Tariffs are reshaping the cosmetics industry, driving up costs, causing supply chain disruptions, and forcing brands to make tough choices. Whether it’s increasing prices or reworking global supply chains, the impact is far-reaching. As tariffs on imports, especially from China, rise, cosmetics brands face new financial hurdles.
But it’s not all doom and gloom; the right strategies can help brands stay competitive. Let’s dive into the numbers and explore how beauty companies are adapting to this shifting landscape.
The rising cost of imports: A strain on margins
The latest tariffs, particularly those targeting goods sourced from China, have left cosmetics brands with few choices: absorb the cost themselves or pass it on to consumers.
According to our new survey on tariffs, nearly half (49%) of businesses are absorbing at least some of the increased tariff costs themselves. Specifically, 27% of businesses are absorbing up to 50% of the costs, while 22% are shouldering 51-99% of the increase. Just 14% of businesses are passing the full costs on to customers.
However, for many brands, the question remains: How much can consumers bear?
According to recent reporting, major companies like e.l.f. Beauty and Glow Recipe have already announced price hikes to offset higher tariffs on raw materials and finished goods, setting a trend that smaller brands may follow as cost pressures mount.
But increased import duties are not the only challenge. Brands are also facing delays in their supply chains, with over half (51%) of surveyed businesses reporting late payments to suppliers, due in part to the rising cost of materials and a backlog of shipments. This has created a significant cash flow crunch, impacting everything from production schedules to delivery timelines.
The ‘first sale’ rule: A temporary lifeline for global giants
As the tariff situation escalates, some cosmetics giants are turning to legal loopholes to soften the blow. Companies like L’Oréal are leveraging the obscure ‘first sale’ rule, which allows businesses to apply tariffs at the point of manufacturing rather than retail, a strategy that reduces the financial impact of higher import duties.
While this strategy offers some relief, it comes with a host of compliance complexities and potential legal hurdles. It’s a risk some of the largest players in the beauty industry are willing to take, as the cost of navigating the tariffs may outweigh the benefits of absorbing them.
However, this tactic isn’t universally applicable. Small and mid-sized companies with less flexibility in their global supply chains are finding themselves in a tougher position.
Without the ability to take advantage of the first sale rule, these companies are more likely to face margin squeezes and price hikes that could alienate price-sensitive consumers.
Supply chain adjustments: Hoarding inventory and seeking alternatives
In response to tariff uncertainty, a significant number of cosmetics companies are rethinking their supply chain strategies. According to our report, 48% of businesses have increased their inventory purchases to stockpile goods before prices rise further.
This “just in case” approach, while useful in the short term, can create its own set of problems. Storing excess inventory incurs additional costs, including storage fees, taxes, and the risk of holding obsolete goods.
Meanwhile, some companies are exploring alternative suppliers in lower-tariff regions. However, the transition to new suppliers isn’t as simple as it seems.
As 73% of businesses surveyed have noted, there is a growing concern that the rise in tariffs could spur an increase in trade fraud. From falsifying country of origin to undervaluing shipments, suppliers in high-tariff regions may attempt to circumvent the rules, creating additional risks for brands relying on their goods.
The impact of de minimis exemption changes
Another critical shift in U.S. trade policy is the suspension of the de minimis exemption, which previously allowed goods valued under $800 to be shipped duty-free. The recent elimination of this rule for goods coming from China has left many brands scrambling to adapt their logistics strategies.
E-commerce giants like Shein and Temu, which rely on low-cost, high-volume shipments, have already begun stockpiling goods in U.S. warehouses to mitigate the impact of new tariffs. However, this move has resulted in higher prices for consumers, raising the question of whether such companies can maintain their competitive edge in the market.
The broader impact of the de minimis change on cosmetics brands will depend on their reliance on low-value goods imported from China and other high-tariff regions. For many smaller beauty brands that source packaging or ingredients from China, this could mean higher operational costs and potentially reduced profitability.
For larger companies with diversified supply chains, the impact may be less significant, but still worth monitoring.
Future-proofing the supply chain: Strategic recommendations
As tariffs continue to change, it’s crucial for cosmetics brands to take proactive steps to mitigate risks. One of the most critical strategies is to incorporate tariff impacts into financial planning.
Surprisingly, nearly 55% of U.S. businesses have not yet factored tariffs into their annual financial models. This oversight could leave companies exposed to sudden shifts in tariff policy and unforeseen cash flow challenges.
To future-proof against tariffs, cosmetics companies should:
- Diversify suppliers: Reduce reliance on high-tariff countries by exploring alternative sourcing regions with lower tariffs.
- Reevaluate pricing strategies: Adjust product prices strategically, balancing the need to pass costs to consumers with the risk of losing market share.
- Strengthen supplier relationships: Ensure that suppliers are financially stable and able to absorb the additional strain of tariffs without compromising on delivery timelines.
- Monitor tariff developments: Stay updated on evolving trade policies to quickly adapt to any changes.
Looking ahead
The impact of tariffs on the cosmetics industry is undeniable, and as global trade tensions continue to shape the market, brands will need to be agile and strategic. While larger players may have the resources to navigate the complexities of tariff changes, smaller brands will need to find innovative ways to adapt without sacrificing their competitive edge.
By staying informed, diversifying supply chains, and incorporating tariffs into their financial planning, cosmetics companies can weather the storm and emerge stronger in the long run.
