Speaker 1: Hello and welcome to the Votesenbergs podcast hosted by Bloomberg Intelligence,
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Speaker 1: part of the Bloomberg Intelligence Election series, covering the industry
Speaker 1: and company impacts of the upcoming election. On October twenty second,
Speaker 1: Holifrom and Punam Goyle discuss what the election might mean
Speaker 1: for the US consumer sector. If you have any questions,
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Speaker 1: on the Bloomberg terminal. Good morning, everyone will get started.
Speaker 1: Welcome and thank you for joining this webinar. We're my
Speaker 1: colleague gol. I will discuss implications of the next election
Speaker 1: on consumer companies. My name is Holly from I'm a
Speaker 1: litigation analyst. A few quick administrative notes. This presentation will
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Speaker 1: from bi analysts in their given industry. So the outcome
Speaker 1: of the US presidential election could have important implications for
Speaker 1: consumer companies, including apparel companies, auto manufacturers, and grocery chains.
Speaker 1: President Trump and Vice President Harris have somewhat different views
Speaker 1: about the applications of tariffs, which could have multi billion
Speaker 1: dollar implications. The other area of the campaigns seem to
Speaker 1: be focusing on is grocery prices. So I will start
Speaker 1: with tariffs, and then I'll talk about potential price gouting
Speaker 1: bills in a Harris administration, and then I'll pass it
Speaker 1: over to my colleague, senior US retail analyst Punum Gooyle,
Speaker 1: who will talk more about potential business implications of terrafs.
Speaker 1: So tariffs have become a focal point of the campaign.
Speaker 1: We think tariffs are likely under either Harris or Trump,
Speaker 1: given precedent and what the candidates have been saying on
Speaker 1: the campaign trail, but we think tariffs will be far
Speaker 1: more far reaching under a Trump presidency. So what are
Speaker 1: the proposals? Trump has said he would impose ten to
Speaker 1: twenty percent across the board tariffs on imports into the
Speaker 1: US and sixty percent on those from China, and in fact,
Speaker 1: recently he has threatened to increase terrists by as much
Speaker 1: as one hundred percent on Chinese goods and two hundred
Speaker 1: percent on Chinese electric vehicles. The sixty percent tariffs on
Speaker 1: goods from China put impact apparel companies like Nike and Adidas, which,
Speaker 1: according to the estimates source, eighteen and fourteen percent of
Speaker 1: their footwear from China. Automakers like Pulster and Vovo could
Speaker 1: also be impacted since some of their evs are made
Speaker 1: in China, and companies like Mulu, Lemon and Alberts may
Speaker 1: also be affected by the proposal of ten to twenty
Speaker 1: percent across the boer tariffs on imports given they largely
Speaker 1: make products in Vietnam. So Harris has criticized Trump's plan,
Speaker 1: saying it would cost the average household thousands of dollars
Speaker 1: a year and increased costs, with some estimating the poor
Speaker 1: household costs could be around twenty six hundred a year.
Speaker 1: But we said targeted tariffs are likely under Harris too,
Speaker 1: and we think that because of the following so. When
Speaker 1: Trump was in office, he imposed tariffs on hundreds of
Speaker 1: billions of dollars worth of goods from China, including many
Speaker 1: on steel and aluminum. The Biden administration kept many of
Speaker 1: those tariffs and even increased some, and recently the Biden
Speaker 1: administration pleaded pledged terariffs ranging from seven point five to
Speaker 1: one hundred percent on solar sales, evs, syringes, steel, and
Speaker 1: other goods from China. We doubt Harris is going to
Speaker 1: depart from the Biden administration's tariffs, so we see tariffs
Speaker 1: continuing under either president. The other thing Biden has said
Speaker 1: he intends to do is eliminate a deminimus exemption for
Speaker 1: goods that cost under age hundred dollars if anyone is
Speaker 1: wondering what that dominimus exemption is. By statute, the Treasury
Speaker 1: Secretary can prescribe an exemption from terrorists for goods that
Speaker 1: cost less than eight hundred dollars. Packages under the limit
Speaker 1: enter terror free if they're addressed to individual residences. According
Speaker 1: to Reuters, about one billion goods qualified for this exemption
Speaker 1: last year. Excuse me n Reuters reported in September that
Speaker 1: the Biden administration is trying to tackle this loophole that's
Speaker 1: been created and used by online Chinese companies that ship
Speaker 1: direct to consumer. I've been asked whether Biden has the
Speaker 1: power to eliminate the diminist exemption, and I think he does,
Speaker 1: and then a judicial challenge would fail. And that's because
Speaker 1: under the same law that grants the Treasury Secretary the
Speaker 1: right to exempt a DIMINISHNUS good from the terrorists, the
Speaker 1: Treasury Secretary also was given the power to make an
Speaker 1: exception to the exemption when needed to protect revenue or
Speaker 1: to protect against unlawful imports. The statute is pretty clear,
Speaker 1: and for that reason, we don't think a legal challenge
Speaker 1: of pose would succeed. And though the terraffs that Trump
Speaker 1: proposes are probably broader than any other president before him,
Speaker 1: I think his terrorists would also survive potential judicial challenges.
