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Kleinfeld's borderline outrage on tariffs is well-aligned with what I am hearing elsewhere in the leadership community.
Caught in the middle of this trade war is you, the average investor. I know you have a lot of questions. The best I can offer is a concise dose of insight into the questions I get from you all. I hope this is helpful to your thinking!
How much disruption are tariffs causing to companies I invest in?
Major disruption. What I'm most concerned with on this front is twofold. First, how tariffs are impacting a company's cost of goods sold on a micro level. And two, the inability of a company to respond quickly to address tariffs. In a lot of cases, finding new vendors in the US or countries with lower tariffs isn't easily done. You can't just raise a price in the hopes of beating tariffs. The problem is deeply structural, and it will take time — the kind of time the stock market doesn't give to the boardroom.
A good example from my interview with Procter & Gamble (PG) CEO Jon Moeller this week:
"If you take something like Metamucil, for example, its main active ingredient is psyllium husk, which is grown in a smaller region in India exclusively at the yield levels that we need to make to have it make sense. And so we'll be paying likely a tariff on the importation of that material to produce the global supply of Metamucil, which is manufactured in a plant in Arizona.
"There isn't the climate opportunity in the United States to support, again, the yield levels that would be necessary on that kind of crop. So, localizing that isn't an option. We need to find other solutions. And those would include, obviously, unrelated cost reductions. They would include potential pricing."
Are tariffs taking a material slice from corporate profits?
You bet they are!
Take PepsiCo (PEP), a company I've covered for the better part of 15 years. In that time, I've known it to do three things very well: One, come up with innovative new drinks and snacks. Two, cut costs to boost margins. And three, never warn on guidance.
This week, PepsiCo took its full-year profit forecast down to no growth this year. Just three months ago, the company had expected low-single-digit percentage growth. The guidance cut encompasses not only a more cautious consumer but also the hit to margins from aluminum tariffs on its cans. The company also sources its concentrates from Ireland, so expect a tariff hit on that as well.
Some further perspective from elevator maker Otis (OTIS) CEO Judy Marks this week:
"Right now, some sources for some components are at scale in China that we don't manufacture. We've searched for sources here. We're moving supply around. We've asked suppliers to set up manufacturing facilities here, because it's just not things we would do, but everything else."
How are tariffs impacting the economy?
If there is any saving grace, it's that tariffs don't appear to be sending the economy into a Great Depression-like tailspin.
My sense is, however, that the economy is flirting with not growing in the second quarter and possibly meager growth in the third quarter. I'm hesitant to opine on whether we are entering a recession — I don't make $5 million a year to be an economist.
I look at what Chipotle (CMG) reported this week — its first sales decline since the pandemic. CEO Scott Boatwright told Yahoo Finance's Brooke DiPalma the consumer is showing signs of pulling back.
I thought Chipotle bowls were recession-proof? Alas, no.
Also not recession-proof, apparently, is washing your clothes.
Here's what P&G's CEO Moeller told me on detergent demand:
"What we are seeing is a reduction in consumption. We have these wired homes with the permission of consumers, we can track exactly what's happening in the laundry room, for example, how many loads are done per week, what temperature are those loads, etc. And what you see is a reduction in the number of loads that are done per week currently going from about, if you go all the way back pre-COVID, about five loads per week to now about three and a half."
Are tariffs leading to price increases?
I can't tell you how many leaders in January told me on and off the record that tariffs would not lead to price increases. I didn't buy it then, and I darn sure ain't buying it now!
That's because the price increases have already started, and more are on the way. So be ready for sticker shock in stores and online.
Whirlpool (WHR) CEO Marc Bitzer told me this week that he recently took price increases. Makes sense, as a typical washing machine uses at least 70 pounds of steel.
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