Tariffs and the Trade War: How to Survive as an Amazon Seller Caught in the Crossfire
At the end of September when the latest tariffs were imposed, the trade war between President Trump and the Chinese government delivered a direct and painful blow to many Amazon sellers.
While Trump’s long-term mission may bode well for U.S. business -- that's yet to be determined -- the short-term effects of a 10 percent increase to cost of goods sold (COGS) are sobering to say the least. Add the possibility of tariffs going up to 25 percent in January, and the effects can seem downright frightening.
As entrepreneurs and business owners, we’re trained by experience to expect the unexpected and to view problems and setbacks as opportunities. At this point, with goods brought in from China suddenly becoming significantly more expensive, the question for Amazon-based businesses who sell these goods becomes, how do you roll with this latest punch and still come out swinging?
Is anyone safe in ecommerce?
I talked to James Thomson of The Prosper Show recently to get his read on the situation and find out what recommendations he has for Amazon sellers in light of recent developments.
The list of goods and raw materials now taxed upon entry into the U.S. from China hits ecommerce where it hurts and covers a wide swath of industries. Some of those most directly affected include:
- Fashion and apparel
- Arts and crafts
- Home improvement
- Housewares and furniture
- Outdoor sports
- Mattresses and bedding
For many Amazon sellers, which now include the majority of ecommerce brands, the profitability of certain product lines, and in some case, their entire business model, now becomes a major concern.
As an Amazon expert who spent six years running Amazon Services and acting as their first Fulfillment by Amazon (FBA) account manager, Thomson knows his way around the Buy Box. As he sees it, the potential solutions to this problem right now for Amazon sellers (both Vendor Central 1P and Seller Central 3P) fall into two distinct categories -- short-term solutions and long-term solutions.
Do you have any wiggle room in the short term?
When it comes to Amazon, nothing is simple. So most of Thomson’s advice about pivoting in response to the tariffs comes with its own Amazon twist. Overall, some short-term options include:
1. Negotiate with suppliers and manufacturers.
Not many on the supply chain can stay immune to the cost increase. Try using the promise of raising your inventory levels before the bigger increase in January as leverage to get manufacturers who aren’t already directly affected to share some of the cost burden.
2. Consider pricing strategies.
Be aware if you’re a 1P seller with a Vendor Central account that Amazon doesn’t accept price increases as a rule. One way around that is to release a new version -- 2019 editions may be popular this year -- of a current product at a higher price. 1P sellers have more flexibility to set retail prices, but Thomson warns sellers to protect their Buy Box percentages. Be careful not to increase your item prices above list prices, as doing so can keep you out of the Buy Box altogether. If you’re a reseller without brand registry ability, communicate with brands ahead of time about raising the list prices in question. Private label sellers have the most price flexibility of all those selling on Amazon.
3. Stock up on inventory.
It may be less expensive in the short-term to stock up on inventory ahead of the threatened January tariff increase, even if you have to look to third party logistics providers. Switching to Seller Fulfilled Prime may be another option that ends up cheaper now than paying the higher tariffs later. For FBA sellers, know that Amazon now determines your FBA capacity based on the sell-through rate of each individual SKU. This means that slower-moving items may end up with a cap on inventory levels. You may want to create an FBA shipment now to test those waters.
Where should you look for the long term?
Finding alternate suppliers or products is the name of the long-term game right now. Areas to watch going forward include the countries in South East Asia, where labor is still cheap. Unfortunately, these countries and others will take time to get up to speed and become real contenders.
While they may have the manpower, they haven’t had the benefit of decades of government subsidies for manufacturing that the Chinese have enjoyed. The task that lies ahead for countries like Laos and Vietnam include building out infrastructure and ramping up production, and neither are small tasks. Not to mention that these countries don’t have a marketplace like Alibaba. It’s a major hurdle they’ll have to clear, creating a way for sellers to find their producers in the first place.
The Trade War may make for uncertain times in business, but, as usual, the one constant seems to be change. A business’s ability to roll with the punches makes all the difference going forward. With little way to predict the future of trade relations with China right now, it’s time to develop a plan B that takes into account the complexity of dealing with Amazon. According to experts like Thomson, preparing ahead for a lengthy conflict, developing new product lines and sourcing alternate suppliers are among your next best moves.