Speaker 1: The reason why I think so is because Congress has
Speaker 1: delegated substantial authority to the President to impose harris via
Speaker 1: various statutes, and courts that have presided over challenges generally
Speaker 1: have sided with the President and read the statutes very broadly. So.
Speaker 1: For example, Section three oh one of the Trade Act,
Speaker 1: also known as Relief from Unfair Trade Practices Act, allows
Speaker 1: the US to impose trade sanctions on foreign countries that
Speaker 1: violate US trade agreements or unreasonably burning US commerce. Basically,
Speaker 1: the lawgerans the Office of the US Trade Representative power
Speaker 1: to investigate and take actions to enforce US rights under
Speaker 1: trade agreements. During his administration twenty eighteen, Trump used that
Speaker 1: section to justify terraffs on Chinese goods after the Trade
Speaker 1: Representative concluded that China was engaging in unfair trade practices
Speaker 1: with respect to in US intellectual property. Similarly, Section two
Speaker 1: thirty two of the Trade Expansion Act, another law, gives
Speaker 1: the President discussion to investigate and then impose trade restrictions
Speaker 1: on certain products found to threaten national security. This one
Speaker 1: has been used to justify tariffs on steel and aluminum,
Speaker 1: for example. Also of the International Emergency Economic Powers Act
Speaker 1: gives the president power to restrict international trade on national
Speaker 1: securities grounds to advance US economic interests. To use this power,
Speaker 1: the president has to declare a national emergency, but the
Speaker 1: president has brought authority to do that. So, for example,
Speaker 1: in May twenty and eighteen, Trump announced his intention to
Speaker 1: use the statue to impose a five percent tariff on
Speaker 1: all goods from Mexico to take effect the next month
Speaker 1: until quote the illegal migration crisis is alleviated. And finally,
Speaker 1: under section three thirty nine of the Teriff Act, the
Speaker 1: President can impost terraces of up to fifty percent and
Speaker 1: imports from countries discriminating against US commerce. So, as I said,
Speaker 1: courts have given presidents a lot of difference when it
Speaker 1: comes to trade actions, and challenges for the most part,
Speaker 1: have failed. So for example, the Federal Circuit, which is
Speaker 1: the appeals court that handles appeals from the International Trade Court,
Speaker 1: upheld the Trump administration Section two thirty two terroriffs on
Speaker 1: steel imports and then affirm the International Trade Court's determination
Speaker 1: that that section did not violate the constitution separation of powers.
Speaker 1: The Appellate court explicitly said that courts have a very
Speaker 1: limited role in reviewing the president's trade actions that are discretionary.
Speaker 1: It will only find conduct umlawful if it involves a
Speaker 1: clear misconstruction the statute or significant procedural violation. So the
Speaker 1: delegation of power from Congress is very broad, So can
Speaker 1: Congress limit that terrort authority. Congress can try to limit
Speaker 1: these statutes by enacting another law, but they need a
Speaker 1: two thirds majority to overrule a presidential veto which neither
Speaker 1: party is likely to get in the next election. So
Speaker 1: for that reason, we think terrists are likely in our
Speaker 1: both administrations. They are unlikely to be curved by either
Speaker 1: the judicial or legislative branch. Turning now to price gouging.
