Every retail brand – big and small – is vulnerable to exchange rate risks, especially if they operate both locally and abroad. Just this year, profit margins fell by 2% for Asos not only due to the rise in freight and duty costs but also because of the “foreign exchange rate movements going against the company”.
Let’s take a look at what exactly exchange rate risk is, and what your retail business can do to mitigate this risk.
What is exchange rate risk?
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Exchange rate or forex risk is the risk caused by the rise and fall of an investor’s local currency against another, foreign currency. One current example is the near-parity of the U.S. dollar against the euro – which is a first in nearly 20 years, according to the Washington Post. Whilst that’s great news for Americans travelling to Europe for holiday, it’s bad news for those who have businesses that work mainly with euros locally but also have to purchase supplies or have other business-related costs in dollars. Even though the forex rate risk cannot be completely eliminated or avoided, there are ways to mitigate it.
How can it be mitigated?
Organisational analysis
One of the first steps is to conduct an organisational analysis or risk assessment. This assessment should allow business owners to identify data such as affected streams of income and profit margins that are most affected by forex fluctuations. The Office for National Statistics (UK) claims that the total exports of goods had increased by £2.3 billion (7.4%) in May of this year – this means that companies whose core business is the exportation of goods are probably the most affected by forex. Take a close look at shipping costs, taxes, and other components that are heavily affected by exchange rates.
Study the market
There are quite a few different factors that can affect exchange rates: interest rates, confidence in local and international economies, and even economic growth. All these can cause the forex market to fluctuate. Since rates are affected so easily by global and local news, forex traders are often found keeping their eye on the news – and this is something business owners can benefit from as well. Understanding how to identify news that can potentially change forex rates will help you stay ahead of these fluctuations and make decisions that can protect your business better. One of the most popular tools at your disposal for forex news is using a forex broker platform that is specifically designed to spot trends. FXCM’s Trading Station features helpful tools such as the News & Calendar and the Trading Analytics platform that gives users real time updates. This allows them to be agile in how they react to currency fluctuations. Whilst these tools are great for forex traders, they’re also beneficial for business owners that want to stay ahead of the curve.
Implement a forex management strategy
Once you understand which parts of your business are most affected by forex, you can then begin to create and implement a strategy with forex risk management techniques. Consider adding automation to this strategy in order to make your life a bit easier: timing conversion rates can be a hassle as they change so quickly, but there are tools that can help you stay on top of these changes and make decisions in a timely manner.
The retail sector in the UK is doing well, despite the challenges over the last two years. Internet sales remain at a steady 28% – and internet retailing is the most popular form of selling, as reported by the “Retail Sector in the UK” paper from the House of Commons Library. Yet the increase in inflation and a drop in the value of the pound could quickly affect companies that sell online, especially those who sell abroad. This means that retailers need to pay special attention to how the foreign exchange rate risk can affect their business, and what they can do to mitigate it. One way to do this is to account for any fluctuations in the commercial contract. This will protect both parties should their chosen currency drop in value.
The exchange rate is not something many retail businesses consider in their future planning. But as the above points show it can be detrimental to not take these fluctuations into account.
