Tariffs Catch-All

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superrific said:
Can someone explain something to me -- and maybe I need a new thread. Why are distributors taking markups on tariffs?

The value-added by the distributor hasn't changed. If they were adding $20 in value to a $100 product, they are still adding $20 in value for the $150 product. Why should their fee increase by 50% just because the price went up?

This is a way of asking, why do so many businesses accept multiplicative profit margins? I mean, it's a little bit like tipping waiters -- why would you tip the waiter 40% more for the same work just because the food on the plate is being charged more? In practice I tend to accept because why bother fighting (and I suppose this could be the answer above, though it seems like more is at stake there), though I tend to tip higher % at low-end restaurants and less % at higher-end ones.
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You have to increase prices correspondingly if you want to maintain your margins. Shrinking margins is never a good thing for any business. In your example, the margin is $20 on a product selling for $100, costing $80. If the retail price goes up to $150 (cost to $130) and the distributor still has a $20 margin, his profit margin shrinks to 13%. Go try to get a loan with your profit margins shrinking....who is going to loan you money when your margins are dropping 35% vs prior year?

BTW, your example of 20% margins is very low. Most distributors in businesses I've worked couldn't keep the doors open with 20% margins.
 
Huh? said:
I'm perplexed by the rationale given by WH staffers on background that markets don't matter because they don't affect the core MAGA voter. When there's a recession, the vulnerable always suffer the most.
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Also, everything I’ve ever read indicates that the “wealth effect” of a rising market positively influences the spending habits of people who are not invested in market; and, the reverse is true - in a bear market, even non-investors become increasingly concerned and pessimistic.
 
ChileG said:
Then I guess those who claimed, “Trump won’t be as bad as everyone is predicting,” we’re way, way wrong.
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Trump has been worse than we expected on tariffs, no? I mean, a 104% tariff on China is lunacy land. If someone would have asked me whether tariffs would get that high, I would have said I strongly doubt it.

Of course, elect an idiot and you run the risk of being idiot-ified by senseless government policies.
 
superrific said:
Trump has been worse than we expected on tariffs, no? I mean, a 104% tariff on China is lunacy land. If someone would have asked me whether tariffs would get that high, I would have said I strongly doubt it.

Of course, elect an idiot and you run the risk of being idiot-ified by senseless government policies.
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That’s what I am saying (perhaps poorly). Trump has been way worse than expected. In every area.
 
farce© said:
You have to increase prices correspondingly if you want to maintain your margins. Shrinking margins is never a good thing for any business. In your example, the margin is $20 on a product selling for $100, costing $80. If the retail price goes up to $150 (cost to $130) and the distributor still has a $20 margin, his profit margin shrinks to 13%. Go try to get a loan with your profit margins shrinking....who is going to loan you money when your margins are dropping 35% vs prior year?

BTW, your example of 20% margins is very low. Most distributors in businesses I've worked couldn't keep the doors open with 20% margins.
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OK, I don't know margins of distributors. 20%, 50%, whatever.

If I was a bank, and someone came to me with shrinking margins that I could see were the result of tariffs, why would I deny them that loan? They were the same business as before. Now, there would be genuine concerns about their productive capacity and market demand, but if you take those out of the picture for now, I just can't see why easily-explainable dropping margins would make a difference in terms of attracting capital. I don't know, maybe I'm taking too much of an ivory tower view.

Another hypothetical: suppose you distribute Beanie Baby widgets. There's suddenly a huge spike in consumer demand for them. Prices double. Why should your profit double? You are literally doing the same work. Shouldn't competition bring that price down? I mean, maybe that's the answer: competition exists; this is the way it works; maybe it's efficient for reasons that I don't understand. Which is why I asked the question.

Still, it seems lunacy to me.
 
ChileG said:
That’s what I am saying (perhaps poorly). Trump has been way worse than expected. In every area.
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Actually, on voting I've been pleasantly surprised so far (pleasantly being relative). And he has been more or less following court orders so far. It would be better if we didn't have to add that more or less, but he hasn't been telling the courts to fuck off entirely.

On net, of course, he's been much worse -- on that I will agree. That's in part because we didn't see DOGE coming. Not with this ferocity. And then his all of the above tariff bullshit, and his antagonism of Canada, I mean there's a reason we say there's no bottom.

I thought you were mocking the small business owners for the pollyanna attitude many Trump voters put on display, that everything would work out fine despite the fact that Trump was talking utter nonsense the entire time.
 
The larger issue is the loss in revenue from price elasticity when you raise your prices to accommodate the tariff. Then your net margin decreases because you have less revenue to apply to your more fixed S, G&A costs.
 
Zoo_View said:
Also, everything I’ve ever read indicates that the “wealth effect” of a rising market positively influences the spending habits of people who are not invested in market; and, the reverse is true - in a bear market, even non-investors become increasingly concerned and pessimistic.
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I could be wrong, but I think it's more that the wealth effect makes consumers feel richer, so they buy more stuff, and those purchases are booms for the non-investor class. I don't think the wealth effect touches the non-invested worker directly. But directly or indirectly, it doesn't matter that much.
 
A sizable drop in margin would freak out a bank. Reduced margins means that the enterprise would have a reduced chance of succeeding as an ongoing enterprise, which increases the risk of the loan.
 
Huh? said:
The larger issue is the loss in revenue from price elasticity when you raise your prices to accommodate the tariff. Then your net margin decreases because you have less revenue to apply to your more fixed S, G&A costs.
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Right. That I understand. Absolutely.

The problem, though, is that the multiplicative markup only exacerbates that issue, right? Let's say a product leaves the factory costing $20. Old system: wholesaler marks it up 50%, so now it's $30. Retailer also marks it up, let's say 50% (I don't know the numbers and they don't matter much), so it's now retailing for $45.

New system: product leaves the factory costing $40. Wholesaler marks it up to $60 and the retailer maintains that 50% margin and it's now retailing for $90. That's a doubling in price because there's a doubling at every stage. But if the wholesaler retains the $10 markup and the retailer the $15 markup -- which were profitable! -- then the retail price is $65. Bad, but hell of a lot better than $90.

Just seems to me that distributors would lose a lot more revenue by pumping prices to the point where product can't be sold, than by keeping their markup tied to their value-add. But again, it's often the case that people who merely observe markets from the outside, with little detail, will often see irrationality where none exists. I'm trying to avoid that, but I'd still like it to make sense.
 
CRHeel94 said:
A sizable drop in margin would freak out a bank. Reduced margins means that the enterprise would have a reduced chance of succeeding as an ongoing enterprise, which increases the risk of the loan.
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But by the same token, revenue would be way up! If you were doing $10M in business, and suddenly you're doing $20M in business, the lower margins would lead to the same profit.

This is the explanation I've seen elsewhere on the internet, and it just doesn't make economic sense. The business has the same risk level as before. Its operational leverage hasn't changed.

Maybe the answer is that small business loans are not processed with a great deal of intelligence because intelligence is too costly. Like, you'd get a person to evaluate a $1B loan; a $1M loan might go into a formula because it's too expensive otherwise, and the formula doesn't know about steep tariff increases. And maybe also the reason is that people expect that banks will nix their loans on declining margins, even if the banks wouldn't.
 
Sorry, I thought I had my graph set on one minute bars but it's 5 minute bars. Still, a 325 jump in the S&P's in 15 minutes is.. something. The Dow's jump (from low tick to high) was 2460 points in 15 minutes. Damn...
 
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