Market View: How Food Processors Can Deal With Tariffs

Sept. 18, 2019
According to our chief marketing expert, right or wrong, tariffs are a fact that must be dealt with. Lucky for us, he's going to explain how.

The basic class in marketing addresses two classes of variables: controllables and uncontrollables. The controllables are the things most people think of as marketing – e.g., Price, Product, Place (distribution) and Promotion, or the 4 P’s.

Anyone, especially those not in marketing, imagines the marketers manipulating price, creating advertising, being concerned over distribution and of course setting the price. However, it is often the uncontrollables that have as much impact on sales and profits as the controllables.

The uncontrollables are all those things that affect sales and profits but for which you have little control. These would include competition, economic and legal environment and of course government involvement. Companies or associations can have some impact on the legal environment and government through PACs and other means. In general, though, we cannot have much influence on the uncontrollables.

However, today there is one factor that can have a major impact on the sales of food and beverages that has not been a big issue for years: tariffs. To understand the value of tariffs in the modern context, it is useful to consider (1) the historical role of tariffs in the U.S., (2) the reasons why tariffs largely were abandoned in the mid-20th century, and (3) the reasons why some people believe it would be a good idea to implement tariffs today.

In the early years of our country, we needed tariffs to protect our farmers from cheap imports from the more developed European countries. However, as our economy developed, especially our agricultural and food processing capabilities, tariffs became a situation of “If you have tariffs, I will too.” Right after World War II, the U.S. realized the folly of tariffs and was a founding member of the General Agreement on Tariffs and Trade. This was the precursor to the World Trade Organization, which has sought to promote the reduction of tariff barriers to world trade.

Not everyone was against tariffs. For example, if you were Harley-Davidson and you were the last American-made motorcycle, the tariffs on foreign imports may have just kept you in business. However, if you were a soy bean farmer and most of the crop is exported, then the U.S. charging tariffs on products from another country could result in that country charging retaliatory tariffs on U.S. soy beans, which would not be good for you. If you are a food processor and many of your ingredients are imported, then added tariffs will increase the cost of your final product.

Given that for the past 50 years the nations of the world have been trying to eliminate tariffs, what’s different today? A number of justifications have been offered for the renewed reliance on tariffs. Some believe tariffs will bring back jobs lost to foreign countries, or to make up for foreign nations' tariffs on imports from the U.S. Some believe it can be a “punishment” to China for its intellectual property (IP) theft. There can be no doubt that the offshoring of jobs and IP theft by countries like China pose a tangible threat to American workers. But the question is, are tariffs the right tool to address these problems?

This article is not meant to offer agreement or disagreement on the issue of tariffs. Rather it is to highlight the role of the “uncontrollable” variables that marketers face on a regular basis. Right or wrong, it still has to be dealt with. One outcome will clearly be that prices of products on the shelves will increase.

If you import more than your competitors, you may be at a price disadvantage. One way to deal with this is to augment product added services. Of course, the tried and true method of “taking weight out” is sometimes a solution but we have been doing that for so long consumers are noticing that a pound of coffee is only 11 ounces. However, since the tariffs for many food items are not a substantial part of the costs, only a small reduction may make you whole.

Another action is to reduce packaging costs. So many of our food products seem to be overly packaged, primarily for promotional advantages -- like making it look like you are getting more product because the box is bigger. Changes in formulation might also be considered that use fewer imported ingredients if it does not have a major impact on taste.

The world of tariffs is very different from a free trade world. It would not be fair for me to say better or worse. For some it would be better and others it would be worse. The issue is, how will companies adjust to the new environment? Tariffs may be no more disruptive than new legislation (like labeling laws), or weather (like the reduction in vanilla supplies after a tsunami in Madagascar). These are the uncontrollable variables to which we need to react.

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