How retailers can navigate currency fluctuations

Internet Retailing

5th May 2016

Since the beginning of this year, the Australian dollar has fluctuated from 68 to 78 US cents. It’s no surprise that most retailers and wholesalers know the spot rate to the nearest decimal point.

To date, 2016 has been quite volatile for markets and currencies worldwide. The Reserve Bank of Australia cut interest rates this week to a new low of 1.75pc, which saw the Australian dollar move 3 cents lower following the announcement. Any rapid decrease like this quickly puts pressure on retailers’ import prices and margins.

The drivers of currency volatility are complex, and due to both global and local economic conditions. The RBA has a mandate to maintain a balanced inflation figure, targeting 2.5 per cent, and poor economic news can impact its view on the official cash rate. Looking back at the actions of RBA chief Glenn Stevens over the last week, 15 of his 28 rate decisions occurred after inflation data was reported.

Central banks rarely cut rates only once. The market is now starting to factor in a 60 per cent chance of a second rate cut in August, hence the drop in the Australian dollar.

What we do know is that currency volatility is here to stay for the foreseeable future. Without the proper tools and knowledge, these challenging conditions will have a direct impact on retailers’ profit margins. Since most retailers cannot afford to lose market share through price rises, they need to understand how to navigate these currency fluctuations.

Build and sustain omnichannel customer relationships
The fluctuating dollar means there is an ongoing shift in the amount of domestic and offshore online sales. To combat this, retailers should explore all the omnichannel relationships available – mobile, click and collect and third-party sites – to maximise customer interaction and ultimately sales.

It’s important to diversify your revenue streams and not depend on one client with rigid pricing terms. Clients which are diversified are less impacted by changes to customer base.

Forecast sales and set budget
Each year, it is important to forecast sales, consider potential currency volatility and then set a budget level to determine profit margins and prices. It is important to consider how slight currency movements can have an enormous impact on product prices, market share and profit margins.  

Consider solutions available
External expertise, from accountants, financiers and specialists, can provide support to help determine an efficient solution to managing currency risk.

We predominately see clients ask for forward contracts to buy or sell at the market price of the day which settle within 90 days. In isolation, this currency hedging tool works when the dollar is declining or fairly stable. However, when the dollar has large movements we encourage clients to explore an options contract as well to maximise dollar increases.

Each retailer is different – the level of imports and exports, risk appetite, market exposure and budget impact the hedging strategy that would suit your business.  

To help analyse the best solution, consider the following questions.

Questions to ask

• Does my international payments strategy match my business goals (market share, market initiatives, growth strategy, competition, industry maturity)?
• Do I have a level that I set my pricing and profit margins from (budget level)?
• How often should I review this level?
• Do I have the ability to reprice?
• What effect will re-pricing have on my client relationships?
• Is there a timing misalignment between my international payments program and local pricing agreements?
• How can I plan for more AUD weakness if the US Federal Reserve raising the cash rate this year?
• How accurately can I forecast purchases?
• Do I set the same level budget for all stock (even if they have different margins)?
• Are my product margins considered premium or price-driven?
• Should I manage risk differently for premium and price-driven products?
• Do I hold stock or sell-by-order?
• What are the market conditions ahead in the currency pairs that I’m exposed to?
• What forward coverage do I have? Is it sufficient for my business?
• Are there other levers, such as extending supplier terms, to help improve working capital?

Lachie Swann is a director at AFEX Asia Pacific.