Speaker 1: Vice President Kamala Harris has made reducing grocery prices a
Speaker 1: focal point of her campaign. She mentioned it in her
Speaker 1: Economic Address in August and during the presidential debate in September.
Speaker 1: So currently there's no federal price gouging laws. States have them,
Speaker 1: which have been successful to varying degrees. But we think
Speaker 1: Harris may propose federal legislation that lifts from a senateville
Speaker 1: Massachusetts Senator Elizabeth Warren proposed in twenty twenty four, so
Speaker 1: what a Senator learned bill due The bill would make
Speaker 1: it unlawful to charge a quote grossly excessive price for
Speaker 1: products apart from certain exceptions, including the seller's increased costs,
Speaker 1: or were the seller's annual gross income is less than
Speaker 1: one hundred million dollars. The bill declares a presumptive violation
Speaker 1: during a market shock like a global health emergency, where
Speaker 1: there's unfair market leverage, or would the seller increase the
Speaker 1: price over the average price for which sold the good
Speaker 1: one hundred and twenty days preceding the market shock. If
Speaker 1: there's a violation, the bill imposes penalties of as much
Speaker 1: as five percent of annual revenue if the seller that
Speaker 1: committed the violation has quote unfair leverage. An unfair leverage
Speaker 1: may be found where the seller earned at least one
Speaker 1: billion dollars in gross revenue in the US during the
Speaker 1: twelve month period preceding the sale, or aware, for example,
Speaker 1: the seller discriminies between equal trading partners, engages in unfair
Speaker 1: deceptive practices, or has a dominant position in commerce. If
Speaker 1: a similar bill is reintroduced during a Harris presidency in past,
Speaker 1: we think grocery retailers could be impacted. Albertson Kroger by
Speaker 1: way of example, Currently I have profit margins of one
Speaker 1: point four to two point one percent. For example, selling
Speaker 1: prices fall short of the rise in their costs by
Speaker 1: three percent according to the Bureau of Economic Analysis, so
Speaker 1: that legislation could be very impactful if the violation is found.
Speaker 1: But we give Senator Warren's bill a thirty percent chance
Speaker 1: of passing this year because it hasn't made it out
Speaker 1: of Senate committees, and we give the bill the same
Speaker 1: chance of passing if Harris wins the presidency because Democrats
Speaker 1: are unlikely to secure a filibus recruit majority in the Senate. Also,
Speaker 1: if it is passed in its current form, we think
Speaker 1: of potential judicial challenge on grounds as void for vagueness
Speaker 1: would be successful because the bill allows the Federal Trade
Speaker 1: Commission to define quote grossly excessive price using any metric
Speaker 1: it deems appropriate. So arguably the statue gives inadequate notice
Speaker 1: to potential violators. But unless such a pricing price gouging
Speaker 1: bill is passed, the USFDC lacks power to address product
Speaker 1: pricing unless deceptive marketing or unfair competition exists, so we
Speaker 1: don't think a bill is likely to pass, though the
Speaker 1: companies still continue to face this risk. So with that
Speaker 1: I'll turn over to my colleague Puno to talk more
Speaker 1: on tariffs.
Speaker 2: Thank you Holly. Good morning everyone. So, as we know,
Speaker 2: the tariffs are being proposed by either party, but clearly
Speaker 2: more severe from the Trump administration. So what does this mean.
Speaker 2: It's definitely not good news for retail. Retail sales and
Speaker 2: margins will both be pressured regardless of the magnitude of
Speaker 2: tariff increases that could come up over the next year. Now,
Speaker 2: the interesting thing is that right now tariffs are largely
Speaker 2: placed on Chinese imports, and over the last five years
Speaker 2: or longer, there has been an intent to diversify exposure
Speaker 2: to Chinese manufacturing by retailers and brands where they've actually
Speaker 2: started to shift their production into other Asian countries. So
Speaker 2: that's good news, which means that the exposure is less
Speaker 2: than it was the last time when Trump had administered tariffs.
