How the Trade War Hurts the Millennial Consumer Economy

For anyone keeping score in the US-China trade war, $110 billion of US goods versus $250 billion of Chinese goods are now subject to tariffs. While the latest tariff list of $200 billion of Chinese goods includes peculiar items like Angora rabbit hair, bible paper, a whole lot of leather, and theatrical and operatic sets, the bulk of the list consists of more common goods meant for US consumers.

At the moment, how the 10% tariff will affect product prices and Americans’ pocket books will be difficult to determine precisely. And there’s usually a lag in seeing the effect of tariffs on end products given the length and complexity of supply chains.

But one segment of consumers that could well be caught in the trade war crossfire is millennials—generally defined as a demographic cohort that’s in the 18-36 age bracket. Or more specifically, the burgeoning direct-to-consumer (D2C) market that is increasingly becoming the basis of the millennial consumer economy (see Figure 1).

Figure 1. E-Commerce’s Rise Has Bolstered the D2C Retail Market (in $ million)

Note: Advance retail sales do not include food services.
Source: Federal Reserve Bank of St. Louis.

The main appeal of the D2C business model is the ability of retailers to offer premium products at affordable prices. They achieve this by getting rid of the “middle man,” or distributors, and sell products directly to consumers, usually exclusively through e-commerce channels, company-specific websites, or apps. Their ads are ubiquitous on social media, typically appearing on Instagram, Facebook, and even on popular podcasts. There are sneakers from Allbirds and apparel from Everlane, men’s shirts from Untucked, and on and on.

To be sure, online purchases have grown tremendously over the last 18 years, a trend that D2C retailers have embraced (see Figure 2). By capitalizing on these new market opportunities, these retailers can eschew large, upfront investments in brick and mortar stores (though some do maintain flagship stores) and better manage inventory. This enables the retailers to dramatically cut costs while establishing brand loyalty by engaging directly with consumers. 

Figure 2. E-Commerce Has Grown from 2.4% to 28.4% of Retail Sales
Source: Federal Reserve Bank of St. Louis.

But that’s only one part of the formula. Another key ingredient that allows these D2C retailers to keep their prices low is their reliance on suppliers and manufacturing capability in China.

Take Warby Parker, the wildly successful eyewear brand and pioneer of the online D2C model. The company has made no secret about manufacturing its frames in China, since its price point of $95 for a pair of stylish frames (including lenses) would basically be impossible without taking into account the “China price.” But beyond price, Warby’s success is also a testament to the evolution of Chinese OEMs that can now manufacture relatively high-end consumer products and still maintain a reasonable price, even as labor costs have risen significantly in China.

It’s a twofer that’s tough to beat if you are a scrappy D2C startup seeking to manufacture at volume without compromising quality. Very few manufacturing ecosystems in the world can match these advantages in both price and quality that Chinese suppliers currently have for a wide range of consumer products.

That is of course very attractive to a millennial consumer class that is less well off than previous generations but still wants to buy bespoke, branded products that have good value. With a median income of just about $36,000, the millennial cohort rests on weaker financial foundations than previous generations, according to various studies. For instance, 5.3 million millennial households are in poverty, the highest of any previous generation, according to recent Pew research. Even though millennials now constitute the largest generational cohort by size, its consumption power is less potent (there is also a difference in financial wellbeing between “1980s millennials” vs. “post-1990s millennials,” particularly those that entered the workforce after the financial crisis).

These dynamics have made D2C retailers even more attractive to a young but struggling consumer class. It is little wonder that D2C brands have proliferated on the back of Warby Parker’s trailblazing success. From socks to razors, bespoke brands have popped up in droves and have begun eating into the market share of traditional retailers. Although many of the D2C brands are still relatively small, they’ve certainly gotten the attention of incumbents—for instance, Wal-Mart decided to acquire hip clothing brand Bonobos for $310 million.

Precisely because even the leading D2C brands aren’t nearly at the scale of a Walmart or Target, they may not weather the latest round of tariffs as well because of their exposure to Chinese suppliers. One reason is that because of the D2C model, they buy directly from a handful of Chinese manufacturers. This means they could feel a price squeeze more immediately, whereas in a larger supply chain, price hikes may get absorbed across a broader network of suppliers and distributors. If these retailers cannot absorb the price hikes as a result of the tariffs, then that will be reflected in the end product, which will in turn hurt millennial consumers who are particularly sensitive to prices. And even if the 10% tariff is manageable for now, the possibility of raising it to 25% or if Trump banks on his threat to tax all Chinese goods, the impact could be significant on the millennial consumer economy.

