Understanding Tariffs & Their Impact on Grocery Stores

Ashley Page: Hello and welcome everyone. I'm Ashley Page, Vice President of Marketing and Public Affairs for IGA. Thank you for joining us today for this special edition webinar. We have IGA CEO John Ross with us and we'll be diving into a topic that's top-of-mind for independent retailers across the country: the growing impact of tariffs on local grocery stores, and of course, ultimately on the customers who depend upon them.

John, it's been a hectic year for those of us who are trying to keep tabs on what's happening in government. With seemingly daily changes, I think there's a need to go back to the basics and get a better understanding of what tariffs really are. So please explain to us how tariffs actually work, and more importantly, how they might impact the food industry.

John Ross: Well, you're right. It is changing all the time. There's a lot of misinformation out there.

Tariffs aren't new. We've had tariffs in this country and in Europe and across the world for a long time. It's essentially an incremental fee that a country charges for imports. So if you're importing pasta sauce from Italy, and that pasta sauce normally costs a dollar, and there's a 20% tariff, then 20% of that has to be collected and sent to the federal government. And that fee gets charged to the importer, or the person who brought that product in the first place. It's not the country that made it. It's not the manufacturer that pays the tariff. It's the importer that pays the tariff or the distributor.

And then that importer has a decision. Are they going to pass that on to their customers? Are they going to eat some of that? How much actually gets passed on through the value chain?

There's a lot of factors that work there. But at the core, the simplest way is just an incremental fee charged to the importer at the moment that the product came in.

Ashley Page: So I've heard you say before, this isn't politics. It's mathematics. What do you mean by that specifically?

John Ross: This webinar today is not about politics. It's not about conservatives or liberals or any of that. It is really looking at how tariffs work and then what's most likely to happen in the grocery industry. So if we're going to have incremental tariffs, a blanket 10% tariff across all countries, or we're going to have incremental tariffs by country, then what does it mean? How does that cost flow through the system?

And so if you understand how the mathematics work, and most important, what that means to our costs and how that has to be passed on to the shoppers, then you can begin to make business decisions about how you're going to run your business.

I think the thing that worries me, Ashley, about tariffs is this: there's nothing about tariffs that lowers the cost. And we're now four years into an unprecedented run of inflation. So we're up about a 37% increase in cost of groceries to consumers from what it was back in 2019. And so no matter what happens, if you're going to continue to see an increase in the cost of goods, that puts pressure on the retailer because the customer doesn't understand this — they're not mathematicians, they're certainly not global trade experts. And they kind of come into their store expecting somehow tariffs magically are going to push down the cost of groceries.

They're not. They're an incremental tax. And so we have to talk about what that means and how we should communicate. And then we have to anticipate what that means for our business.

Ashley Page: John, doesn't the U.S.-Mexico-Canada agreement or the USMCA mean that food products from Canada and Mexico won't be impacted by tariffs?

John Ross: Well, right now, that's true. Of course, it can change by day. And then there's the information coming out of Washington that does seem to vary by hour. But right now, yes, under what was formerly known as NAFTA and in the first Trump administration was changed to the U.S.-Mexico-Canada Agreement, it provides for no tariffs.

It was an open borders model between the two countries. Now we've since put on incremental tariffs in certain areas like automotive and aluminum, and that gets into cost of goods and you can get real complicated on this. So yes, you know, the cost of avocados coming from Mexico or from cherry tomatoes coming down from Canada right now aren't subject to tariffs, but raw materials are. So things like the materials that go into fertilizer, which then gets into the cost of goods of product grown in the United States or the aluminum that goes into cans that end up on our shelves.

There are short-term effects, and medium- and long-range effects. And that's what makes this so tricky to understand and often to explain to consumers.

Ashley Page: That makes sense. IGA has stores in China. Let's talk about the impact on the rest of the world. What's the mood among our China retailers right now?

John Ross: Yeah, I get calls from all over the world from our retailers, not just in China, but in Australia, South Africa, and the rest of the world, asking, "Hey, what's going on?" And, "What kind of craziness is this? Why are we at war essentially with the United States in terms of tariffs?"

I don't want to really get into the strategy coming out of Washington. That's not what this webinar is about. I want to talk about effects. So China is a strategic target for things like reducing the flow of chemicals that get made into control substances in the United States, specifically fentanyl, trying to get them just to rein that in. And we don't like the fact that IP protection doesn't seem to exist in China. There are a lot of other issues outside of food that are reasons to negotiate very strongly with China.

And tariffs are one of many different tactics that you could use. We've got a very aggressive tariff model on there, over 140%. They've responded with 120% tariffs back on us.

The real impact, the thing that should be scary to American retailers, and is also worrying to our retailers all over the globe, is the impact on American farmers — your local soybean farmer or wheat or Georgia peaches or apples or whatever — China is a large export market for us. And the American farm industry has relied on sending pork and chicken and agricultural products to China. It could be as much as 40 or 50% of domestic farms' export volume, depending on what they make. And so when the tariffs start ranking up, essentially you shut down that flow of goods.

When that happens, the farms and the poultry processing plants and all the infrastructure of the farm industry gets really compressed. And in the first Trump Administration, we put billions of dollars into subsidies to protect those farmers. Right now, there are no subsidies in place.

It's in our local communities. A lot of those farmers are afraid. We need those farmers to be successful, especially the family farms that we buy so much from. And so you really do have to be worried about the long term impacts on the U.S. agriculture industry if these tariffs continue, because you end up shutting down enormous export markets for those farmers.

