NAFTA collapse could be catastrophic for US retail

11 June 2018

The prospects of the US withdrawing from NAFTA appear increasingly likely after the Trump administration’s efforts to renegotiate the trade agreement hit a standstill. If the era of tariff-free North American trade comes to an end, a new report from consulting firm A.T. Kearney projects a huge $15.8 billion hit for US retailers, and the loss of hundreds of thousands of jobs.

Chocolate, beef, jeans, and electronics could become considerably more expensive for US consumers if the gridlock plaguing NAFTA renegotiations proves insurmountable. The collapse of the North American Free Trade Agreement would almost certainly lead to higher tariffs, reduced spending, and lost jobs, concludes a new report from A.T. Kearney.

The consulting firm has done its best to quantify the impact a US withdrawal from NAFTA would have on the nation’s retail sector. Headline figures are alarming. The study – conducted in partnership with the National Retail Federation – assessed census data on imports flowing in from Mexico and Canada. It estimates the total cost to the industry at $15.8 billion within three years.

Consequences for employment in the retail sector would be devastating should the report hold true. Job losses from exiting the agreement – signed in 1994 by Bill Clinton – would potentially exceed 125,000. Retail sectors most likely to be severely affected include food & beverage, electronics, household goods, auto parts, pharmaceuticals, and footwear. 

The US retail industry imports $182 billion worth of goods

In 2017 US retailers imported $182 billion worth of goods from its NAFTA partners – $128 billion from Mexico and $54 billion from Canada. The neighboring nations are the second and third exporters to the US for all products, behind only China – which itself is bracing for a trade war with its rival across the Pacific.

President Trump – who campaigned on securing better trading conditions for the US and vowed to renegotiate NAFTA – has met strong resistance from his Canadian and Mexican counterparts. With the future of the agreement hanging in the balance, A.T. Kearney consultants looked at what would happen if default World Trade Organization (WTO) rules came into force. 

A withdrawal from NAFTA would have wide ranging impact

Without NAFTA the authors estimate that US retailers would have to pay an extra $5.3 billion in tariffs. More than half ($2.7 billion) would directly affect the food & beverage sector. One example cited by the study is chocolate. Americans munch their way through $18 billion worth of chocolate a year, roughly $2 billion of which comes from Mexican or Canadian factories. Falling back on WTO tariffs would force US retailers to cough up an extra $261 million per year for Canada/Mexico produced chocolate alone.

Another complicating factor is the globalized nature of supply chains. Mexico exports almost $750 million worth of jeans to the US each year. But those jeans are made with US-sourced cotton, which is exported to Mexico to produce the fabric. Kentucky and Georgia make buttons and labels, separately sent south of the border, then fixed onto the fabric and exported back north as a final product. If this process were to continue without NAFTA, it would be hit with multiple tariffs and retailer costs would skyrocket by $124 million a year.

The knockout blow for retailers would come from decreased consumer spending as they are forced to ramp up prices to maintain supply chain margins. A.T. Kearney estimates that retailers would absorb an $11 billion hit as US households reeled in their spending on non-essential items.

Retailers would further take an $11 billion hit

Food and pharmaceuticals would see only slight contractions, but with the average US household spending 73% of its budget on absolute essentials, the electronics and appliances sector could take a $5.3 billion hit over three years.

A knock-on effect would see retail job creation hampered and severe job losses in the sector. The severest impact would be in sales – with 35,000 job losses projected. Waitresses, pharmacists, mechanics, managers, IT experts, drivers, clerks and warehouse workers would be other casualties of a domino effect costing the retail sector 128,000 jobs.

"NAFTA has dramatically influenced the US economy, the retail sector, and Americans' standard of living,” said Johan Gott, Principal at A.T. Kearney and co-author of the report. “From the time it came into force, retailers have gradually become de facto importers, because their customers demand the products that NAFTA allows them to purchase easily, affordably, and with great variety. Retailers, then, are agents without the protections that other importers enjoy."

Apocalypse Now

Whether NAFTA is successfully renegotiated remains to be seen. Warnings have been issued that, should it collapse, millions of manufacturing jobs would also be at risk. But it is unclear if the imposition of WTO trade rules would be the automatic result of the NAFTA partners’ failure to reach a compromise. A middle ground could emerge by which the agreement is replaced by another less-overreaching regime that still reduces tariffs and protects jobs.