Speaker 2: But the bad news is under the Trump administration, as
Speaker 2: Holly mentioned earlier, he is also proposing that other countries
Speaker 2: are too similarly tariffed as they were in the last
Speaker 2: round ten to twenty percent. So in that case, regardless
Speaker 2: if that was to happen, regardless of where you have migrated,
Speaker 2: the exposure, the impact is still very similar to what
Speaker 2: it was the last round. So while it's nice to
Speaker 2: see that, you know manufacturing has diversified. If in fact
Speaker 2: all Asian countries or most Asian countries are taxed and
Speaker 2: tariff such as India, Indonesia, Bangladesh, Vietnam, you know these
Speaker 2: are becoming to be large manufacturing hubs. Today we will
Speaker 2: have negative impact. Under our Harrison administration, the impact could
Speaker 2: be less because the magnitude of the increase is clearly lower.
Speaker 2: But that said, there is still a headwind in place. Now.
Speaker 2: The biggest question is who's exposed. And Holly mentioned a
Speaker 2: few of the names, but just to put one thing
Speaker 2: into perspective, the US largely does not produce its own
Speaker 2: apparel and footwear, so the apparel and footwear industries do
Speaker 2: have a large exposure to manufacturing outside of the US.
Speaker 2: Could we bring manufacturing back to the US, Yes, but
Speaker 2: it would take decades. We no longer have the scaled labor,
Speaker 2: we no longer have the manufacturing plans, and we just
Speaker 2: don't have the infrastructure to support manufacturing of apparel and
Speaker 2: footwear at the scale that it has moved abroad. So
Speaker 2: how much do we consume from China clearly a lot.
Speaker 2: We consume twenty four percent of apparel and thirty four
Speaker 2: percent of footwear from China alone. Now that has moderated
Speaker 2: from thirty one percent of footwear before and fifteen percent.
Speaker 2: So I would say that, you know, when I think
Speaker 2: about the space, I think there is clearly a headwind
Speaker 2: and a bigger headwind in place from the Trump administration
Speaker 2: going into effect versus the Harris But nonetheless, retailers will
Speaker 2: be forced to take up prices. They will see a
Speaker 2: margin hit to the bottom line because there's it's unlikely
Speaker 2: that they could do a one to one increase passing
Speaker 2: along the entire cost to the consumer. So when we
Speaker 2: think about this and we think about who's exposed, I'm
Speaker 2: going to go sector vice sector. At BI, we have
Speaker 2: various senior analysts that cover the consumer space, and many
Speaker 2: of us have written to the impact it has on
Speaker 2: each of the companies that we cover. You can find
Speaker 2: all this research on BI. But just to start with
Speaker 2: the apparel and footwear space. You know, when we think
Speaker 2: about the largest footwear manufacturer retailer, Nike comes to mind,
Speaker 2: and the company itself gets twenty nine percent of its
Speaker 2: footwear and twenty six percent of its apparel came from
Speaker 2: China in twenty sixteen. Now they have moderated that exposure.
Speaker 2: It now gets eighteen percent of its footworth, so more
Speaker 2: than a ten percentage point decrease from before, and sixteen
Speaker 2: percent from apparel, and that's also about a ten percentage
Speaker 2: point decrease making strides, but nonetheless they're going to be exposed.
Speaker 2: When you think about Adidas, the second largest footwear manufacturer,
Speaker 2: Adida sources from China alone in twenty twenty three fifteen
Speaker 2: percent of its apparel and fourteen percent of its footwear.
Speaker 2: That's also down. It was twenty nine percent for apparel
Speaker 2: in twenty fifteen and twenty three percent of footwear in
Speaker 2: twenty fifteen, So you know Adidas. The one nice thing
Speaker 2: that we see in Adidas is that they are now
Speaker 2: using and many of the footwear companies, they are using
Speaker 2: what's produced in China for China. So companies have the ability,
Speaker 2: if additional tariffs were to be imposed, to take what's
Speaker 2: manufactured in China and distribute it to regions outside of
Speaker 2: the US. That way, they don't have to have terraffs
Speaker 2: and utilize the other regions to fulfill a lot of
Speaker 2: the demand for the US. A company that has not
Speaker 2: reduced tariffs in the footwear space, but rather sorry not
Speaker 2: tariff's exposure has increased it is Puma. So Puma's exposure
Speaker 2: to China has gone from twenty six percent to thirty percent,
Speaker 2: and that's intentional because they want to fill local demand.
