It’s kind of hard to talk about the future of retail these days without discussing tariffs.
Even before tariffs came into the mix, retailers were struggling.
The pandemic forced many nonessential retailers into bankruptcy when brick-and-mortar stores lost foot traffic and a massive unemployment crisis erupted, forcing consumers to curb their spending.
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Even once the economy recovered from the pandemic broadly, retailers were left in a bind.
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Consumers had stimulus checks to spend, but a wave of demand flooded retailers at a time when supply chains were backlogged. That drove an uptick in inflation that hasn’t settled since.
Now, consumers are continuing to spend their money more carefully, which has negatively impacted many retailers’ bottom lines. Store closures have been rampant in recent years, and many retailers have struggled to stave off bankruptcy.
Walmart and Target risk losing major supplier.
Image source: Getty Images
Tariffs are a huge threat to retailers
The introduction of tariffs has the potential to fuel even more retail bankruptcies as businesses struggle to make up for those higher costs.
Of course, some retailers are better poised to work around tariffs than others. Big box giants, for example, can leverage their size and footprint to negotiate better deals with suppliers.
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Some major retailers are also somewhat safeguarded from tariffs if they source a large percentage of their products domestically. Walmart, for example, gets about two-thirds of the goods it sells from U.S. sources.
Retailers that are worried about tariffs could seek to follow Walmart’s lead. But whether the cost of sourcing domestically will allow for that is a different story.
Walmart and Target risk losing important supplier
Steep tariffs on Chinese imports has put a major supplier for Walmart and Target at risk of shutting down.
Huntar factory in Guangdong Province, China, which is a huge supplier of educational toys for Walmart and Target, has experienced a steady decline in orders since tariff announcements were made.
Related: Major toy brand faces new threat over tariff plan
As a result, the factory has reduced output by 60% to 70% and has downsized one-third of its workforce.
Huntar CEO Jason Cheung is now in scramble mode. He’s looking into the option to move operations to Vietnam before his company runs out of money completely.
It’s a challenge that’s by no means limited to Huntar.
A good 80% of toys sold in the U.S. are manufactured in China. With orders plummeting, many factories risk going out of business like Huntar does.
But that could leave major retailers like Walmart and Target in the lurch.
Even though both companies have the resources to build relationships with new suppliers, it can take time to negotiate deals and move products through necessary channels. And given U.S. retailers’ heavy reliance on China for toy production in particular, the fear is that consumers will be looking at empty shelves just in time for the holiday season.
The goal of tariffs is to move production to the U.S. But the high cost of doing so is apt to be a deterrent for manufacturers.
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Walmart and Target have reassured consumers and investors alike that they’re poised to manage the impact of tariffs. But there are still many unknowns both retail giants must grapple with.
And while both companies may have the resources to shield consumers from price hikes to some degree, it’s questionable whether they’ll be able to pivot and fill their shelves with toys in time for the holidays.Â
Maurie Backman owns shares of Target.
