CPG Week: The Long Tail Of Tariffs’ Impacts

[00:00:05] Monica Watrous: Welcome to the CPG Week podcast by BevNET and Nosh, your source for the latest food and beverage industry news. I'm Monica Watrous, Managing Editor of Nosh, here with my co-hosts, Brad Avery and Lukas Southard, along with our special guest for today's episode, BevNET Editor-in-Chief, Jeffrey Klineman. If you're enjoying the show, please subscribe on your listening platform of choice. On the podcast today, we are discussing tariffs. But first, what comes after Tariff Tuesday? Super Bowl Sunday.

[00:00:37] Brad Avery: I mean, not right after.

[00:00:41] Monica Watrous: Soon enough. So we're recording this episode a few days ahead of the big game as marketers love to call it and My hometown team the Kansas City Chiefs are once again facing off this time against the Philadelphia Eagles We're very excited Lucas already before the recording. Let us know that he plans to Avoid the Super Bowl at all costs. So I'm going to direct this question to Brad and Jeff What are you? You're sitting out, whatever. You're going to be a curmudgeon about it. It's fine.

[00:01:13] Lukas Southard: Uh, what can I say? It's three years in a row. And last year your team beat my kind of de facto team, the 49ers. So I'm not that interested. And, and let's just be honest. Nobody really likes, uh, Philadelphia Eagles fans, unless you live in Philly.

[00:01:28] Monica Watrous: Okay. Some strong takes there. So Jeff and Brad, what are you drinking during the big game?

[00:01:36] Brad Avery: Well, it's on a Sunday, and I try not to overdo it on Sundays, but what I'm more interested in is there's a real clash of hometown chows here in this matchup between Kansas City barbecue, and the good old Philly cheesesteak. And let me tell you, I'm a barbecue guy. Anyone who knows me will tell you that. But there is nothing like a good cheesesteak. I really, I mean, I think the big money is a prop bet as to whether I can stuff both the ribs and the cheesesteak down and follow it with a nice plate of Scrapple.

[00:02:23] Monica Watrous: Is that your plan for Sunday?

[00:02:25] Lukas Southard: Yes, gluttony. Yeah, it sounds like you're going to have a heart attack before we even get to the halftime show.

[00:02:32] Jeffrey Klineman: She asked you what you were going to drink, and I'm going to assume that you're drinking a blended cheesesteak.

[00:02:38] Monica Watrous: Hey, I'm not here to judge. No, but that's a good question, Brad. In the scheme of things, would you prefer to eat a Philly cheesesteak or Kansas City barbecue?

[00:02:49] Jeffrey Klineman: I feel like the food answer does not reflect my team preference. I'm going to go with the barbecue. The barbecue for food, I definitely, I think, choose first. I love some good barbecue sauce. Cheese steak? Totally good. Excellent. I'm not knocking the cheese steak, but if you're making me choose one, I'm going with the barbecue.

[00:03:11] Brad Avery: What about a rib cheese steak? So we bring, rather than separate each other, we bring it together.

[00:03:20] Lukas Southard: McDonald's has done that. They call it the McRib. It's already been done.

[00:03:24] Brad Avery: There's no cheese on a McRib.

[00:03:25] Jeffrey Klineman: If you got to remember our audience, our CPG entrepreneurs are going to steal that idea. You got to protect that. Keep it under wraps.

[00:03:33] Brad Avery: Yeah, well, I mean, they, you know, they're probably pretty far past the production cycle anyway, so they gotta hope for another rematch, which I'm sure everyone's looking forward to, is seeing Philly and Casey play in 2026 again, forever and ever.

[00:03:53] Monica Watrous: Well, this went off the rails and no one answered my original question, but I will say that I'm still going strong on my dry January. And so I will be drinking some lovely mocktails to cheer my chiefs on with. What did you want to say, Lucas? You raised your hand.

[00:04:08] Lukas Southard: Well, I didn't, I didn't get asked. So, I mean, I'm just, you know, I'm, I'm, I'm volunteering myself if you've wanted someone to answer your question.

[00:04:15] Monica Watrous: No, we're good. Okay, let's move on.

