Braving the Currency Storm: What U.S. Brands Can Do
By Brian Ehrig
The U.S. dollar has risen by more than 20% against the other major currencies over the last year, buoyed by a respectable if not torrid economic recovery and sinking oil prices, among other factors. That could be a breath of fresh air for U.S. shoppers with a taste for imported goods. For global mega-brands like PVH, Microsoft and Coach, however, the implications are closer to a gathering storm.
The reason, of course, is that every uptick in the dollar has the effect of reducing both revenue and profitability for U.S.-based companies. Apple’s fourth-quarter profits last year would have been $2 billion higher but for the soaring greenback. In the third quarter of fiscal 2015, Nike’s revenue was up by 7%, but that was 6 percentage points less than the 13% increase the company would have posted on a constant currency basis.
The last time the dollar was this strong was in 2002, when there were far fewer global companies and the effects of currency turbulence were therefore less damaging. Companies that have since gone global may be facing the currency challenge for the first time.
But they don’t have to give in to it.
Defying the elements
On the face of it, brands could juice revenue by raising prices — or so it would seem. Price is a quick, simple lever to pull, except that European consumers are already blanching at price tags on Fossil watches and Lululemon yoga pants. In addition, the Internet has broken down barriers to pricing information, making consumers much more educated and, in some cases, positioning them to profit from the crisis.
While cutting prices may be a nonstarter, a more sustainable solution with minimal consumer impact would be to strategically pare back SG&A spending — the selling, general and administrative services that can easily account for as much as 10% of a corporation’s expenses.
Well, of course. Even freshman business majors know that when margins are squeezed and you’ve pushed prices to the max, the only remaining option is to cut expenses.
The problem is that understanding the theoretical benefits of strategic cost reduction isn’t the same as identifying and calculating costs across the enterprise and then strategically reducing them. It takes a serious commitment of time, money and personnel for a global corporation to view its total non-merchandise spend — a prerequisite to identifying opportunities for realistic cost savings. Few companies have this information at all, let alone take action on it.
Finding a new path to profitability
That said, for brands that have been battered in the currency storm, a well-thought-out cost calculation and strategic cost-reduction initiative is well worth the investment, whether it’s handled internally or entrusted to outside resources.
The dramatic shifts in the global landscape have created opportunities for savings that wouldn’t have been obvious or practical as recently as three years ago. What’s more, there are measures that can be implemented right now, yielding immediate savings.
The following options, while not an exhaustive list of action steps, can be an effective starting point:
• Changing the channel. Start by taking stock of your channel mix. If it has shifted more than 10% in the last few years due to the omnichannel revolution, it’s likely that your related costs are growing faster than the revenue.
• Leveraging supplier relationships. Reach out to your highest-volume suppliers — the ones you use for your longest-running products — and push them to commit to year-over-year price adjustments.
• Remapping the back office. Take a fresh look at your location costs with a view to moving back-office functions to lower-cost geographies — or outsourcing them altogether.
• Revisiting the case for DIY. If you have outsourced some functions, have you netted the savings you anticipated? If not, it may be time to put those functions out to bid again — or even consider bringing them back in-house.
• Buying smarter. Savings often come about from changing how you buy rather than what you buy. Contract reviews of any agreements like enterprise resource planning programs — negotiated by purchasing professionals rather than IT specialists — might lead to a significant reduction of your costs.
• Realigning resources with revenue. Not all product categories are created equal. Look for inefficiencies in your total merchandising, staffing and product development spend, shifting resources away from low-priority categories and into high-potential ones.
Stormy weather — with no end in sight
The currency forecast is for more of the same. FX analysts at Barclays, Goldman Sachs and other Wall Street firms are predicting that the euro and the dollar will be at parity by year-end, tightening the vise even further on U.S. sales and profits.
As the storm builds, global brands seeking to continue growing their presence abroad needn’t be buffeted like toy boats in a typhoon. Strategically reducing costs by addressing the inefficiencies created by recent industry shifts can provide companies with a highly effective buffer — and a quick way of realizing significant savings. There’s no need to wait until the headwinds die down.
Brian Ehrig is partner and retail strategist in global consultancy Kurt Salmon's Retail and Consumer Group. He can be reached at [email protected].