| May 20, 2019
With President Trump’s tariffs driving prices higher for many goods it is going to be interesting to see which brands can best ride out the inevitable consumer response. In part, whether a brand thrives will depend on its category, and in part how well it is differentiated from its competition.
The recent tariff increases from 10 percent to 25 percent on $200 billion of Chinese goods is likely to impact prices for a wide range of goods : food, commodities, industrial items and household items like washing machines, toys and electronics. The price of many products not directly impacted will still rise due to tariffs imposed on components coming from China. This might be a good thing for local producers, but a bad thing for everyday consumers. As prices rise, people are going to have to decide where to spend and where to save.
Rising prices across a wide array of goods will force consumers to reappraise their purchasing priorities and brand choices. Do they really need to buy a new car, eat out, or take an Uber? Do they really believe they are getting value from that premium brand, or would a cheaper one do just as well? While the impact differs by category (a mobile phone might be a must-have, but an expensive hotel stay not so much), consumers typically employ three strategies to stretch their dollars: defer buying, reduce consumption, or trade down.
Even strong, well-differentiated brands could potentially be impacted by the trade down effect. Take, for instance, the iPhone XS. J.P. Morgan estimated that that the price of the iPhone XS might have to increase by 14 percent with the implementation of a 25 percent tariff on China imports. Bank of America Merrill Lynch estimates prices would increase by around 20 percent if the phone is manufactured in the U.S. and suggests that the increase if passed onto consumers could “lead to demand destruction”.
The iPhone already commands a huge price premium over comparable phones. For instance, the OnePlus 6T has been selling for about $670 and gets a very similar “spectacular” review to the iPhone XS Max according to ZDNet. The iPhone was already about $430 more expensive, now, assuming the Chinese phone price also increases by the same proportion, that gap is going to widen to more like $490. Combined an absolute price north of $1000, and the need to pay more for basics like food and other household items, this increase in differential might be enough to tip people over the edge and opt for a cheaper phone.
Of course, it might be that people decided that it is too risky to spend money on an unknown brand, no matter how well it is reviewed. And in the short-term analysts expect that Apple will absorb the cost of the tariff increases at take the margin hit instead, a capability perhaps not available to cheaper competitors. But what do you think? How will the impact of tariffs play out for brands? Please share your thoughts.