Speaker 2: They are making a much bigger push in the Asian countries,
Speaker 2: notably China, and they want to use inventory meat in
Speaker 2: the region for the region. Now, companies in the at
Speaker 2: leisure space that don't have as big of an exposure
Speaker 2: are companies like lul Lemon, All Birds, and VF Corp.
Speaker 2: They don't have exposure to China, are very little exposure,
Speaker 2: and it's interesting to see the companies that don't because
Speaker 2: you know, as you're looking at who gets elected, you
Speaker 2: can kind of segregate the ones with more exposure versus
Speaker 2: the ones with little to no exposure. And they don't
Speaker 2: have exposure to China, but they do have exposure to
Speaker 2: the other Asian countries. So we still have to remember
Speaker 2: that there is a possibility that they too would still
Speaker 2: be impacted should tariffs extend beyond China. Additional teriffs. Now,
Speaker 2: when you move over to the apparel space. The companies
Speaker 2: that are largely exposed to China manufacturing are companies like
Speaker 2: Oxford Industries, as my colleague highlights, forty one percent of
Speaker 2: its merchandise is from China in twenty twenty three. Aritzia,
Speaker 2: another company, source thirty to thirty five percent. So both
Speaker 2: of these retailers are clearly more exposed should tariffs be
Speaker 2: increased next year. And now when we look at, you know,
Speaker 2: within apparel brands, who's less exposed. The companies that were
Speaker 2: highlighted include Gap, Levi's, Victoria's Secret, and Abercrombie. They too
Speaker 2: have been shifting away from China since twenty eighteen, and Gap,
Speaker 2: for example, we estimate ATBI imported about ten percent or
Speaker 2: less from China, and that was also ten percentage points
Speaker 2: below what it did in twenty eighteen of about twenty
Speaker 2: one percent. Levi's, interestingly, just imports under one percent, and
Speaker 2: that's down from eight percent five years ago. So you're
Speaker 2: starting to see the theme that companies have diversified, they
Speaker 2: are moving away from China. But I still want to
Speaker 2: remind everyone that if tariffs are imposed on other countries
Speaker 2: outside of China, the impact this round could be more
Speaker 2: pronounced than it was the last round, because not only
Speaker 2: do you have increasing tariffs from China, but you also
Speaker 2: have tariffs being added to other Asian countries. So the
Speaker 2: combined impact is actually going to be bigger than it
Speaker 2: was the last round should both of those scenarios play
Speaker 2: out under the Trump administration. Ralph Lauren also said that
Speaker 2: they've brought down their exposure to a high single digit
Speaker 2: percentage point coming into the US from China, and that's
Speaker 2: stands substantially from thirty three percent in twenty eighteen. Now
Speaker 2: when we move over into the hardline space or analyst
Speaker 2: highlights that ELF Beauty is probably the most exposed when
Speaker 2: I think across retail to China because eighty percent comes
Speaker 2: China alone. They beat Hasbro and Mattel, which is now
Speaker 2: fifty percent down from sixty to seventy percent prior. On
Speaker 2: the home hardline section, William Sinoma and our Ah are
Speaker 2: also exposed at twenty to twenty five percent, down also
Speaker 2: about from thirty five to fifty percent prior. So you know,
Speaker 2: when you think about the space collectively, I would say
Speaker 2: the headwind is there under any situation, clearly greater under
Speaker 2: Trump presidency and even greater should tariffs be imposed to
Speaker 2: countries outside of China, because you know, we have this
Speaker 2: notion that many companies have diverse fight out of China,
Speaker 2: so the exposure is less and therefore the impact should
Speaker 2: be less. But if Vietnam is going to be tariff,
Speaker 2: even if it's at ten percent, it's going to magnify.
Speaker 2: It's going to magnify the impact that retailers are going
Speaker 2: to face and margins will be hit greater. Our parel
Speaker 2: analyst estimates the basis to fifty basis point impact from
Speaker 2: additional terroriffs, but I think you know the impact could
Speaker 2: be much much higher should both situations play out where
Speaker 2: other countries are also text with that, I'll pass it
Speaker 2: back to Holly and thank you.
Speaker 1: I don't see any open questions, so again, if if
Speaker 1: any if any of you have questions after the call,
Speaker 1: you can I be either of us and we'll be
Speaker 1: happy to chat