariff environment, which we also have modeled out. And so the moderate environment still has a pretty sizable effect on ad spending. Because as these companies see their margins being squeezed, they've got to protect their bottom line.

(08:46):

And so they're going to shift their advertising spending to where they can see the clear effect of that spending. So they're going to shift to performance-based advertising rather than just the type of brand building that they otherwise would be spending on.

Sara Lebow (09:06):

Perhaps a more clear way of putting this is that we currently forecast... Or ahead of tariffs, we forecasted social media ad spend would grow in the US by about 13% with these heavy Liberation Day tariffs. Year-over-year growth would slow to about 1.5%. And if you want to look into that more, Zak helped put together a fantastic report on the impact of tariffs on US businesses. That's on our subscription website.

Zak Stambor (09:31):

Yeah. I mean, I think a really good way of looking at this is not only looking at social, but just looking more broadly at digital ad spending as a whole. We had expected spending to grow about 12% this year. In the current environment that we're in, we think it'll be about 8%. But if we shift to the heavy environment, it'll grow just 4.5%.

Sara Lebow (09:58):

Are there any unexpected outcomes coming from tariffs, or is this all how you guys predicted a year ago when we talked about potential tariffs?

Rachel Wolff (10:09):

I don't know if this is unexpected, but certainly one thing that I'm looking at is how anti-US sentiment is affecting brands. I mean, we talk a lot about their performance in the US. But if you're a global brand like Nike and you have a huge presence in China and China is a very important market for you, and all of a sudden, Chinese people are just not interested in buying US products, what does that mean for your ability as a company, especially for Nike, to come back from what's been a pretty terrible year?

(10:38):

And this is not only the case for Nike, but for companies like Walmart also that have operations in all these different countries having to navigate that. I think that's going to be pretty tricky in the year ahead.

Sara Lebow (10:51):

Something that surprised me is seeing how many companies are using tariffs or tariff's potential as a buy now advertisement. Obviously we've seen this within auto. Buy your car now before its price goes up by 100%. We've also seen more demand for iPhones and smartphones in general. But I've just seen in regular CPG ads every so often, buy before the tariff comes. This is an ad strategy now.

Zak Stambor (11:24):

I think that's right, and I think it's working. I mean, I got a promotion this weekend to trade in my phone. And I am not somebody who trades in my phone often. I let my phone just age and age and age. But I was thinking about it and being like, "Well, maybe I should just take advantage of this now because it's going to be more expensive."

Sara Lebow (11:47):

I've been really on the fence about trading in my phone as well. I have an old phone. I have the Mini, which they don't make anymore. And so I've also been seeing this as a consumer. Something concerning about it is it's a very right now way of thinking for brands. I don't want to call it shortsighted. Obviously brands are preparing for tariffs. But if you are encouraging a whole bunch of buying behavior right now, then it's naturally going to slow down and tariffs will impact that further.

Rachel Wolff (12:17):

But I think it sense makes, right? Because if you're expecting sales to slow regardless, you want to take advantage of the panic buying behaviors that people are exhibiting right now.

Zak Stambor (12:26):

Also, things have moved so rapidly, it is very hard for any company to make any sort of long-range plans, so you have to live in the moment. And might as well goose the numbers as much as you can at the moment because who knows what's ahead around the corner.

Sara Lebow (12:49):

Yeah. I think a good way of thinking about this for retailers would be thinking about that low, moderate, heavy way that you modeled in that report, Zak. If I were a brand right now or a retailer, I would be coming up with contingency plans for each of those potential outcomes.

Rachel Wolff (13:07):

Yes, but it's also difficult to figure out what the contingency plan is. Because unless you're moving production to the US, you're going to be subject to tariffs in some way, shape, or form.

Zak Stambor (13:17):

Yes. I was going to make the same exact point. And moving production is incredibly hard and something that takes many years. And even if you are moving production and building a factory, many of the component pieces that you use to build the factory are subject to tariffs. And so even within that, it is difficult to make long-term plans because each of those elements are subject to change.

Sara Lebow (13:52):

If you're a buy American local retailer that really does want to reshore, your machinery is likely going to be made at least in part overseas. Never mind the fact that it will also be difficult to find labor for those factories. There's a lot of aspects at play that make it either impossible or very difficult for retailers that do want to reshore the US to do so.

Zak Stambor (14:18):

Yes.

Sara Lebow (14:18):

Other than that, is anything else unexpected? I feel like we had a November episode where we talked about potential tariffs, the three of us. And honestly, it was a lot of the same conversation we're having right now.

Zak Stambor (14:31):

Yeah. One of the things that we didn't talk about was how retail sales did jump a lot in March, and they were weaker than expected in February. And so I think that is indicative of this weird environment that we're in in which consumers are just I don't want to say panic buying because that's not the right term, but strategically splurging on key items that they are in need of and figure I might as well buy now.

Sara Lebow (15:10):

So sales numbers were fairly healthy in March. If I'm a retailer, that makes it once again really difficult to plan. What numbers should retailers be watching?

Zak Stambor (15:20):

I think we're going to see this funky retail environment for several months because retailers have inventory on hand that was not subject to tariffs. They will sell...

