How Tariffs Could Empty Grocery Shelves
You’ve probably never heard of Sanitube, but the manufacturer of sanitary steel products is an essential link in the supply chain that gets milk, cheese, and other foods to your kitchen table. Todd Adams ’10, the company’s president, says that the tariff turbulence rippling through markets and buffeting his operations could end with escalating prices and even shortages of nutritional staples.
A Kroger store in Bloomington, Indiana, during the first days of the COVID-19 pandemic in March 2020.
Where does your company sit in the supply chain? I had never heard of it, but now I’m thinking I probably eat food all the time that arrives because of your product.
We manufacture and supply stainless steel tubing, valves, and fittings that are used primarily in food processing and production. If you look at an industrial-scale bakery making potato chips, all the guts of that facility would be stainless steel. Or if you’ve ever been to a craft brewery, you’ve seen some of the tanks that they use. We don’t make the tanks, but we make all the accessories—the valves, the tubing, all the conduit that feeds the fluids into these tanks. Dairy facilities are huge for us. We even get involved in some pharmaceuticals and nutritional supplements. Basically anything that goes into the body—mostly the human body, but also animal bodies—has to be produced with either a sanitary grade plastic, which is not as durable, or a sanitary grade metal, which is primarily stainless steel.
So if you’re sitting in the gastropub, a lot of the shiny things you see would’ve come from your company?
Yes. Our product is pretty, as far as industrial materials go. And that’s on purpose. It’s polished to keep it sanitary. It’s basically removing any pits and valleys at a microscopic level in the metal where contamination could occur due to entrapment and harboring of bacteria.
Our real bread and butter is dairy, because dairy is prone to contamination, it’s prone to spoilage, and it requires our high-quality products. Every day they have what’s called a clean-in-place cycle. All of our product is designed to be disassembled, cleaned with a very strong detergent, and then put back together for production the next day. Those abrasive cleaning cycles are what actually wears our product down. After two or three years, it all has to be replaced. So we have a nice recurring revenue model with dairy.
We’ve had to dial back our purchasing. That will inevitably lead to shortages of our product, which will lead to escalating costs to the food production facilities and ultimately higher food costs.
With a winery, on the other hand, you’ll see some stainless steel in there that’s 30, 40 years old. It’s kind of interesting to go to some old wineries and see valves from manufacturers that are no longer even in business.
Because of that lifecycle, we’re constantly bringing product in from overseas. We also manufacture at a facility here in Florida. We do as much manufacturing as makes sense. But a lot of the simple products—think of a two-inch elbow—are made overseas because that’s a menial job: it’s somebody sitting in front of a machine pressing an elbow all day long. I don’t think that’s necessarily the type of manufacturing we want to do in the United States.
The question of manufacturing in the U.S. has been a big part of the debate around tariffs.
We’ve been caught in the crossfire of this trade war. Part of the reason is that our industry is overlooked. It’s a critical industry, but there’s only a handful of us who do it. And when the administration talks about targeting steel, they’re thinking of steel for construction or oil and gas piping. They’re not thinking about sanitary grade food products. Because if they were, they would realize that, while we’re importing products, we’re supplying to a domestic industry: food production.
So there’s a balance there; we can’t do it all ourselves. And that’s true for a lot of industries. And frankly, we don’t have lobbyists; we’re a small industry. So we feel like we’re overlooked in this trade war, and we’re being penalized for supporting not only domestic food manufacturing, but supporting a critical infrastructure. And I see real problems ahead if this continues in the food supply chain.
Can you tell me some of the direct effects both the tariffs and the uncertainty around tariffs have had on your business so far?
We are a capital-intensive industry. We have to buy inventory, and then we house the inventory. We predict demand. What we’ve had to do is dial back our purchasing, because we don’t want to be caught with high-cost inventory if there’s a relaxation in duties. We also don’t want to be caught or get trapped with a lot of material that’s in transit to the United States, and all of a sudden we owe immediately x percent more. That could be crippling.
So what we’ve had to do is be a lot more conservative with our inventory. And we’re not the only ones; all of our competitors have.
What that will lead to inevitably—assuming demand maintains, and that’s a big question mark—is very lean inventories amongst ourselves and our competitors, and that can only lead to two things. There will be shortages of our product that will lead to escalating costs to the food production facilities, if they’re even able to get their hands on our product. And they will have to pass those higher costs along, and it will ultimately lead to higher food costs.
So it’s inflationary, but it also compounds. We’re only in the beginning stages of this. It’s going to take some time. And unfortunately, by the time it trickles down to the price of broccoli at the grocery store, it’ll be too late. It takes two, three years to right that ship. So hopefully at that point, somebody notices that maybe we do need affordable food in this country, and policies may change, but it’s going to take some time. And realistically, I think history has shown prices are not going to come back down. All we can hope for with inflation is that wages catch up.
In addition to price increases, shortages could end up limiting what variety and choice people have.
If there’s a shortage of dairy fittings, one of two things might happen: The bulk of fittings will be rerouted to the essential production. So sure, we might have milk available, but you’re not going to be able to find certain protein shakes or other items. Or it might be the opposite, maybe the protein shake companies are the ones who can afford to pay the higher costs. And that’s the worst situation, because then the basic goods are going to be in short supply, and that will affect a certain category of people more so than others. That’s probably the more likely scenario.
