For Levi Strauss & Co., European Union tariffs are one thing. A global trade war is quite another.
Jeans giant Levi’s was pulled into the latest trade spat last week when the EU began charging 25-per-cent import duties on a range of U.S. products – including jeans. It was in response to U.S. tariffs imposed on EU steel and aluminum.
Chip Bergh, chief executive of Levi’s, says while the latest EU duties will barely pinch Levi’s – a very small amount of its merchandise is made in the United States and just a fraction of that is shipped to Europe – other potential trade battles between the U.S. and China and Mexico, where Levi’s produces more jeans, could hit it harder.
He warns an escalating trade war could hurt Levi’s business and that of other American companies, forcing them to raise prices to help offset higher costs and potentially spark a consumer backlash against U.S. brands.
“Look at my face and hear it in my voice that I am really worried about the risk to the global economy,” Mr. Bergh said, measuring his words carefully during an interview at a new Levi’s flagship store at the Toronto Eaton Centre – one more piece in his efforts to revive the once-ailing jeans maker after taking the top job in 2011.
“I’m worried about the risk to our business of an escalation of trade wars. I don’t think tariffs are a good thing and at the end of the day I don’t think the consumer – whether it’s the consumer in the United States or the consumer in China or the consumer in Canada – is going to benefit from tariffs and trade wars.”
U.S. President Donald Trump is threatening to step up trade wars on multiple fronts, including possibly ripping up the North American free-trade agreement and targeting US$200-billion more of Chinese imports with tariffs.
Levi’s, which makes a significant portion of its merchandise in each of China and Mexico, would be in the crosshairs of the intensifying battle.
“I am all over this,” said Mr. Bergh, 60, who had breakfast with Terry Branstad, U.S. ambassador to China, on June 18 to discuss the prickly issues.
“I am a big believer in free trade. We as a company are a big believer in free trade. I believe the global economy has benefited from free trade in my lifetime and it is truly a global economy … I’m not convinced that just slapping on tariffs is the way to fix trade imbalances,” Mr. Bergh said.
“You can’t get to US$200-billion worth of additional items to put tariffs on without touching apparel and footwear,” he said. “At that point, it will begin to definitely impact American consumers.”
Levi’s would be able to shave costs to cover some of the expense of higher tariffs but it probably wouldn’t be able to absorb them all, forcing it to raise prices, he said.
Potential apparel tariffs in China and changes to NAFTA that could raise Levi’s production costs in Mexico “would be meaningful enough that we would likely have to take pricing [increases] to offset the tariffs because of the sheer amount of volume that we produce and export from those two critical markets,” he said.
With suppliers in 26 countries, Levi’s is relatively flexible in being able to switch production from market to market but “it would be hard to shift business around dramatically in a short period of time,” he said.
A trade war could mean tens of millions of dollars of lost sales as a result of higher tariffs, he estimated. “It’s not inconsequential.”
Dressed in a pair of custom-made Levi’s jeans, T-shirt and a jean jacket, Mr. Bergh is a travelling ad for his brand’s rejuvenation. But he’s aware of dangers that could emerge from the trade talks. He points to new Levi’s initiatives, a bespoke tailor shop at the centre of the new flagship store and T-shirt bar, where customers can customize their own message on their shirt from a digital screen.
A veteran Procter & Gamble executive, Mr. Bergh arrived at Levi’s prepared to breathe new life into a fading brand by trumpeting its 165-year-old heritage as the original 501 jeans producer.
His strategy has focused on building its core business of men’s jeans; expanding its women’s business (in Canada its women’s sales have tripled since 2015, he said) as well as more tops, jackets and footwear; bolstering its own bricks-and-mortar stores and e-commerce to offset weaker business from faltering department stores; and improving operational efficiencies.
His initiatives are paying off, with solid financial results over the past several years. The company reported net income of US$281.4-million on revenue of US$4.9-billion for the fiscal year ended Nov. 26, 2017.
In Canada, Levi’s sales have doubled since 2012 to more than US$100-million, Mr. Bergh said, adding this market is among the company’s top 10. The gains came even though Levi’s lost business from the bankruptcy and closing of Target Canada in 2015 and, more recently, Sears Canada, which both stocked Levi’s clothing. Now it is boosting its offerings at Hudson’s Bay Co., including its Saks Fifth Avenue division, Holt Renfrew and Aritzia, among other chains, and opening more of its own stores, he said.
He’s making progress by attracting a younger customer on social media and sponsoring concerts and other cultural events, he said. In the United States, Levi’s average male customer is now 32 years old compared with 47 when he arrived, he said.
Tamara Szames, fashion industry analyst at market researcher NPD Group, said Levi’s is profiting from a wider consumer shift to more casual clothing in the workplace and younger consumers discovering jeans after years of wearing stylish athletic pants.
Levi’s also “tapped into a strong interest in heritage brands,” she said. It’s the market leader in jeans, having kept that top spot for years in men’s jeans but having just achieved it in the past year in its women’s line, she said.
For Mr. Bergh, the progress is promising but he has more work to do in branching out further in categories such as footwear and online customized clothing while pumping up its own retail. But the spectre of burgeoning trade wars weighs on his mind.
“We’re confident that the brand is in such a strong position that our ability to withstand it is probably going to be greater than many other brands,” he said. “I plan for the worst and hope for the best.”