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Lee Schafer: Will tariffs hit Target's customers or its suppliers?

Lee Schafer, Star Tribune (Minneapolis) on

Published in Business News

Of course, this sensible policy choice undercuts the president's repeated claim that it's the Chinese who are really paying the tariffs.

American firms that face a new tax on products they import are going to want to find a way to pass that cost on, of course, by raising prices on the Home Depot, Walmart and Target. That means these retailers would raise prices to protect their gross margin, too. That's how tariffs designed to punish the Chinese end up getting paid by American consumers.

Yet the big companies will raise prices only as a last resort, in part because how much tariff costs get passed to consumers becomes yet another battleground in their forever war.

You can get a sense of the competitive dynamic between Walmart and Target through consumer sites like Clark Howard, where a June side-by-side on nearly $650 worth of stuff showed that Target was less than one% more expensive than Walmart. Given the dark art of dynamic pricing practiced by these companies, it's safe to assume that's precisely where Target wanted to be.

The analyst for Clark Howard pointed out that neither company makes it easy to comparison shop, as the same products come packaged in slightly different sizes and quantities.

Target, The Home Depot and other big American retailers are very demanding customers, easily with enough power to get suppliers to provide unique products in even the most boring of categories. But of the biggest companies, it's Walmart that's become best known for ceaselessly pounding on suppliers for lower prices.

 

One school of thought is that as Walmart emerged as a dominant retailer, it almost single-handedly forced American industry to become leaner and more competitive. Yet one outcome, of course, was taht much of American industry gave up on building stuff in relatively high-cost regions like the United States.

One of the most famous case studies about the market power of Walmart concerns cheap Vlasic pickles, and how Walmart merchandisers fell in love with the idea of selling a gallon jar for just $2.97. Walmart's basic promise is that a good life is possible at prices people can afford, and here was a year's supply of pickles for not even three dollars.

No big supplier is eager to say no to Walmart. As writer Charles Fishman described, once sales predictably took off Vlasic had a new set of problems, including its premium brand coming apart as higher-margin pickle sales slipped at other retailers. When Vlasic begged for a higher price, Walmart said it could find another pickle supplier.

Tariffs seem to have become just another cost that suppliers are going to have a tough time getting back from Target and Walmart. During Target's latest investor conference call, the most pointed question about tariffs had CEO Brian Cornell suggesting they finish the discussion "off-line," meaning the rest of us wouldn't hear what they said.

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