Here in Australia, consumers are accustomed to finding products from all around the globe on store shelves nationwide. And although it’s transparent to them, the way those products get there relies on a complex international system of trade.
In normal times, that system works well. But as the recent global Covid-19 pandemic so aptly proved – it doesn’t take much to upset the supply chains that make global trade possible. And that’s just an example of an extraordinary event getting in the way of trade. The truth is, there’s another factor that affects global trade in the same way almost all of the time – fluctuations in the forex markets.
Forex (short for foreign exchange) markets are where investors buy and sell currencies, and as they do, the relative values of those currencies shift. And those shifts have a direct effect on the retail prices of foreign-made goods in Australia. In general, the way it works is simple. When the Australian dollar strengthens, imported products get cheaper. And when it weakens, those products get more expensive.
But consumers care very little for the minutiae that animate global trade. They just want the products they’re looking for to be on the shelf at a price they can afford. And that means Australian retailers have to take some steps to protect their supplies from the vagaries of currency fluctuations. Here’s how they can do it.
Begin with a trend analysis for key currencies
The first step toward hedging against the effects of currency fluctuations is for retailers to analyse the broad trends that affect the prices of currencies in their key trading markets. Most Australian businesses that import will have to concern themselves with China, Japan, the US, and South Korea. Those are the nation’s four largest bilateral trading partners and are the source of many of the country’s imported goods.
The goal is to establish a pricing band – a range of expected currency valuations – to use as a pricing and markup guide. Ideally, keeping prices aligned with the centre of the band is a good place to start. That way, as currency prices move within the expected range, it won’t be necessary to adjust pricing very much, if at all.
Establish backup suppliers
In many cases, certain products may be available from multiple origin points, and businesses will source their goods from the cheapest among them. But when currencies begin to shift, a supplier that was the cheapest one day might be more on the expensive side the next. To guard against that, retailers should try to source key goods from multiple suppliers – or at least have a purchase arrangement with a backup supplier worked out for when the need arises.
That way, they can switch suppliers or shift purchase quantities to mitigate the effects of currency value fluctuations. And, they can set their prices using a moving average of the costs from both suppliers. Pricing goods in that way tends to smooth out the effects of currency-driven price changes at the retail end unless there’s a simultaneous shortage of the product itself.
Consider forward contracts for purchases
Another way that retailers can protect themselves from fluctuations in currency prices is to consider the use of forward contracts for purchases with willing suppliers. A forward contract is a financial instrument where two parties can agree to exchange a specific pair of currencies at a predetermined rate, regardless of the value of those currencies on the open market. Most major Australian banks offer forward contracts as a service, and they can help retailers build some cost certainty into their operations.
With forward contracts in place, retailers can make more accurate financial forecasts that won’t be thrown off by sudden changes in the value of the currencies they use for trade. At the very least, they’ll have cost certainties that last for the duration of their supply contracts. And, forward contracts can buy retailers some valuable time to make alternate supply arrangements in the case of unexpected systemic shocks that wreak havoc on currency markets.
The bottom line
At the end of the day, most of the major currencies that affect the price of goods imported into Australia are relatively stable. That means most retailers won’t have to deal with many currency shifts that impact their bottom line. But when they do happen, they can have an outsize effect on businesses that fail to plan ahead. By using some of the strategies detailed here, however, businesses can protect themselves from the uncertainty and get back to doing what they do best – pleasing their customers by providing them with all of the goods they’ve come to expect and depend on.
