Volatile Rand impacting on Retailers

Tech importers deal with the volatile Rand

The liquidity of the Rand means a “roller-coaster ride” for companies which depend on importing products for retail in South Africa, “but big tech retailers are quick to point out that such a big component of their businesses is definitely factored into the equation”. A movement in the greater global economy, powered by more stable markets such as the USA, the eurozone and Asia, are reflected in the fluctuations in the local unit, which can prove chaotic to some local companies. Tech retailers and distributors such as Incredible Connection, Hi-Fi Corporation and Esquire, who import tech and electronic goods from overseas, weighed in on the impact the volatile Rand has on their businesses. JD Group CEO, Grattan Kirk, opines that exchange rate movements are all part of its business, and as such, the group takes out forward cover for all items imported when orders are place. JD Group houses two of South Africa’s largest tech and electronics retail brands, Incredible Connection and Hi-fi Corporation. “In the case of tech products, as has been seen over the last three or four years, the dollar input prices have been coming down as well,” Kirk said. Reflecting on the impact of the rand, Kirk notes that manufacturer efficiencies, lower dollar component prices, coupled with a stronger rand, has led to a consistent lowering of retail prices for items such as TVs (LED,LCD) computers, computer printers and monitors, HiFi and audio equipment, already.

The cost of volatility

 §     The most obvious impact the Rand has on tech retailers shows up in the form of pricing. “Naturally the volatility of the Rand affects pricing, as it is more difficult to plan and to buy stock,” said local tech and hardware distributor, Esquire. 

§     “If the Rand dips, it is possible to increase the prices on products; but if you have made a big order of a certain product line at a certain Rand price, it is hard to recoup some costs if the value of the Rand suddenly drops, and this drop had not been factored in.”

§     “If there is substantial volatility in the Rand, which we were unable to predict, or factor in, then we do our best to hold our prices steady to the benefit of our clients,” Esquire said.

§     Incredible Connection and Hi-Fi Corporation, being much larger brick-and-mortar retail outlets, also build much longer-term security measures into their stock-piles to buffer any unexpected twists in the local currency’s performance.

§     “As a rule of thumb, we keep about two months stock in store or in our warehouses and the suppliers probably have between 30 and 60 days stock in their logistics infrastructure. That effectively means we have between three and four months stock in the “system” to cover short term exchange rate movements,” Kirk said.

§     “Thus, it’s possible to cope with weekly short-term movement in the exchange rate without having to change selling prices daily or weekly.”

§     But even when retailers and distributors take currency fluctuations into account, they are not immune from the effect of long-term trends or unexpected dips in the Rand’s value.

§     “Longer-term movements in the exchange rate do, however, end up being priced into the selling price. This is either effected by an increase or decrease in selling prices,” the JD Group head added.

Size matters

 Rand fluctuation has a contrasting impact on businesses, depending on the size of operation, while long-term movements in currency will hit both large and small tech importers, the sudden dips and peaks are more likely to impact smaller outlets, “for better, or worse”. 

§     “We have to manage our business with the exchange rate being an integral part thereof,” JD’s Kirk said. “We have been doing it for many years and have policies and procedures to accommodate the exchange rate risk, etc. Practically, you can manage exchange rate movements either up or down when they move slowly.”

§     “The real issue is when the rates move aggressively one way or the other and remain there for 2/3 months and then back again. That plays havoc with procurement and buying and stock holding, particularly for a large group like ours.” 

§     “Smaller players get an advantage if they are not holding a lot of stock when the rand exchange rate strengthens, as they can quickly buy cheaper.”

§     However, as Kirk pointed out, this could also work against smaller companies if the rand weakens: “Then they are forced to buy stock at a higher price, where we are carrying stock at the older, better exchange, hence, we have a pricing advantage.”

§     Esquire also highlighted the impact of such sudden Rand movements. “In the ICT distribution market, a 1% shift in price in any direction can have a real impact on profits,” Esquire said. “Careful forward planning is necessary and one has to try and peg the Rand at a certain trading rate over a period of time, such as taking a three month view.”

§     “It makes it more difficult. But one should not expect business planning to ever be easy. There are always unexpected occurrences which sometimes necessitate a modicum of improvisation.”

Source:

http://businesstech.co.za, dated 30 July 2012