You said you’re having to be more conservative. Are you scaling back on your expectations for growth?
Yes. Obviously, the inventory that we have dictates how much business we can do.
We sell through distribution. Even if distributors are still willing to pay the higher prices for our product, I just don’t want that rug to be pulled out from underneath me if tariffs change again. That’s why I have to keep my eyes and ears open, following the news every day, which is a huge distraction. I have to monitor X for a meaningful change of policy. It might happen overnight. So it’s stressful and distracting.
That’s all the more reason why we’ve been doing the bare minimum to keep our business sustained. For instance, I had plans to expand geographically this year, to open a new distribution center in another part of the country. Even if we currently have the capital available to do it, I’m conserving it. I’m just keeping it in cash. And that’s not good for anybody. That’s not good for me; that’s not good for the economy. Obviously, the leasing agents who wanted to get me that warehouse are not getting that business. So the effects trickle throughout the economy.
What does uncertainty really mean to you now? It seems like that’s just such a big factor.
Uncertainty is risk. And what we’ve had to do to accommodate that is charge more—there’s a risk premium that we’re pricing into our products. It’s a good thing we have, because some of these fears of escalating tariffs have come true.
I should mention that the 145% tariff that went into effect with China didn’t affect our products. We’re considered a separate bucket. And while I’m grateful that we never went to 145%—that would just kill our industry—other industries that were affected to that extreme level have seen some relaxation. Whereas steel and aluminum, we’re over here saying, hey, there’s been no improvement. We got hit with the 25% tariffs plus the 20% fentanyl surcharge. So that’s 45% that we’re hit with in addition to any tariffs that were already in place.
And I think over the last 15, 20 years, we’ve seen a continuous escalation in our tariffs. None of them have gone away. They all just compound and stack on top of one another. So my effective rate that I’m paying is upwards of 80% on a lot of my products, and that hasn’t moved despite the so-called deal that occurred a few weeks ago. And that deal is a temporary arrangement anyways. Even if it did affect my products for 90 days, that’s not enough time for us to really change anything. By the time we order something, it takes more than 90 days to get to the United States. So I would hate to order something, and then at 93 days when it comes in, we’re back up to 300% tariffs.
Is the distraction of keeping up with all of this keeping you from doing other things? Is it a kind of opportunity cost?
Yes, absolutely. Even this interview. As much as I enjoy talking, between prep time and everything else and just diverting my attention to it, that’s an hour of my day talking about this. I’ve probably gotten 20 emails that have rolled in during this conversation already, and they all require a response. This is part of my job right now, but it has convoluted my job description and it’s been wearing.
Some people don’t follow the news quite so closely. They say, hey, listen, I have a business to run. I can’t be distracted with this. And I don’t blame them for that, but they’re even more confused, because it’s really hard to know what you’re going to be paying for your product if you don’t follow every single tweet.
Would you compare this experience to any other periods?
This happened to a lesser extent in the first Trump administration in 2018. That was the first time that I witnessed this sort of abuse of emergency orders. I was under the understanding that the power of the purse is held by Congress and there is a process. You have time to see any changes coming and there’s an avenue for citizens or involved parties to appeal and to share industry insight. In 2018, the president came out on the news with no warning and said, 25% duties are effective tomorrow morning on all steel, and 10% on aluminum.
I happened to have millions of dollars in a big order on the Pacific Ocean in transit to the United States. I had already sold it; I already had the contract. There was a pre-determined sale price, and there was no room for 25% extra duties. And it showed a fundamental misunderstanding or lack of understanding of our industry. And I appealed it as much as I could. I ended up going to Washington, D.C. I testified in front of the House Ways and Means Committee. I got a lot of hopes and prayers, but they never changed anything and I ended up having to eat that. And what was going to be a nice piece of business for us almost put us out of business.
It showed me that they can just basically circumvent the entire political process and do whatever they want overnight. And that’s the way Third World countries operate, and that’s why you don’t see investment in Third World countries. That’s why international companies are very cautious about going into Third World countries, and you don’t see much homegrown business either, because there’s no certainty. There’s volatility.
What has this period demanded of you as a leader and what helps you deal with this situation?
What has led me through it is knowing that I’m doing the right thing, that I’m supplying a critical industry, and that I feel like what I’m saying is right. I’m fighting against misguided principles. And I believe that ultimately, especially in a market economy, the right way will prevail. It’ll be forced to prevail due to market forces. If we have to wait until food costs start spiking and we really have the beginnings of a famine, that would not be my preference, but that would be the screaming red flag that, hey, something’s got to change.
That’s an extreme example of how I feel that ultimately the right path will prevail. But I am trying to short circuit that process, and that’s why I’m talking to you. That’s why I’ve done any interview that’s come my way. The earlier we right the ship the better for the economy and the American consumer. I’m just one person and I represent a small industry. We don’t have lobbyists on Capitol Hill; we really don’t have a voice. But we’re just as critical as some of these higher-profile industries. I want us to get back on course before there are any extreme consequences.