News / Front-loading to beat tariffs now creating costly headaches for US traders

Photo: © Paulus Rusyanto

Front-loading was supposed to alleviate the impact of Washington’s tariff offensive, but it has created costly headaches that companies are now trying to alleviate with savings in transport.

Sportswear maker Puma needs to raise prices in the US to compensate for tariffs and the associated costs, but in a tepid market is under pressure to sell goods at a discount to clear to inventory that piled up as a result of front-loading and is now burdening its balance sheet.

CFO Markus Neubrand added that Puma had adjusted its orders in response to the situation.

The need to discount to reduce inventory costs runs counter to the opposing need to raise prices. Management estimates that the tariffs shave €80m ($93.78 million) off its annual gross profit.

Ironically North America, which accounts for 20% of Puma’s sales, was the weakest region in terms of sales development for the company (down 9.1% year on year in the second quarter) but also the chief driver of elevated inventory costs (up 18.3% on a cost-adjusted basis).

Puma is not alone in this dilemma. Rival Adidas recently warned it would have to raise prices in the US as tariffs add €200m to its costs. Its biggest production areas are Vietnam and Indonesia (accounting for 27% and 19% of its products, respectively), which now face tariffs of 20% and 19%.

Edmund Zagorin, founder and chief strategy officer of procurement solutions provider Arkestro, noted that often the cost of compliance had not been factored into the equation. Having to account for the origin-countries of components that go into a company’s products hugely escalates costs, he pointed out.

While front-loading was the correct strategy, along the lines of ‘better safe than sorry’, many companies made the mistake of viewing the situation in similar terms to the pandemic, he added.

Whereas demand remained strong through the pandemic, this time it actually decreased in a number of categories. Moreover, most tariffs were delayed or paused, which negated the advantage of front-loading, and trade agreements had not eliminated tariffs but cemented them at reduced rates, he pointed out. This also neutralised the popular strategy of storing front-loaded inventory in bonded warehouses or free trade zones, he added.

As they struggle with high inventory costs and flagging demand, companies are looking to relieve some of this cost pressure. One of the most popular angles is to reduce transport costs: “real savings” can be achieved there, said Mr Zagorin.

A second prominent strategy would be to shorten contracts, he noted.

“You have annual contracts that may be double-digits off the market. That’s a latent cost-saving opportunity,” he explained.

A big reason why many companies have stuck with annual contracts is the complexity and time involved in renegotiating agreements, he said. This is an aspect his company targets with a mix of AI, game theory and technology to streamline and accelerate the process from months to as little as under two weeks, he claims.

Usually a slower decision-making process entails elevated costs, Mr Zagorin said, adding: “Technology allows supply chain teams to decrease cycle times and make decisions to establish prices and manage costs at scale.”

AI has been frequently bandied about as a tool to cope with uncertainty by processing vast banks of data and modelling different scenarios. Mr Zagorin has reservations.

“How intrinsically predictable is what you’re trying to predict,” he said. “How predictable is your demand?”

He pointed out that unpredictability had been part of the strategy of the US administration, which has repeatedly wrong-footed reactions with abrupt changes in its stance.

And Mr Zagorin emphasised that dealing with tariffs should go beyond mitigation efforts.

“Tariffs impact the bottom line, so long-term tariff adaptation needs to be about holistic margin expansion. Rather than seeing the tariff as a challenge to be overcome, Arkestro customers see tariffs as an opportunity for margin expansion by renegotiating agreements at mass scale that are not currently aligned with market costs, including in the category of transportation,” he said.