It's not clear Target literally meant what it said last week by insisting suppliers hold the line on prices and bear the whole burden of new tariffs on Chinese imports. But it was a helpful reminder of how companies with a lot of market power, like Target, really act.
When faced with a problem, they make it their suppliers' problem.
The retailing industry hasn't been quiet about tariffs, with the basic lobbying pitch that tariffs are costs that inevitably flow through into the prices American consumers pay. This means new taxes aimed in the general direction of the Chinese government instead will hit regular Americans.
And while that's certainly true, tariffs reshape economic activity in lots of different ways. It's not always easy to know who bears how much of the burden.
The top four American importers on the annual ranking published by the Journal of Commerce are all retailers. Walmart is the biggest, followed by Target, The Home Depot and Lowe's. Target last year brought in about 630,000 standard shipping containers of stuff.
In a formal comment on proposed tariffs in June, Target chief merchandising officer Mark Tritton wrote that they will "further hurt American consumers, especially budget-conscious parents who are concerned about their children's safety, mental and physical development and comfort in everyday life.
Just before the latest tariff kicked in, Tritton's message to Target suppliers was a little different. In a note that leaked, he wrote that Target "will continue to keep guests at the heart of our strategy" and thus "Target will not accept any new cost increases related to tariffs on goods imported from China."
Just to be clear about what we're talking about, a tariffs is simply a tax. American companies that import products must record the shipments and then send in the money.
As tariffs have been announced, the government published lists of products about to get a tariff slapped on them. The latest is broken into an A and a B list. Both have products on them that Target sells, but tariffs won't hit products on the second one until after the middle of December.
That's because this list includes video games, toys and other things enjoyed during the holiday gift-giving season, and the Trump administration appeared to want to give American families a break this Christmas.
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.
Walmart has been more open. Twice this month Walmart executive Steve Bratspies has walked investors through its item-by-item thinking. What products have a cheaper substitute? Which is in inventory already, and thus avoided the tax and can be sprinkled into the sales mix?
Bratspies reminded investors that Walmart has a big store to manage, so it can raise prices on products not subject to tariffs elsewhere in the store if there's a chance to do so.
"But we're going to run the Walmart model, which is we want to lead on price," he continued. "We want to keep prices lower and keep downward pressure on prices and not let them creep up."
Target needs to keep close to Walmart, so it's going to be doing the same thing.
And that's why it might not hurt as much as some have feared, as the trade war drags on, to be a Target customer. Target suppliers, on the other hand, have got to be feeling some real pain.
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