Unpleasant though it may be, 2019 brings increases in ingredient prices from high demand and new tariffs. Given that these price increases are unavoidable, it’s important to take as many steps as possible to minimize any negative impacts on your business and for your customers—much as we are trying to do here as well. This is about educating customers and finding room in your supply chain to absorb what you can and pass on what price increases you must.
Tariffs, Increased Demand & Price Increases
Many industries in the United States are facing price increases as demand grows for natural and organic ingredients and products. The planet can only grow so much and natural disasters, weather, fires, and more all affect crop production and availability in the market. As well, recent tariffs are set to clearly exacerbate this problem. Green beauty is particularly affected as many ingredients have international origins, and many ingredients are facing a 15%-25% price increase in the coming year or so. Tariffs on things like steel from international sources mean that equipment costs are increasing significantly as well, so these price increases are altering the entire cosmetic supply chain. (For a more complete list of tariffs please check here).
We are not here to discuss politics or economic policy, but we can’t ignore the effect these changes will have on our own supply chain, our products, and you, our customers. These issues are happening across the board, and major US retailers are warning customers as well.
Walmart highlighted personal care products as an area that will be significantly affected, and Sarah F Thorn, part of Walmart’s global government affairs, noted that “the immediate impact will be to raise prices on consumers and tax American business and manufacturers”. Unfortunately, most small and medium-sized businesses do not operate with margins large enough to absorb the costs, so inevitably they are passed on to the end consumer. In a September 18, 20189 article, Happi reports:
In accordance with the direction of President Trump, the additional tariffs will be effective starting September 24, 2018, and initially will be in the amount of 10%. Starting Jan. 1, 2019, the level of the additional tariffs will increase to 25%.
The tariffs will affect almost all imported beauty products (HTS Codes 3303 to 3307) and packaging, according to stakeholders in the cosmetic space, including ICMAD.*
Absorbing Increases & Other Tactics
Your greatest challenge is figuring out where you as a company can absorb the price increases, and when you’ll have to pass those on to your customer.
Unfortunately, you cannot rely on your manufacturer or packaging vendors to absorb their own price increases entirely, but there are several ways you can help manage your own bottom line. Potentially, you can work with your suppliers to:
- Reformulate your products to use less expensive and more readily available ingredients. For example, substituting the more affordable Amyris for the expensive sandalwood essential oil.
- Find a new packaging supplier, potentially one outside of China to avoid the tariffs.
- Change how you create and offer samples—perhaps you can make sample sizes smaller or use less expensive sample packaging
- Shift your distribution focus: sell more via direct-to-consumer and less of your sales mix through Amazon or distribution (you may have to manage channel conflict on this).
In our own business here at Essential Wholesale, we do our best to absorb those increases and until recently, haven’t raised prices on most products in three years. Inflation is a fact of life — just as shipping prices go up in the holiday season. With the increase in demand for natural ingredients and the pressure from tariffs and trade challenges, we already know that in the coming months some ingredients are increasing dramatically. One vendor has already announced 25% increases in their raw ingredients to us. While we offset cost increases with sales and other promotions and encourage you to try that with your customers as well.
Negotiate Prices Before You Sign Contracts
An important note that can save you a big headache: Negotiate with your retailers. Secure fixed pricing in advance so you can create budgets and forecast properly. Hammer out the specifics of your formula and the subsequent pricing with your vendors and manufacturers, before you pitch your products and certainly before signing on to a contract with a retailer.
Also, know the penalties for missing retailer delivery windows and be sure to plan ahead so that you have enough time to absorb those unforeseen circumstances.
The beauty industry is a noisy market with many competitors, but that also means there are reliable bodies with advocacy and policy support working to further indie beauty brands. For information on cosmetic politics and other useful resources try ICMAD’s Advocacy section. The SBA (small business alliance) operates a SCORE program, connecting early-stage business owners with veterans to mentor you as you grow and navigate the changing market.
To summarize: now is the time to negotiate prices, restructure where possible, and inform customers. It’s a challenge that every business owner faces in a commodity-based market, and we hope this has helped you prepare better for 2019.
Source: Happi Magazine article Tariffs on $200 Billion of Chinese Imports To Impact Cosmetics