The Internet is roaring with highfalutin experts predicting no end of gloom and doom if Trump were to succeed with his import tariff plans, or if the House Republicans have their way with what they call the ‘Border Adjustment Tax’ – basically not allowing importers to deduct the cost of anything bought overseas.
This from Wall Street’s biggest shill, Steve Forbes, is typical: “let's say a store imports a pair of sneakers for $40 and then sells them for $50, making a $10 profit on which it would owe taxes. Under the Republican plan, however, the retailer wouldn't be able to deduct the $40 it paid for the sneakers. In fact, it would owe taxes on the entire $50! And who, ultimately, pays this tax? You, the consumer, in the form of higher prices or fewer choices of where you can shop. Retailers and their customers will be hit.”
Perhaps Mr. Forbes is deliberately exaggerating to make his case; more likely he is completely naïve when it comes to current MBA thinking. The folks running the big public companies spend as much on marketing and management as they do on the products they sell. In either case, take a gander at the chart to the left and you can see the reality. It doesn’t take much digging or financial expertise to see that the cost of goods at the likes of Mattel and Under Armour is 53% of their sales. And it doesn’t take much to see that the big retailers get a 40% or so markup on the manufacturers’ price to them.
Contrary to Forbes’ example of a $40 import cost and a $50 price, the numbers are more like a $15-20 import cost and a $50 selling price. A 20% tax using Forbes’ pie-in-the-sky math would be $8; the reality is closer to $3.50. The big companies think all of these costs are ‘necessary’; Lean companies know otherwise and typically make more money than the public ones.
Now, lest anybody jump up and point out that the reality would still result in a 7% cost increase and that Forbe’s argument that either scheme would basically be a tax that consumers will have to pay is valid, we need to take a step back and look at the bigger picture the chart above presents: Almost 2/3 of the price you pay for anything and everything you buy at some big box retailer has absolutely nothing to do with the value of the product you are buying.
These guys spend as much money on marketing and massive IT as they do on the product. A Border Adjustment Tax pales in comparison to the ‘Non-Value Added Waste Tax’ these folks hammer consumers with. For Forbes’ prediction of gloom and doom for consumers to come true the big guys would have to search high and low and not be able to find a lousy 7% cost reduction in their armies of marketing experts, financial analysts and IT wizards.
How reasonable is it for the big boys to be cost competitive in the Age of Trump? Well, the Lean companies I work with tend to have a Cost of Goods Sold in the 70-75% of sales range, compared to their 50%.
Of course none of this really matters to the Lean companies I work with because they all manufacture in the USA and sell to the likes of Walmart and make a lot of money. All the more reason why the big boys need to find that 7% in their bloated headquarters waste if they want to stay in business.