Although most D2C retailers are understandably reluctant to unveil specific suppliers they have in China—because it is costly and challenging to settle on the right suppliers and cultivate long-term relationships—many have certainly revealed that they source extensively from China. In fact, many of the products sold by successful D2C retailers, such as upholstered furniture, mattresses, and luggage, are included in the latest tariff list.

Let’s take a quick look at a few leading D2C retailers whose products are increasingly becoming status and lifestyle definers for urban millennials. These also happen to be the products that are now subject to a tariff or may be subject to one in the future (see Figure 3).

Figure 3.  Capital Raised by D2C Companies

Note: There is no public information on Nectar’s funding, but it generated $30 million in revenue since it was founded a year ago.
Sources: Warby ParkerInterior DefineAway Luggage, and Nectar Mattress.


    N E C T A R

What is it?

Memory foam mattress that ships in a box, with limited choices and sold exclusively online.

Where is it made?

According to Nectar, its mattresses are “designed by our talented employees all over the world and (employees) carefully select quality manufacturers in China to manufacture them to our specifications. Our use of quality overseas manufacturers helps us keep our prices so low and affordable for everyone.”

Price differential:

• Nectar: $699 for queen size mattress

• Casper: $995 for similar product; it’s a first mover and leading brand in the “mattress in a box” category and manufactures its products in Georgia and Pennsylvania.

Covered by latest tariffs?

Yes, mattresses of cellular rubber or plastics, cotton and any other types are subject to the 10% tariff. 


    I N T E R I O R   D E F I N E

What is it?

Based in Chicago, the company specializes in built-to-order custom couches and chairs that are “Room & Board quality at West Elm price points.”

Where is it made?

The company “designs everything from our headquarters in Chicago and produce with our dedicated team of experts in China in one of the world’s foremost upholstery production hubs.” In an interview we conducted with one of the startup’s founders last year, he said settling on the right supplier in China was challenging and took a few tries before quality could be assured.

Price differential:

• Interior Define: $1,530 for a three-seat sectional

• Room & Board: $2,000 for a similar product that’s mainly manufactured in North Carolina.

Covered by tariffs?

Yes, upholstered chairs and seats with wooden frames are subject to the 10% tariff.


    A W A Y  L U G G A G E

What is it?

A luggage and travel accessories retailer that markets itself as “first class luggage at a coach price.” It has received several rounds of funding to expand its capacity and diversify product lines and has reportedly already sold 500,000 suitcases since its inception in 2015.

Where is it made?

According to the company, “after visiting dozens of factories, we ultimately decided on a manufacturer in China who impressed us most with their exemplary workplace.” Away’s founders are Warby Parker alumni, where they presumably had experience dealing with supply chains in China and understood the China price advantage in launching a D2C startup.

Price differential:

• Away: $225 for a basic hard shell carry-on with phone charging capability

• Tumi: $525 for a similar suitcase without charging capability; it maintains a factory in New Jersey.

Covered by tariffs?

Yes, trunks, suitcases and luggage are all subject to the 10% tariff.


     W A R B Y   P A R K E R

What is it?

A retailer of fashionable eyewear and pioneer of the D2C online retail model. Started by Wharton alums, the founders created the venture because they didn’t understand why eyeglasses are so expensive. The startup is reportedly now valued at $1.75 billion.

Where is it made?

The frames, the most expensive part of eyeglasses, are made in China, while the glass for the lenses are sourced from an Italian company.

Price differential:

• Warby Parker: $95 (frame and lenses all inclusive)

• State Optical: $450 for similar product; it’s a Chicago-based manufacturer that aims to revive the craft of eyeglass-making in the United States, which has mostly disappeared.

Covered by tariffs?

Not yet but possible. Eyeglass frames are not covered in either the first or the latest tariff list. But as the trade conflict escalates, which seems likely, eyeglass frames will certainly be covered if Trump decides to impose tariffs on virtually all Chinese exports.

These are of course a select sample of some of the leading D2C brands that may get hit by Trump’s tariffs. What’s more, many of the D2C brands that specialize in apparel or shoes could also be affected as the latest tariff list covers apparel extensively. Of the 250 D2C brands to watch, as determined by the International Advertising Bureau, if the bulk of them have China supply chain exposure, they may already be subject, or will soon be subject, to tariffs.

As this trade war of attrition continues, the millennial consumer class, burdened by college loans and wracked by financial uncertainty, may yet face an unexpectedly unpleasant holiday shopping season.

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