In this episode of Retaili$tic, Paul Rosengard, Senior Advisor to WHP Global, joins Coresight Research CEO and Founder Deborah Weinswig to discuss current trends in the retail industry, focusing on the flight to value, consumer spending patterns, and the impacts of tariffs and economic volatility. They explore the differences in retail strategies among major players like Walmart and Costco, the challenges of managing holiday inventory, and the ongoing dependence on China for manufacturing. The discussion also touches on the role of technology in retail, labor challenges, and the importance of adaptability in navigating the ever-changing market landscape.
Takeaways
Chapters
00:00 This Week in Research: New Reports and Data
00:25 Navigating Supply Chain Challenges
06:20 Retail Strategies in a Volatile Market
12:15 The Impact of Tariffs on Consumer Behavior
17:38 The Future of Retail Technology
21:05 Adapting to Change in Retail
Read all Coresight Research coverage of tariffs here.
Speaker 4 (00:00.174)
Welcome to Retaili$tic, the official podcast of Coresight Research for April 15, 2025. This week, CEO Deborah Weinswig sits down with Paul Rosengard, Senior Advisor at WHP Global, to discuss the impact of tariffs on apparel retail. But first, Georgina Smith is here to share all the new research publishing this week on Corsight.com. Hi Georgina.
Hi Philip, Coresight Research continues to keep our finger on the pulse of what's happening around tariffs, as news and views of tariffs are changing daily. We have just released a new report outlining three actions that retail companies can take to mitigate risk and future-proof their business in the long run. We expect the US government's reciprocal tariffs to strain global trade dynamics, raise operational costs for companies, and accelerate shifts in sourcing.
Rising trade barriers and tariff policies are forcing retailers and brand owners to rethink their supply chains and competitive strategies. We break down what companies can do to safeguard margins and discuss why supply chain agility is the new competitive edge. I encourage listeners to dive into our forward-looking analysis of the evolving trade landscape to seize a strategic advantage. In addition, our regularly updated tariff timeline summarizes developments as they unfold and provides your go-to source for our research on tariffs, including proprietary survey analysis of consumer sentiment.
Walmart reported on the impacts of tariffs during its investment community meeting last week. We have published highlights on what management said on tariffs, as well as the performance of the retailers US International and Sam's Club businesses, as Walmart works to become a digitally driven, higher margin enterprise. This week, our US focused research also explores opportunities that music festivals present for brand engagement, new retail sales data, and the implications of the increasing legalization of cannabis.
Our market outlook for the food away from home market assesses growth factors, details the competitive landscape and identifies trends to watch. In terms of our international coverage, you should look out for our survey-driven deep dive on consumer spending behaviour and sentiment in China and insights on the men's skincare segment in India. Of course, this is not a complete overview of our activities and research, so please do visit www.coursite.com including to dive into our numerous data banks which offer comprehensive and regularly updated data on corporate developments, retail real estate and consumer behavior.
Thanks Georgina. Now let's check in with Deborah and Paul.
So Paul, we'll kick things off. Obviously we're in truly, I would have thought we'd be back here so quickly, unprecedented times, specifically around supply chain. How would you kind of categorize this challenge that the industry is facing to some other challenges we've faced in the past?
That's a really interesting question. I think that in many ways, the tariff challenge of 2025 is not dissimilar to the COVID challenge of four or five years ago. In one important way, it will amplify the current trends in our industry. There's been a flight to value for a while.
I mean, if you look historically, well, not historically, if you just look over the last 10 to 15 years, the middle market dominated by department stores and malls has continued to shrink and the value chain has continued to grow. So that, I look for continued flight to value. And if you want to drill that down to retail, it's just over the last two days, the stocks that are up are...TJ Maxx and Walmart and Costco and Ross stores and our friends at Macy's and Coles and Dillard's are all down. It almost historic lows.
The other interesting side like there is, side note, is if you look at some other experiential companies that cater to the middle class like Carnival Cruise Line and Disney, their stocks are also down. So that tells me that you know the the market expects this middle class constriction of spending and a flight to value.