A potentially larger threat to jobs and retail comes from automation. Consulting firms from McKinsey to Deloitte have been actively researching the impact of Industry 4.0 on the US economy. Projections range from the moderate shifting of skill sets, to executive excitement about the new possibilities offered by disruptive technology, and more apocalyptic scenarios where machines replace millions of American jobs.


Maine Pointe examines seven supply chain challenges facing CPG firms

05 April 2019

From trade wars to sustainability demands and operational challenges, consumer packaged goods companies will see their supply chains pressured by a number of factors in the coming period.

Consumer packaged goods (CPG) firms are facing a wide variety of challenges as technology and changing consumer preferences converge. Dining out, meal kits, and food delivery services are siphoning dollars, especially from the pockets of younger consumers. Increased online shopping is also making life more difficult for the large CPG firms that control the customer experience within grocery stores, but have less influence on e-commerce sites.

The rise of dollar retailers, deep discounters, and retailer private label brands are as well squeezing CPG margins. Increasing consumer concerns around health and wellness, and preferences for “small” brands and “local” products is a worrying trend for large CPG firms, products from which are sometimes seen as processed and unnatural.

In addition to these challenges, CPG firms are facing a wave of supply chain-related issues. According to a recent report from global supply chain and operations consultancy Maine Pointe, there are seven major factors that will force CPG execs to institute tough changes: trade wars, globalization, transportation and logistics challenges, digitization and Industry 4.0, supply chain complexity, innovation, and sustainability.Seven supply chain challenges facing CPG firms in 2019With the US-China tariff and trade war under ongoing negotiation, uncertainty still hangs over the free trade system that global supply chains rely on. Maine Pointe recommends CPG firms examine new opportunities with new partners in emerging markets to increase their odds of success.

Because of those globalized supply chains, companies will have to remake intricate networks to compensate for shifting trade relationships. That includes reevaluating existing partnerships or using new acquisitions to reach more consumers, while gaining access to new sources of raw materials.

Transportation challenges will also impact companies, as new regulations and a shortage of over-the-road drivers impact logistics operations. If firms find new sources of raw materials, they’ll also have to negotiate new transportation deals.

Digitization and Industry 4.0 hold great promise, while also offering challenges in implementation. According to Maine Pointe, effective Industry 4.0 strategies can help CPG firms achieve growth through faster and more accurate order fulfillment. Data and analytics can also help optimize customer engagement and better influence customer purchasing.

“CPG companies will need to gain a deeper understanding of the consumer (their customers' customers) and leverage data analytics to get a handle on the rapidly changing demands of those consumers,” Rex Clothier, vice president and industry partner of CPG at Maine Pointe, said.

Upheaval in the supply chain will furthermore lead to greater complexity. Firms should seek to simplify their "buy-make-move-fulfill" supply chain to create greater value, according to the consulting firm. “Companies will need to find more ways to create value and reduce complexity in their value chains without having to pass the additional costs on to price-sensitive consumers,” Clothier said.

The company also sees innovation as a better approach to achieving growth than simple cost-cutting. Maine Pointe expects many CPG firms to take an agile approach to the development, testing, and iteration of innovative ideas.

The demand of consumers, especially Gen Z and millennials, for sustainable products and packaging is adding pressure on the CPG sector. Packaging can account for 60% of the bill of materials for CPG, while also playing a large part in its success. Firms will have to balance the functional, aesthetic, and branding requirements of their packaging with consumer demand for eco-friendly design.

In addition to the seven supply chain factors, Maine Pointe expects CPG firms will have to also battle rising raw material costs, stalled demand, declining profits, retail pricing pressure, and shifting consumer preferences. 

“Being prepared, despite challenges and obstacles, is key. Stress-testing the supply chain will help ensure that companies are able to withstand these challenges and take advantage of new opportunities,” Clothier said. “By asking the right questions, CPG executives can transform their biggest supply chain challenges into opportunities.”

Related: Rex Clothier to lead consumer packaged goods arm of Maine Pointe.