Champagne and designer handbag companies dodged U.S. tariffs this time around, but the risks of tying production to specific terroirs are clear.
By guest author Carol Ryan from Wall Street Journal
Manufacturers of luxury handbags and champagne got lucky in the latest round of U.S. tariffs, but they still need to prepare for a less globalized world.
On Wednesday, October 2, 2019, the Office of the U.S. Trade Representative released details of new levies on jets as well as a range of consumer products imported from the European Union. Earlier in the day, the World Trade Organization gave the U.S. the go-ahead to impose annual tariffs worth USD 7.5 billion as part of a long-running dispute between Washington and Brussels over airline subsidies.
Scotch single-malt whisky is among the products hit with a 25% tariff. That will be painful for the industry, which counts the U.S. as its largest and most valuable single market, according to the Scotch Whisky Association. It will also be painful for Scotch drinkers in the U.S., who will likely bear most of the cost.
Overall, though, the alcohol and luxury sectors got off lightly. Leather goods, champagne and cognac did not make the final cut. Nor did whiskey from the Republic of Ireland, such as Jameson, made by French liquor company Pernod Ricard. Meanwhile, Northern Irish whiskey is subject to the extra duty.
Having fallen Wednesday in response to the WTO ruling, all the major European liquor and luxury stocks rose in morning trading Thursday. Shares in Rémy Cointreau, which makes almost three-quarters of its U.S. revenue from Rémy Martin cognac, jumped 6%, possibly also due to a short squeeze. Handbag stocks including Hermès were up too, after tariff worries wiped $18 billion off European luxury valuations the day before.
The scare highlights which companies have the least flexible supply chains. Production of liquor giant Diageo’s Scotch whisky brands such as Glenkinchie and Cragganmore – which will probably be hit with a 25 % tariff – cannot be moved to the U.S. Like champagne and cognac, Scotch whisky must be made in a specific region. Davide Campari-Milano, however, can shift production of its popular aperitif Aperol, which is not wedded to a traditional location.
Diageo may have to turn to more trade-friendly regions to promote its Scotch. Liquor companies can also diversify their portfolios by buying U.S. brands. Pernod Ricard recently bought a majority stake in Rabbit Hole Whiskey, a start-up label produced in Kentucky.
Luxury-goods companies do not face the same production restrictions as distillers, but they are less footloose than many global corporations. Labels like Hermès use the cachet of French production to charge upward of USD 10000 for their handbags.
However, there are precedents for making “European” luxury in the U.S. A Louis Vuitton handbag bought on Fifth Avenue is likely to have been made in one of the label’s Californian or rural Texan factories, rather than in France. BMW and Mercedes-Benz vehicles have been made in the U.S. for more than two decades without compromising their reputation for German quality.
European companies that rely on selling their heritage abroad dodged the problem this time. With trading powers increasingly at each others’ throats, though, they would be wise to work on backup plans.
Scotch single-malt whisky is among the products hit with a 25% tariff