Retailers with an overseas presence are being hit by currency fluctuations, but there are several ways they can mitigate the effects.
The globalisation of retail has brought many benefits to the sector, including cheaper and more diverse products. But there is no denying there are challenges too, and one of those is the dramatic fluctuation of exchange rates.
Kingfisher is the latest retailer to suffer. It reported last week that foreign exchange rates wiped £10m off its first-quarter retail profit, which came in at £150m.
The DIY giant is not the only retailer struggling. Earlier this month Burberry reported that exchange rates impacted its full-year revenue to the tune of £72m and its pre-tax profit by £38m.
Mothercare on the other hand reported fourth-quarter international retail sales up 11.4% on a constant currency basis, but on an actual currency basis sales rose only 5.5% because of fluctuations. In its full year the mother and baby specialist experienced currency devaluation of 2.8% but still managed to grow its international profit 7.6%.
Sales at Marks & Spencer’s international business fell 2.1% because of currency volatility and political instability in countries including Russia, Ukraine and Turkey.
Conlumino analyst Maureen Hinton says unexpected currency fluctuations can wreak havoc on retailers’ ability to budget. “Because the clothing sector is so price-competitive, retailers are up against indigenous competitors that do everything in euros,” she says.
“Retailers can’t keep changing their price points, and they can’t put on huge margins at the beginning to take account for fluctuations in currency.”
“Once you’ve set up a store, you can’t just withdraw due to a weak currency”
Franziska Schmidt, Planet Retail
Franziska Schmidt, associate analyst at Planet Retail, says quantitative easing launched by the European Central Bank has flooded the market with euros and caused the currency to weaken substantially.
“The euro will remain a weak currency and revenue contributions from the euro for businesses headquartered outside will remain quite low,” she says. “Retailers have to get used to the fact that it will probably remain a bit subdued for the next decade.”
“And retailers can’t do much against it - once you’ve set up a store, you can’t just withdraw due to a weak currency,” she says.
While retailers have no control over currency fluctuations, it is possible to mitigate their effects.
Schmidt suggests that rather than transferring any turnover in euros to the pound, retailers should consider reinvesting the cash in the country where it was earned.
“It’s only when the turnover is transferred into the pound that the loss is created,” she explains.
And reinvesting in weak-currency countries has its upside because retailers can get more bang for their buck and the value of investments will grow as the currency bounces back.
For example, because of the decline of the ruble in Russia, property prices there are falling in pound and euro terms, according to Schmidt. That provides a good opportunity for retailers looking to expand in the region. Karen Millen, for instance, is remaining in Russia despite currency fluctuations.
Retailers can take more direct action on currency woes by introducing localised pricing. When fashion etailer Asos was struggling against currency volatility last year, it worked frantically to introduce zonal pricing after the strength of the pound caused its prices to appear up to 25% more expensive in some markets.
The etailer rolled out localised pricing at the end of last year. While Asos boss Nick Robertson warned zonal pricing was not a “silver bullet”, the fashion etailer’s overseas sales for the three months to February 28, 2015 increased 12%, up from a 2% fall in the previous quarter, driven by the localised pricing.
But it is not just the European market that is proving volatile. Asos has identified Australia as one of its hardest-hit markets and has had to lower prices to match local competitors. Hinton also says China is causing problems for luxury goods retailers because more Chinese consumers are coming over to Europe to buy goods as they are too expensive in their home regions.
Primark parent Associated British Foods (ABF) is looking to make savings on sourcing to mitigate the effects of volatile exchange rates, and has reported that the fall in the price of cotton and synthetics is helping.
However, ABF finance director John Bason said in April that currency fluctuations could move even further and Primark has taken the decision to take the hit rather than passing it on to its customers.
“We’re taking on the margin and we’re saying Primark wants to remain the best value and lowest prices on the high street,”
Currency fluctuations are undoubtedly frustrating for retailers, adding further costs to business in an already challenging market. Those big enough to absorb the costs will no doubt continue to do so, but smaller businesses may begin to question whether international expansion is worth the trouble.