Restaurants will feel an immediate and dramatic effect on food costs if President Trump makes good on his threat to levy a tariff on imports from Mexico, according to an analysis issued Friday by the Specialty Food Association (SFA).
“Food will be hit first, and it’ll be felt almost immediately both by restaurants and grocers,” said Phil Kafarakis, president of the association and a former C-level officer of the National Restaurant Association. “It’ll take about three to four weeks to feel the impact.” He characterized the likely impact as “major.”
Trump has said he'll initially impose a duty of 5% on Mexican imports a week from today, but could raise the levy to as much as 25% by October.
Chipotle Mexican Grill has alerted the investment community that the tariffs could cost the chain an additional $15 million for supplies during 2019, and could cut into margins by 20 to 30 basis points.
Kafarakis noted in the analysis that about 70% of the vegetables imported into the United States come from Mexico, which also supplies about 40% of its northern neighbor’s fresh fruit. The U.S. food industry is particularly dependent on the nation to the south for avocados, sourcing 80% to 90% of the restaurant staple from that growing area. The association says that about 40% of the U.S.’s supply of tomatoes come from south of the border.
Few establishments will escape the impact, whether they use raw product or buy materials that have already been processed, he stressed. “Whether it’s fast casual or quick service, they’ll all be affected,” Kafarakis said.
He suggested that securing enough product could become a problem regardless of what a restaurant operator is willing to pay.
“Businesses haven’t had time to figure out how to replace existing sources with other sources, and this will put a strain on public and private companies,” said Kafarakis. “And in some cases, such as in the case of avocados, there isn’t a ready second source. If you’re dependent on one supplier, your wake-up call just came.”
The management consulting firm A.T. Kearney has estimated that a full 25% tariff would cost avocado importers an additional $575 million, which would presumably then be passed along to restaurants and other customers. It pegs the likely increase in tomato import costs at $300 million.
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The SFA analysis was conducted as a follow-up to Kafarakis’ meeting with the Office of the U.S. Trade Representative on the potential impact of tariffs on imports from other parts of the world, including Europe. Trump raised the possibility of levying import duties on goods from across the Atlantic on Tuesday.
The Trump administration has already levied a 25% tariff on selected goods brought into the U.S. from China. The aim, according to the president, is to spare certain sectors of the domestic economy from being undercut in price by imports from Asia. Others view the move as a political backhand against China’s alleged cybercrimes against American businesses and security forces.
The restaurant industry has taken a wait-and-see attitude toward the Chinese tariffs. Kafarakis suggested the industry won’t have that luxury if Trump makes good on his threat.
Trump said last Thursday that he intends to levy a 5% tariff on Mexican imports starting June 10 unless the U.S.’s leading trade partner halts undocumented aliens from flowing northward across the border. The tariff will be raised 5 percentage points for each month the Mexican government fails to act, Trump said at the time.
Mexico’s ambassador to the U.S., Martha Barcena, said she intends to meet with White House officials in an attempt to head off the tariffs. But she warned the Trump administration via the media that there is “a clear limit” to what Mexico is willing to offer in negotiations.
The potential damage is open-ended for restaurants and grocers, Kafarakis suggested.
“The longer these tariffs stay in effect, the greater the danger businesses will lose the customer, who’ll stop coming back and will find an alternative,” he said in the SFA analysis. “So you’ll see damage done to a very long business cycle. And businesses will need to change their models.”
The SFA represents about 3,500 providers, importers, distributors, users and sellers of specialty foods.