It's interesting that 100% crop rates, so we do a weekly survey, we do it by demographic, psychographic, et cetera. And so what we've seen is the household income 50,000 and under, that consumer has had the greatest kind of negative positioning with the tariff news specifically. 50 to 100,000 has, I say it's actually an order of magnitude of almost a thousand basis points different. And then because of the volatility in the market, right?
And if you're playing the market, what we've seen is more affluent households are actually positively dispositioned because, right, they are more sophisticated when it comes to the market and are thinking about, so if we think this, how would we position our portfolio, et cetera? So that's been really interesting to us. But I do think that the experiential aspect of this on companies who are catering to a more modest income base.
That's, think, where a lot of people have been surprised at the impact on the stock. So the next question, can you help the audience understand the difference between how a Walmart and a Costco buy and how a TJ and a Ross buy and they are different. Costco is a narrow and deep commodity merchandising strategy. So they'll pick one brand of paper towels and then also offer their Kirkland signature private brand and you buy it in bulk. And they focus on commodities.
And if we were talking about t-shirts, they would pick a solid t-shirt in three or four colors and be narrow and deep in their assortment and in their unit ownership, as opposed to a department store or even an off-price channel where they want to offer an assortment. People come in looking for a differentiation.
One question to follow up on that, since TJ Maxx isn't, you know, deep in private label like a Costco, like a Walmart, how does that impact them differently in this environment with sourcing and they don't really have a sourcing base because they're leveraging others, if you will. Yeah.
Well, actually they do have a small sourcing base. They do a little bit in what's called DTR direct to retail, where they cut a deal with the brand owner and they design and manufacture and bring the goods in and then pay a very small, low single digit royalty or commission, if you will, on those sales to the brand owner. But the majority of their business is what we refer to as the treasure hunt. Or certainly that's what they want us to believe is the majority of their business.
The truth is they have to buy some goods up front also. mean, they have to be in stock in basic items, just use a white dress shirt as an example. If you were a dress shirt manufacturer, you don't discount those goods because they have a half life of dozens of years unless the silhouette changes. The true off-pricers have to buy some goods up front or program them out in advance, and their margin on those goods are not as good, and the vendors' margins are pretty good.
And then there's the distressed inventory that makes up the lion's share of the off-price inventory. And that's very high margin to the off-pricers and low margin to the vendors. And the other component in there, Deborah, is the three big off-pricers, TJX, Ross & Burlington have this program. They call it Hotelling, which is just a word for warehousing, where they'll buy distressed inventory a year in advance and hold on to it because they can buy it at a very advantageous price.
The easiest example I can give you is on seasonal merchandise after the spring or after Christmas, they'll come in and clean a vendor out or brand out of a number of categories and then just hold onto them, knowing that in nine months, they can put that inventory into their stores. So I think one of the reasons TJX's stock went up from the get-go when everyone else's stock went down last week was a reflection of how much inventory they held in their hotels because they held it at a low price.
You actually just dove into something I think is incredibly important for people to think about, which is if you think about where we are on the calendar and bringing in inventory for holiday, we've spoken to many retailers and brands and besides the fact that everything in China, right, people are already furloughed, right, factories are basically not running. And so where at least some of our clients are buying the majority of products from China.
They're trying to kind of put in, all of these, you know, okay, well, this is what we'll do if this happens, this what we'll do if this happens, right? So all of these kind of contingencies, but needless to say, right, holiday is probably not tracking as they had originally projected. And in light of that, what advice do you have for people in terms of how to think about holiday 25?
Wow, when you say people, do you mean retailers or manufacturers or... are you referring to? I have to think about that for a minute. And I think that the retailers are going to look for bargains. They're going to look to leverage their buying power and their strength to buy things at a steep discount if they can. And the brands, they're in a tough position because if they don't buy the inventory...
Think retailers and brands. They create a self-fulfilling prophecy, their sales will go down. So I think that they have to find that delicate balance of committing to some goods so that they have it, particularly in the basics, things that aren't so seasonal or aren't so fashion dependent.
