If you’ve been watching the news this past week, it’s been hard to ignore all of the discussion around NAFTA. The North American Free Trade Agreement came into play in 1994 and has been in the spotlight of late as the U.S., Canada and Mexico have been negotiating a revamp. However, trade experts aren’t very optimistic about an agreement given that the Trump administration recently slapped tariffs on Canada and Mexico.
Large and small companies alike rely on NAFTA for cost-effective trade. It also helps retailers and brands to more easily sell to Canada and Mexico. Ultimately, it increases the global competitiveness of U.S. companies, helping to create jobs that provide more spending money, which ultimately ends up in retailers’ tills. At least this is what prior administrations believed.
Yes, this has been in the media a lot lately, but it also reminds me of a Forbes article I wrote nearly a year ago. In the article I discussed the retail apocalypse, stating that store closings were growing and debt continued to build for companies such as J.Crew, Neiman Marcus, Macy’s and Claire’s. I also discussed new legislation that could push retail woes to their max:
A perfect storm of new tax reforms, legislation and changing regulations could exacerbate retail woes. Depending on how quickly the dollar can gain value, a steep border tax could cost American families more for everyday items. In addition, pending renegotiations of existing trade agreements like NAFTA could result in retail companies needing to find and hire new workers and new suppliers and enter new markets to control the aftermath of added expenses, further escalating the costs of goods.
Fast forward a year and the idea presented above has never been more real. A report from Business Roundtable says U.S. exports could face more than $15 billion in new tariffs without NAFTA. That’s bound to make those industries less competitive and could potentially cost their workers’ jobs.
Retailers are already looking for ways to cut costs and be more efficient. This will only continue if we don’t come to an agreement on NAFTA, and it will likely be at the expense of the consumer. We’ll find retailers and brands turning to higher prices for their goods, and the retail industry will start on a downward spiral. Experts at management consulting firm ATKearney estimate that reduced consumer spending would impact revenues and shrink retailer margins by $10.5 million.
So, what should retailers and brands do?
As mentioned in my article from last year, there are three drivers that are key:
#1 Speed to market with products that meet consumers’ fast-changing preferences
#2 Price points which consumers are willing to accept
#3 Differentiated product
The pricing piece of the puzzle is one that I think is becoming increasingly important. I’ve written a lot about the need for the industry to optimize their pricing strategies. This is even more important if tariffs are raised and retailers are looking for a greater edge on the competition and to boost margins.
When facing declining sales, many retailers’ and brands’ go-to tactic is to provide deep discounts. However, if they truly are offering differentiated product that their target customers will love, they can attain full-price sales whether consumers are being more price conscious or not.
A strong pricing strategy is more important than ever. Armed with technology, consumers have all the power, and they can and will move on to competitors if retailers and brands aren’t offering the right products at the right price. Luckily, organizations also have technology to aid them. Gone are the days of relying only on historical data or guesswork to inform pricing strategies.
Should there be no agreement and we see tariffs rise, the most successful retailers will have embraced forward-looking data that bring insight into price elasticity trends. There are solutions in the market that enable retailers and brands to analyze various pricing scenarios in real time and predict how consumers will react to different price points.
Technology like this allows retailers and brands to decrease markdown rates, increase the percentage of full-price sales and eliminate poor performing products before they go to market.
While we may still have to wait to learn the fate of NAFTA, it’s never been more important for retailers and brands to modernize their businesses in smart ways that will boost margins. A world without NAFTA will only escalate the need for this, and while we may have to wait to find out what the future holds, the time is now to make a change for the better.
