New tariffs creating challenges for Dollar Tree supply chain

The escalating trade war between the United States and China has disrupted many industries, but low-margin businesses are feeling the effects more acutely than most. And few retailers are as low-margin as Dollar Tree, the popular chain of discount variety stores that sells all of its items for $1 or less.

Headquartered in Chesapeake, Virginia, Dollar Tree is a Fortune 150 company with nearly 15,000 locations spread out among the 48 contiguous United States and parts of Canada. Since 2015, the company has also operated the multi-price-point retail chain Family Dollar, which claims over 8,000 stores and a presence in all but four states.

The 10 percent tariff that President Donald Trump placed on $200 billion worth of Chinese imports in late September dealt a substantial blow to Dollar Tree's supply chain, according to USA Today. While the previous rounds of tariffs had primarily targeted industrial goods from China, the new duty impacted the sort of everyday consumer items that make up Dollar Tree's bread and butter.

A full 42 percent of Dollar Tree's products are imported, as are 23 percent of Family Dollar's products, according to estimates by the research firm Tesley Advisory Group. Because many of the most affordable items can only be made in China, the majority of those shipments come from the People's Republic.

In a letter to U.S. Trade Representative Robert Lighthizer, Dollar Tree noted that over 60 percent of the chain's shoppers have less than $40,000 in annual household income, and argued that any price increases would be burdensome for middle- and low-income families.

In the meantime, the company braced for even higher duties, as the tariffs were originally set to rise from 10 to 25 percent on January 1. On December 1, however, Trump announced a 90-day trade truce, following a meeting with China's President Xi Jinping.

Dollar Tree finding ways to mitigate the effects

Should the U.S. and China fail to reach a new agreement before the new negotiation period ends, though, the 25 percent tariffs could still be invoked. That's the eventuality Dollar Tree is preparing for, while simultaneously coping with the extant 10 percent tariff.

"We've got to be just better buyers"

Speaking to analysts, CEO Gary Philbin claimed that the company had managed to mitigate 80 percent of the existing and expected 2019 tariffs for Dollar Tree and 50 percent for Family Dollar. He cited a broader supplier base, agreements renegotiated with current suppliers, the elimination of certain items and attention towards landed costs regardless of the source as ways in which the company had adjusted to the new conditions.

"I mean it sounds like it's easy; it's not because we are touching a lot of SKUs," said Philbin, reports Supply Chain Dive.

While Family Dollar has some flexibility when it comes to price increases, Dollar Tree stores are premised on the concept of nothing costing more than a single dollar.
"We've got to be just better buyers," admitted Philbin.

Tariffs further complicate existing supply chain issues 

The mitigation efforts have exacerbated what has already proven to be a difficult and lengthy process of integrating Family Dollar. Four years after acquiring the chain, Dollar Tree is still struggling to combine the separate distribution networks of the two retailers.

The trouble with tariffs has also been compounded by rising domestic freight costs, as well as recent wage increases. The company's already tight margins are being squeezed razor-thin, with sales up 4.2 percent year-over-year in the third quarter, but gross margin down roughly 1 percent.

"We expect higher domestic freight and diesel costs to continue," CFO Kevin Wampler said to analysts.

With those supply chain costs projected to remain, and tariffs possibly rising another 15 percent in March, the company will likely have to keep finding new ways to stretch a dollar.