That's a very good point. I think that the words kind of like delicate balance. think that is probably the kind of vision of reason right now. And as we think about this, and there's obviously a lot of concern across the retail industry. As you think about China, I mean, is there a replacement for China for some of these retailers or brands or manufacturers? How do you think about that? And how do you think this plays out?
One of the things that people outside the industry don't understand is that in our industry, we're dependent on China, not just for manufacturing, but for raw materials. That's where a lot of the cotton is grown. That's where the weaving is done. That's where a lot of the trims, the other components that go into an apparel garment are made in China. So even if you can do your cut and sew in Bangladesh or Vietnam, you're still going to China for the buttons and the zippers and all the other trim.
Just looking at China, there are some products for which there really is no replacement for China. And then there are other places where you can move. And it's going to take a long time to figure this out. mean, the current imbalance in the trade deficit is really compelling. In round numbers last year, we imported or China exported to the U.S. about $440 billion worth of goods and we shipped out to China about $140 billion. That's a $300 billion trade deficit. That's a lot to swallow.
No, that's really caused it. think it's interesting because I think this whole conversation is bringing to light things that many of us probably haven't thought about in this way before. I mean, we're living in a very volatile time. It's volatile economically, politically, climatically. We see that almost on a weekly basis. It's globally volatile. And tariffs are the latest instrument creating volatility.
And Trump's versions of tariffs, while I believe directionally correct, he's tinkering with supply and demand the way a toddler tunes a piano. Loudly, randomly and with total confidence. And obviously he's not going to be right all the time. No one is. And we've seen him yo-yo up and down a little bit over the last few days in the impact that has on global markets. And that's not a good thing. The markets don't like uncertainty. People don't like uncertainty. mean, it's human nature, Deborah, to be afraid of that which we do not understand. And we don't understand global supply and demand and tariffs and that very delicate balance that world leaders have to strike. That's hard to really understand.
I think Paul, going back to, I you and I obviously are incredibly well versed in supply chain. And there are things that either we're hearing for the first time, right? Like we're hearing from certain retailers that they may have a line on their receipt, right? Kind of tear of surcharge. First of I would never have thought of it. And it's something that if you had been like, which of these is not correct? I would have chosen that one. So things like that. And then I think even how people are starting to think about mix, right? Like de-emphasizing private label. mean, there's just so much that I think is coming at folks.
It's a lot. If you look at it from the consumer perspective, right, if you think about how much they spend on goods, how do you think that that changes in light of what we're seeing?
The interesting question, I think we have to start from the premise that everything's gonna go up. The cost of raw materials are gonna go up, the cost of finished goods are gonna go up, the cost that retailers are gonna pay are gonna go up, and the cost that consumers are gonna pay will go up. One of the few things that will go down is the cost of containers, the shipping.
That'll be a small silver lining here. So what I believe will happen is as the customer has to pay more for basic items, he or she will gravitate toward brands that they trust. If they're going to have to pay what they perceive to be a premium, they're going to be more comfortable paying it for a brand as opposed to a private brand. And other people could argue the other side that you can, when you net out the cost of the royalties that you have to pay for a brand, that a private brand can offer better value. And there's some truth to that. I just believe that human nature will gravitate toward brands.
I think you're right, but also for another reason, is that, right, and for many reasons right now, right, the secondhand market continues to strengthen. And so for items to have value in a secondhand market, right, typically branded versus unbranded merchandise does better. And so some these private labels are strong, but many are not. And so I think they're, like, from some of our work, we've seen that people are also leaning into brands for other reasons as well.
What do you think are some of the maybe, as we kind of put our heads together collectively, what are some of the kind of like unintended consequences on like the plus and the negative side?
Another really good question. Tariffs are the yo-yo diets of economic policy. Loudly announced, poorly sustained, and guaranteed to yield side effects. So what are some of those side effects or, as you said, unintended consequences? Well, on the plus side, I believe that it will create some U.S. manufacturing jobs. Just not in our industry. I don't believe that people want to invest in building garment factories back in the United States. And we have the added cost of much more expensive labor, not just unions, but in general.
