Lee McDarby, director of Corporate FX at moneycorp explains why grocery businesses should have a strategy around currency exposure, particularly with Brexit looming large on the horizon.
The British Retail Consortium recently suggested that the UK’s Brexit plan could put pressure on both British and European supermarkets; estimating that EU retail businesses could face losing £21 billion of agri-food exports to the UK, whilst 12,500 small retail businesses in the UK could go bust.
For example, The Finsbury Food Group has already had to close its London-based bakery, Grain D’Or, due to its profits plummeting by two thirds. The cake manufacturer cited a sharp increase in the price of butter, compounding problems in the business.
The fall in the value of the pound after the Brexit vote has driven up the price of a number of ingredients purchased from continental Europe; in fact since 2016 the price of butter has increased threefold and research from Credit Suisse suggests costs will continue to rise by an estimated 2.3% in the case of a soft Brexit and 5.6% for a hard Brexit.
As prices rise retailers will have to make an important decision as to whether they absorb these increases, increase prices, or look for entirely new domestic suppliers, which will have a knock-on effect on Europe’s export market.
The need to hedge currency to ride out any fluctuations in the foreign exchange markets has never been more important. European retailers that import or export goods, should take note and ensure they are not vulnerable to volatile currency rates.
Unprecedented Fluctuation
We are in a period of unprecedented fluctuations in the Pound as a result of Britain’s vote to leave the European Union. In the days after the result, the Pound fell dramatically and even some major banks were unable to cope.
Over the course of the two years since the Brexit vote, the Pound has never fully recovered and at several moments has fallen even lower.
In essence, the Pound has become a lightning rod for the Brexit negotiations with investors losing confidence in the Pound anytime the news suggests a hard Brexit and Sterling recovering on signs of a soft Brexit.
Even in normal times fluctuating exchange rates can affect a business, but Brexit has contributed to never before seen collapses in the Pound. In October 2016, Sterling hit its weakest mark on the Bank of England's "effective exchange rate index" since the index was created in 1990. These currency shifts have exposed those who do not have strategies in place to maximise their international payments and minimise risk.
Hedging Currency
Regardless of whether you are a British supermarket importing ingredients from continental Europe or a fresh produce supplier exporting to major European markets, at some point your business will have to make or receive a payment transaction to or from a foreign partner.
It is at this point that currency fluctuations become real; potentially forcing you to accept poor exchange rates and the associated financial losses.
Likewise, if you are a business owner looking to expand your operations overseas and need to make a large one-off payment, you may notice considerable changes in currency rates in between the planning phase of the venture and the eventual launch of the project.
Fluctuating exchange rates need not to lead to huge company losses. Being prepared and well- can not only protect retailers from risks, but can also ensure they are making the most out of their international payments.
Redefining The Industry
It is too simplistic for a business to see itself as an exporter or importer. The realities of a global supply chain mean that in a period of fluctuation, it appears a distinct advantage can be achieved by those that deploy an effective FX strategy.
As Britain nears its departure from the European Union it is difficult to predict how the British Pound will fare – but we do know this will put a serious strain on the grocery industry and businesses who haven’t prepared for this scenario are likely to be putting themselves at risk.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Lee McDarby. Click subscribe to sign up to ESM: The European Supermarket Magazine