[00:04:19] Lukas Southard: Fair enough.

[00:04:22] Monica Watrous: We're recording this episode on Tuesday, February 4th, the day that we were anticipating tariffs in Canada, Mexico, and China. Jeff, why were entrepreneurs in the CPG industry watching this news and concerned about how to brace for them within their own businesses?

[00:04:40] Brad Avery: Yeah, so there was a lot of concern around the cost of goods. Things in the supply chain that might be part of your ingredient or packaging supplies, so different. We get a lot of produce in the U.S. from Mexico and from Canada. We get a lot of specialty ingredients from China. We get a lot of packaging. materials from China, and we were also looking, domestic entrepreneurs were looking at issues of sort of retaliatory tariffs, so beer from the U.S. being sold in Canada, Kentucky bourbon being sold in Canada, and there were a lot of reports of those products even being taken off shelves because there was a lot of anger around the idea that the U.S. government would impose these import tariffs on its neighbors. Now, with a 30-day pause, that's not an immediate, immediate danger, but Certainly, a lot of products could be affected. There's also, you know, a concern for U.S. consumers that these things that are produce and go direct from produce warehouses to supermarkets could see increased prices. You know, certainly we were talking about the Super Bowl, one of the big Issues would be avocados for guacamole facing 25% tax markup that's often just delivered to the end consumer.

[00:06:23] Jeffrey Klineman: You know, it should be noted that it's not just a matter of stores in Canada pulling products off shelves. Several provinces were ordering bans on U.S. products, U.S. liquor in response. And even though that the terrorists on Canada and Mexico have both been kicked down the road for a month, as President Trump has said, There's still massive ramifications that have come from this. There is a huge backlash, especially in Canada, of what is seen as a strong betrayal of the relationship between the US and Canada. Canadians in particular are furious. You see footage of the Star Spangled Banner being booed at sports games with Canadian teams and American teams playing. So what impact a boycott might have on the liquor industry could still linger, you know, given that I don't think a 30-day reprieve on the tariffs going into effect is necessarily going to change the feelings that have arisen as a result of this.

[00:07:26] Brad Avery: The other thing that came up as you start to look deeper and further down the road in these discussions with supply chain experts isn't just the cost of raw goods, and I think this is a really important point, machinery. that brands use for manufacturing is often brought over from China or manufactured in Mexico, or parts of those machines are manufactured in different countries. They're brought over. There's sort of a push to have those machines made in the U.S. And I think that's sort of one of Trump's larger aims with a lot of these tariffs is that manufacturing aspect of production. And right now, we're in a situation where you'll have machines brought over and installed in, say, US manufacturing plants, having a Chinese origin, or maybe they're brought from China to Mexico, which is a big trading partner of China, and then brought up. And where it could hit brands pretty hard is if you're trying to have something installed. in a co-man, or if you're vertically integrated and you're putting it into your own supply chain, you're inevitably paying more for that investment. And that's something that's not immediate for companies, but These kinds of costs, if you think closer to a car than an avocado in terms of complexity, these are the kinds of things that really start to affect companies' bottom line.

[00:09:33] Jeffrey Klineman: You can also look at something like aluminum, which there was a report in Reuters yesterday. I'm not sure if this was before the announcement that the Canadian tariffs would be postponed, but the cost of aluminum for consumers in Europe was going to drop because Canada was going to be rerouting a lot of its aluminum shipments into the EU instead. Data from this article, according to the Commerce Department, Canada accounts for 3.08 million tons or 56% of aluminum product imports to the United States. That was in 2023. So you're talking about cans, you're talking about just the raw material for these machines to produce going up drastically if these tariffs ever do go into effect.

[00:10:13] Brad Avery: Yeah, and it's actually interesting that you brought up aluminum, Brad, because it actually is a double tariff situation again, because to make aluminum for cans, you actually need a certain rare earth metal that's largely sourced from China. as part of that production process.

[00:10:37] Jeffrey Klineman: And we should also remember that the tariffs on China are now in effect. Yes. And China has imposed retaliatory tariffs as a result. So even though the tariffs for Canada and Mexico are paused, and we'll see what happens there, if they ever actually do go to effect or not, the tariffs on China are very real now.