Ashley Page: So with so many obviously negative impacts on farmers, on grocery prices, are tariffs ever a good idea?

John Ross: They are one of many tactics that you could use to put pressure on a foreign government. And they're completely legitimate target.

So let's take IP protection. You don't like the fact that Chinese manufacturers will rip off U.S.-protected IP and then they'll just copy the product and send it back into the marketplace often under much much lower quality standards. Our own Chinese retailers hate this about their own country. They would love it if there was more IP protection. They don't want to sell low quality products under a fake label in their stores either. And so using tariffs as a weapon, as one of many different kinds of weapons in order to try to get another government to do what you want, it's a completely legitimate tactic.

You do have to ask though, if we're going to go down this path with it, that's important to us, then what are the short- and the long-range implications for our stores? Let's go through that really quick.

In the short run right now, anything that's a seasonal product in our store — the Halloween decorations, the pool floaties and stuff that you have for summer, bowls and mixing devices and the clip strips for for potato chips — is often heavily dependent upon exports. Expect to see a 100% or more cost increase almost immediately. It's already happening, you can see it on everything from toys to cooking utensils to supplements and a lot of other things. So that's the short-term impact.

The medium-range impact, you expect to see in the next sets of orders, you're starting to see some costs rise on products coming from parts of South America. So mangoes and bananas and a lot of this. And whether it's a 10% tariff or it's a 15% or 20% tariff, the wholesaler and the importers have to make a decision how much of that they may pass along to us retailers, how much will they eat, so there's a lot of conversations going on now, but inevitably that's going to cause costs to rise.

In the longer range, you have to look at the infrastructure for farming: everything from the cost of the tractor to fertilizer to all kinds of other factors that go into the cost of goods of green beans that either we buy directly from a farm or end up in a can and end up on a shelf. And in the long term, all of those rising costs for agriculture go up and so will our cost of goods.

And so I think you have to be looking at the year going, I'm probably okay right now. Very quickly, I'm starting to see selective products go up. And by the fall or certainly in Q1 of next year, you can start to see a lot of price increases all the way across the store in a way that would certainly not feel good to the average consumer.

Ashley Page: Thanks for laying that out for our retailers. I think that that is the clearest and most effective way to put it that I have heard up to this point. What would we ask our retailers to do to combat some of this?

John Ross: Well, certainly you have to be thinking about messaging, right? Because you're going to have shoppers come in your store that are expecting grocery prices to go down because of tariffs. And that does not happen. Tariffs do not lower the cost. They raise costs. So you're going to have to figure out messaging.

And I think, Ashley, we at IGA, we're going to have to come up with some suggestions on messaging, and push those out. And whether that's signage or how you train your associates to talk about it, perhaps a training module inside the IGA Institute. How do we talk about this in a way — you can't make them watch a 20-minute webinar, right?

You're going to have to have a very succinct and simple way to talk about why costs are rising and specifically why your local retailer is not gouging you because, of course, our margins are down.

I think in the medium range, though, we have to think about using our influence. And here's my biggest problem with all of this. I was talking about it's mathematics, it's not politics, it doesn't matter which side you're on.

You do have to look at your government and say, if people are having substantive conversations about trying to lower the cost of groceries in the U.S., that's a good conversation. Who's in the room? And if you've got investment bankers, and you've got attorneys, and some politicians in the room that know nothing about food or farming or agriculture or retail, perhaps we need a seat at that table. And so probably the most important thing you can do is engage with FMI, engage with NGA, engage with your local state associations, call your local representative and say, we can help you lower the cost of food.

There's a lot of tactics we could do. I'd start with lowering the cost of credit card fees in the United States, which would be, you know, a percent and a half right off the top. We could fix that with some just honest legislation around something that's unjust, right?

There's a lot of things we could do, but let's make sure that the food industry has a seat at that table. If we do that, perhaps we can navigate through this in a way that, in the long run, does what everyone wants: lower the cost of groceries for Americans.

Ashley Page: That's an incredibly important point. I sit on NGA's Government Relations Committee along with a number of our IGA retailers. There is an event coming up May 20-21 in D.C. It's NGA's Fly-In for Fair Competition where we will meet on Capitol Hill so that we can talk specifically to these lawmakers about what's impacting independence. So it's not too late to register for that. Please join us there. You'll be assigned to talk to lawmakers from your state. It's really a great event.

So, John, in closing, is there anything else you want our retailers to know?

John Ross: Well, I'm worried. I'm worried about the long term implications for family farmers. We need those family farmers to survive. Often they're a really critical part of our supply chain. And they don't make enough to supply Walmart or the big chains, which means we get access to that product in a way a lot of big retailers don't, which is why our stores often have incredible produce or meat or fish. I'm worried about that.

And I'm worried about the potential for channel shift. If prices start going up, we don't have a lot of other categories to absorb those margin hits like a Walmart or a Target might. And so if this goes on too long, you could end up with a real price discrepancy between independents and the big super discounters in a way that's not good for consumers or our markets or our communities.

We need to let our voice be heard and we need to do it now in a way that isn't emotional. It's just literally about the mathematics. Let's get in those conversations and see if we can get a reasonable conversation going with our legislators.

Ashley Page: John, thank you so much for taking the time to do this.

We will continue to do these kinds of short webinars about the topics that are important related to everything in government, particularly tariffs, SNAP changes, all of that. So please stay tuned to the newsletter to find out everything you need to know about policy impacting independence. Thanks, John.