Tariffs have been a prominent talking point for the incoming administration. With the outdoor cooking industry doing much of their production outside of the USA, any tariffs could have a big impact on the industry.
For corporate earnings calls that happened after the election, there were many questions around dealing with tariffs. A common theme has emerged around any tariffs that may be levied in the future.
The first is companies are strategizing how they flex their supply chain to manufacture in other low cost countries other than China. If that option doesn’t work, or in combination with it, they’ll turn to price.
YETI’s Tariff Strategy
YETI was hit by tariffs in their soft goods category around 2018/2019, so they already had a head start on planning to avoid tariffs. They discussed their plan in Q2 on how they’re adjusting their supply chain.
While being mindful of the macroeconomic and geopolitical complexities that we expect to remain present through the year. Our focus remains on controlling what we can and being nimble and prepared to respond effectively in the face of uncertainty. For YETI, that always begins with our approach to customer engagement and delivering uncompromising products. It also means a commitment to investments so we can efficiently and globally scale our business.
This investment includes the addition of key roles in our leadership team to manage Asia and Europe. Addition to our global logistics footprint and the build-out of capabilities across our regions to support our expanding product offering. Additionally, we continue to drive the strategic diversification of our global supply. Today, approximately 40% of our total cost of goods is tied to products sourced from China, primarily related to our Drinkware portfolio.
As we have previously discussed, we began our major supply chain transformation journey in 2018, beginning with our soft goods. At that time, we also indicated we started to optimize our Drinkware supply base including process improvements and automation efforts with our partners. As mentioned in early 2023, we successfully proved out our model and began our first production location for Drinkware outside of China. We are pleased with the quality and performance of this initiative and by year-end 2024, expect to bring online a second non-China location for Drinkware.
As a result, we expect that by the end of this year, approximately 20% of our global Drinkware production capacity will be located outside of China. As we look forward to other opportunities and initiatives, we believe we can extend this program further, providing greater global scale, diversification and reach of our supply base. Additionally, we expect to have the flexibility to allocate capacity to specific end markets for cost optimization. By the end of 2025, we plan that roughly half of our Drinkware production capacity will reside outside of China and available to support our global growth.
Going forward, we anticipate opportunity to scale this diversification even further to meet the needs of the business. This has been and will continue to be a significant priority for YETI. Our work here is designed to give us maximum flexibility to address a range of future global tariff scenarios and cost dynamics. To be clear, as we expressed when we started these initiatives in 2018, we will focus on making the right long-term decisions to support our growing global business, while being mindful of the geopolitical landscape.
Matthew Reintjes, President and CEO of YETI – Q2 2024 Earnings Call
This quarter, YETI noted that they were on pace for the plan they laid out above to move business away from China. If that doesn’t work, or to supplement it for earnings, they’ll turn to price increases.
There’s just too much that we don’t know to try and quantify beyond what we talked about last quarter and then reiterated today in terms of what we’re doing. So — and I think that’s where we’d like to focus is here’s what we are doing. The plan that we laid out last quarter and that we — and that we reiterated today is on track, number one. Number two, we’re working very closely with our suppliers who have strong — we have strong long-standing relationships with, we’re working with them on a solution and also assessing potential new partners.
And third, you know, if we — we’ll have to see as we go through this, but I think we would look at price potentially as a — as an option to offset any potential tariff risk. So, basically, we’re focused on the things that we can control. And the other thing that I would lay out that as — just as a reminder, we have been through this before in the 2018, 2019 time frame with soft goods. And we navigated that successfully, and we believe the plan that we have in place today would allow it — allow us to do that again.
Mike McMullen, CFO of YETI – Q3 2024 Earnings Call
It’s also important to note that part of their strategy for diversifying their supply base is continuing to grow as a global brand. For example, if there was a tariff on their drinkware imported from China, they could use their China manufacturing to import to other countries and support those markets.
Traeger Tariff Strategy
Traeger currently does their grill and accessory manufacturing in Asian countries. They had plans in 2022 to nearshore some manufacturing to Mexico, but pulled the plug on those efforts when the grill market crashed.
Unlike YETI, they haven’t had tariffs imposed on their grills. They’re still taking in data and have created a strategy in the event they need to implement it.
Yes, definitely a hot topic and one that we’ve started talking about that we’ve been talking about for a number of years now. So first of all, let me provide just some general information on state of play in terms of where we manufacture and where we may have risk. About 80% of Grills are manufactured in China, about 20% are manufactured in Vietnam. Currently, Wood Pellet Grill is not included on the import code from — in terms of tariffs.
So although we have exposure to China, tariffs were assessed only on our accessories and not on our Grills. With that said, we have been — we’ve been thinking about diversification for some period of time. Again, 20% produced in Vietnam, although we’re in the process of adding a very large new manufacturing partner in Vietnam that has the ability to scale meaningfully. And so the 20% is certainly a backward-looking number and not a forward-looking number based on the capacity that we’ll have.
If you go beyond grills, that said accessories, non-MEATER accessories are largely manufactured in China. We’re currently assessed the tariff on those. MEATER is produced entirely in Taiwan and our consumables are produced here in the U.S. There’s a lot of chatter on tariffs right now.
And I think it’s going to take a little bit of time to sort out exactly the new administration strategy on tariffs, timing, magnitude of those tariffs. But I would say that we have been building optionality around — in our sourcing model. We’ve been diversified, not just in Vietnam. We’re looking closely at other manufacturing options in Asia.
We’ve been working on Mexico as a long-term geography in which to manufacture. And although the U.S. is not a viable manufacturing source given a number of the dynamics of the category. We feel like we have built a fair bit of optionality with the partnerships that we either have in place or they were in the process of building.
And with that optionality, we think we have the ability to react reasonably quickly and reasonably efficiently to how tariffs evolve. And so I think we’re well-positioned to do the best thing for the business. We won’t be reactive. We’ve been very proactive in this process.
And as we understand the shifting landscape, we will make decisions accordingly. And of course, when tariffs are assessed. And to the extent that they are assessed across geographic sourcing locations, we will work closely with our manufacturers to become more efficient. To figure out how we can share in those tariffs.Jeremy Andrus, CEO of Traeger – Q3 2024 Earning Call
And pricing is always a lever. And I suspect that an environment where tariffs are broad-based and pervasive that that most brands will also be leading to price to mitigate the downside of those tariffs, and we would look to do the same.
Traeger’s response to tariffs follows the same strategy as we heard from YETI. Try to adjust the supply chain to avoid the tariffs and then turn to pricing.