But I do believe it'll create some manufacturing jobs. If we bring in the, you know, hundreds of billions that it's intended to bring in, it might actually lower our income tax rates. And that would be a beautiful thing. But that could be much farther down the road. I already referenced there'll be some lower container costs that'll hhelp offset some of the cost increases, but retail prices are going to go up. Some estimates say that it could add up to $600 billion in consumer costs.
And while some inflation is good, a lot of inflation is not good. And when I say some inflation is good, Deborah, what I'm really referring to is when I entered the industry 38 years ago, I believe the Van Heusen white dress shirt went out the door at Macy's at $19.99. I think it still goes out the door at $19.99. There just hasn't really been inflation in apparel, mostly because of the sourcing curve that you and I experienced when we worked together at Lee & Fung.
And there's been this wave of offshoring or right shoring manufacturing to find a country with a lower cost of production. But back to a little bit of inflation is good. There are only two levers for retailer or a wholesaler to drive top line sales. So I'll talk about profit or margin at the moment. And the levers are very simple. They can sell more units or they can sell those units at a higher average unit retail.
Well, it's pretty hard, Debra, to imagine that anyone's going to be able to sell more apparel units going forward. In fact, I think the trend has been pretty clear for a couple of years. We sell fewer units. We're in the creating of want business. We're not in a need-based business. So as consumers get squeezed, they're going to buy fewer units. So if we can sell those units in a slightly higher average unit retail, that will be pretty good.
On the negative side of the unintended consequences, while the U.S. will survive this moment in time, other countries will get crushed. People, particularly factory workers, are going to suffer terribly. Similarly, some retailers, brands, vendors and suppliers will also get crushed because scale matters here.
It provides leverage. A bigger company with a strong balance sheet is in a better position. Not only does that balance sheet give them a cushion, but it gives them a means to gain market share. They can be opportunistic as a euphemism, preditorial as a stronger modifier. They can be very opportunistic or preditorial of going after market share and then waiting for the rising tide to lift all ships. If they can pick up more market share.
Today, eventually that will translate to much more business. As I think I mentioned earlier, I believe companies will hesitate to build new factories in not only in the US, but also in other countries, because who knows what countries will be hit by other tariffs. Plus the volatility militarily, globally, politically, everywhere makes that just a bigger risk today than what we saw a few years ago when a lot of apparel companies were investing and smaller Southeast Asian companies and even some sub-Saharan companies looking at Africa as a base for manufacturing.
And then there's the political ramifications of the global confidence that our current and former partners will have in the United States as a trusted ally and partner. And again, I don't want to turn this into a political conversation. This is just economically, that's going to be an issue. The tariffs go up one day, come down one day. It just makes us a less trusted partner.
That's a lot to digest. Sorry. But as I was thinking about, if we go back to 2020 and 21, right, which were, I think in some ways for the retailers turned out much different than folks would have expected. We saw some of the highest margins ever in the industry. And so how would you kind of compare and contrast what we saw there with what we're going to see potentially in 25?
I believe margins are going to come down for everyone and companies will look to tighten their belts everywhere they can. They will start at the source of supply and squeeze all their partners in the value chain or supply chain for better costing. And they'll try to work on tighter margins themselves so that the smallest amount of the increase gets passed on to the consumer. But it's still going to be a fairly significant amount and back to unintended consequences or really just good but hard business, companies are going to look to lay off workers because it's one of the expense lines they can control and everyone's going to have to figure out how to do more with less.
Yeah, I mean, we've also heard from some, not in the retail sector as of yet, but we've heard from a FinTech company and a tech company, tech platform company, that basically if you, before you put in kind of a rep for any new hire, you have to kind of basically kind of go through the logic of why AI can't do that. So I think it were all right. We also had that as like a backdrop in terms of narrative.