Sara Lebow (15:37):

A lot of them are bringing in more inventory or brought in more inventory ahead of tariffs as well. We saw Apple do this with iPhones.

Rachel Wolff (15:43):

Right. But the one exception to that is grocery. So I think that is one of the key numbers to watch, which is grocery inflation because that's going to have an immediate impact on people's purchasing behavior.

Sara Lebow (15:55):

I'm weaning myself off of avocados to prepare.

Zak Stambor (15:58):

I know. Avocados and bananas and coffee. What will my breakfast be? I do not know. But yeah, I think we will very quickly, to Rachel's point, see the impact at the grocery store. How those higher grocery bills then impact consumer behavior will be really interesting because we've already seen consumer sentiment fall to near historic lows.

Sara Lebow (16:30):

And we already know that people are strained at the grocery store in particular as it stands with the price of eggs and other goods.

Zak Stambor (16:36):

For sure, and that's only going to intensify.

Rachel Wolff (16:39):

The other thing I would add is the jobs report numbers I think are also going to be really instructive again about how people are feeling, if they're confident or less confident about their job prospects. That's also going to be important for retailers to keep an eye on.

Zak Stambor (16:53):

Are you talking about unemployment or are you talking about the JOLTS numbers, job openings?

Rachel Wolff (16:57):

Well, I think it's both, right? One is if you're worried about the overall health of the jobs market, then you care both about layoffs, but also are there opportunities out there?

Zak Stambor (17:06):

Yeah, I think the job openings number is going to be fascinating to see how businesses are responding. Are they just bunkering down and saying, "We're going to make do with what we've got?" Or are they going to say, "Well, we need people to do stuff, and so we're going to keep on hiring?" I think it's the former, but we'll see.

Sara Lebow (17:29):

Yeah. I mean, we talked about this as a key difference between the last time that Trump was in office and tariffs set in. There were decent job numbers then or decent employment numbers?

Zak Stambor (17:40):

Yes. So few differences though. One is that those tariffs were really finely targeted. You might have a tariff on washing machines, but you didn't have a 10% universal tariff on everything else. So yeah, the price of a washing machine went up, but the price of a refrigerator did not. And so the other thing about it was the labor market was really strong. If you look just at the surface line numbers, the unemployment rate, the labor market looks pretty decent.

(18:21):

But we have seen it loosen quite a bit over the past year. We had that incredibly strong labor market during the past inflationary period, during the Biden administration, and people just kept spending because they felt okay about their job prospects. Now, I don't think that's going to be the case. And so that's a major difference in terms of the potential response to an inflationary environment this time around.

Sara Lebow (18:56):

I also think people are just more confused in general this time around. They have less of a clear vision of the future. On that note, if you're a retailer right now, what is one thing you would do tomorrow to prep for tariffs?

Zak Stambor (19:13):

I would take a sharp, sharp look at my ad budget. I would X out brand building initiatives, focus on performance based ad spending like search. Lean into search. You know you're going to get the bang for the buck.

Rachel Wolff (19:30):

What I would say is that with price increases likely to come, now is the time for brands to start the messaging around that be as transparent as possible and not just say, "Oh, we're raising prices because everybody's raising prices." Be surgical about it. Tell shoppers, "We're raising prices because our products come from X, Y, & Z and now we're being charged X percent more," all of that. Just be transparent.

Zak Stambor (19:53):

And some brands are doing interesting things with that. Sexual wellness brand Dame has a line item when you check out, Trump Tariff Fee. And I think it's like five bucks or something. They're absorbing some of the cost, but they're passing along some of the cost to the consumer, but saying, "Hey, this isn't us. This is just the overarching conditions that we're having to deal with."

Sara Lebow (20:20):

That depends what kind of company you are. I saw some data a while back that a lot of consumers don't really want to see you blaming Trump or the economy, but a sexual wellness brand, their consumers might be more comfortable with that sort of messaging. That really depends on who your consumer is.

Rachel Wolff (20:37):

But I think you could even just call it a tariff surcharge and just say, "This is the cost of the tariff that I now have to pass on to the consumer."

Sara Lebow (20:44):

Yeah. What I would be doing if I were especially leadership at a large retail company is making sure that I have a clear and contemporary understanding of where each part of my supply chain is, which sounds really simple, but I feel like that messaging gets lost a lot of the time, especially at the leadership level.

(21:03):

I would make sure I know where everything is being made, how much of my production is coming from each country, and where the other potential options for that production could be if there are other options. Yeah, just making sure that I'm communicating within my company as well. Well, that is all we have time for today. So until next time we talk about tariffs, thank you, Rachel.

Rachel Wolff (21:26):

Thanks, Sara.

Sara Lebow (21:26):

Thank you, Zak.

Zak Stambor (21:27):

Yeah, thanks for having me.

Sara Lebow (21:29):

Thank you to our listeners and to our team that edits the podcast. Last tariff episode I called them terrific. So we'll call them that again. We'll be back next Wednesday with another episode of Reimagining Retail, an EMARKETER podcast made possible by Kinective Media by United Airlines. And on Friday, join Marcus for another episode of The Behind the Numbers Show.