[00:10:57] Brad Avery: Yeah, and will likely only be a starting point.

[00:11:03] Monica Watrous: We've seen a variety of industry responses so far. In Canada, several startups, including Flourish Pancakes and Midday Squares, which generate a lot of sales in the U.S., are considering moving operations to the U.S. to avoid some of these tariffs.

[00:11:21] Lukas Southard: To go along with that, Monica, there was a survey done by a Canadian financial advisory firm, KPMG, that in the lead up to these tariffs said that 48% of the businesses that they talked to were planning to shift their investments to the U.S. and set up new operations there. But these things take time. And in the case of Midday Squares, you know, they have manufacturing in Montreal and they were planning to expand their manufacturing because they've added a bunch of new retailers and distribution recently, but to have to shift that across the border is gonna take a lot of time and a lot of capital in itself to move all their machinery and find space and do all that work. So it's not like that's maybe long-term that will possibly mitigate some of the costs, but in the short term, it's still gonna increase the cost down to the consumer, assuming that they are gonna make that move.

[00:12:17] Monica Watrous: And many of these operators are talking about passing along the cost to the consumer. So, I mean, you know, margins are razor thin anyway, to begin with. A lot of these brands can't absorb the extra costs. And so we'll all be seeing it in the grocery store.

[00:12:35] Brad Avery: Yeah, it's true. And I think as a sort of understanding that it does all get passed along to the consumer, The supply chain experts I spoke with for this story, one of the things that they all said was, you're looking at your cost of goods and unless it's something specific to your recipe, formula, the way you create your product, with regard to most ingredients that are subject to tariffs, your entire industry is going to face these price increases. So, you know, again, that's something that'll be priced into investment, priced into cost of goods. It's something that I think a lot of brands are in fact set up to absorb fairly well under the idea that it's only temporary. But it's, you know, as we've seen with inflation overall, it doesn't tend to go back down. It just slows the rate of increase.

[00:13:46] Monica Watrous: So Jeff, what are the recommendations from the supply chain experts that you spoke with for entrepreneurs looking to brace for these new costs?

[00:13:56] Brad Avery: The main line is don't panic. Okay. Um, one of them cited someone who, you know, one of their clients who said, well, I'm going to forward by X number of ingredients for the coming year. Don't, uh, is, is the initial recommendation. as with many discussions with supply chain experts there, they always talk about things that you should be doing anyway. Take a hard look at your cost of goods. Take a hard look at where you're sourcing from. Develop alternative sourcing possibilities. Understand that The ingredients that you source from one location may be different from the ingredients you source from another country, and figure out whether or not it will still work in your formulation. Consider whether you need a packaging switch. Consider whether you can survive without a specific ingredient. And, you know, one of them recommended heavying up a little bit on what you would ordinarily be buying, just in case there is some kind of price shock. the core was just know what you're getting from where so that you can substitute if you have to. And also, and I thought this was pretty interesting, recognize that this isn't going to be a situation like the pandemic where you could need something and not be able to get it. You may just have to pay a little bit more. And that's, you know, That's troubling if you've priced out everything, you know, if you've got your cogs priced out and set. But it beats not being able to manufacture at all.

[00:15:49] Monica Watrous: Well, insiders can read more of those insights in the story, Are You Ready for Tariff Tuesday? on Nosh.com. Thanks for joining us today, Jeff.

[00:15:58] Brad Avery: Pleasure to be here. I really enjoyed it.

[00:16:00] Monica Watrous: And here are some other notable bits of news from the week. Molson Coors strikes strategic deal with Fever Tree, takes 8.5% stake. The specialty egg space is consolidating, but bird flu isn't the impetus. And tinned fish 3.0, Bella evolves for the modern age. For these stories and more, become an insider at BevNET and Nosh. That wraps up this edition of CPG Week by BevNET and Nosh. Thank you to our audio engineer, Joshua Pratt, our director is Mike Schneider, and our designer is Aaron Willette. If you enjoyed the podcast, please subscribe on your listening platform of choice, and we will see you next time.