And now, right. So, so do you think with that, right? You have a background in retail tech as well. Do you think that we've seen going back to 2020 and 21, right? We saw a little bit of focus on supply chain tech, but once everyone could leave behind the less sexy part of retail, right? We all focused on in-store tech, et cetera. How do you think kind of tech plays into this? How do you think companies think about where to allocate their time and resources? And, and is it kind of the same story that it's been or do things change? Everything changes, change is the only constant.
How tech and how AI is going to play in, I'm not smart enough to know that, but I am smart enough to know that it will. It's going to have to be part of the solution. And that plays into the theme we've already talked about, that companies will have to figure out how to do more with less. And that includes less people and tech invariably replaces people.
Absolutely. And one other question that I've had is, we've been talking about near-shoring, on-shoring for years. What has been the limiting factor?
Well, you know, the positive factor is speed. The closer you can get the source of production to where you're selling it, that's a huge advantage. But the limiting factor is always the labor cost. And I don't see that changing, particularly right now in the political climate we have in this country. Who wants to work in what we used to refer to as sweatshops? Even if you, you know, through OSHA regulations improve the quality of the work environment. It's still not a very attractive job. And I don't see a lot of Americans lining up to take those jobs. And all indicators are that there will be fewer undocumented workers in this country going forward, at least over the next three years. So I think that's going to be a limiting factor for on-shoring manufacturing, particularly in our industry.
That's a very kind of, think, direct way to think about it. So as we kind of come to a close, although this time went very quickly, how do you think about, right, in this era of volatility, what are your words of wisdom? Because I think you have many of them.
You're very kind. So back to one of the original statements of change being the only constant and the current paradigm of volatility that we find ourselves in. If metaphorically, you don't like the weather today, just wait till tomorrow. It's going to change. And the same thing is true here. mean, earlier this week we had, or two days ago, the 90 day pause, also known as a reversal.
That proves the yo-yos going on here. Last week, owning inventory was a bad thing. This week, it's a bonus. Next week, who knows? So I guess my advice would be, don't freeze up because inaction usually leads to a suboptimal place. Make the best decisions you can today with the data you have today. Sometimes a good decision today is better than a great decision tomorrow.
Think of it if you execute your decision well. And we should all follow the advice of Winston Churchill. Difficulties mastered, opportunities won which in that expression sort of morphed into Rahm Emanuel's observations during the Great Recession of 2008 when he said, never let a good crisis go to waste.
And I think in conclusion there, is I think a lot of us had expected a lot more supply chain work to be done during, you know, 2021. And it is incredibly difficult, often goes wrong, is, you know, kind of requires a lot more people in the organization to kind of come together to change things.
So fast forward to 25 and maybe we'll start to see kind of some incremental change because I've always felt and I know you do too, that not only is there an incredible amount of opportunity to be more efficient in supply chain, but also to give companies better visibility into product, so you have less waste. In some cases, there's intended markdowns and whatnot, but in many cases, there isn't.
But I just think this is a huge opportunity for the industry to reset and think about what they need to do to be successful in the future. if you're in the midst of a crisis, you've got to address that. But I do think we have this opportunity. And so I think, you know, your wise words, I think stay with us.
Yeah, this is the fruition of Darwinism, which isn't about the biggest and the strongest. That's not what social Darwinism was about. It's about adapting to change. Whoever has the best adaptation to change survives. So we have to be adaptable right now more than ever.
Yeah, and I think the industry kind of coming together, know, opportunities like this to kind of hear from experts like yourself. But I think the more of that that we have to hear kind of how our folks approaching this advice to others. So Paul, thank you so much and we look forward to having you on again soon.
It's always a pleasure to chat with you. I always learn a lot when I talk to you. Thank you for having me. Thanks.
And thank you for joining us this week on Retaili$tic. Every week we bring thought leaders from the world of retail to help you stay abreast of the latest trends and tech innovations. If you found some value in this episode, please give us a review and make Retailistic part of your podcast routine. To learn more about our AI Council, our strategic advisory services, abstracts of more than 7,000 reports, webinars, and video presentations, visit us online at Coresight.com. Have a wonderful day, and we'll see you next week.