Why this one currency mistake will eat into your 2018 profits

Moneycorp’s Lee McDarby reveals how indies can get to grips with the currency exchange market

Fashion is a global business and getting it right means curating the best for your customers from all over the world. The challenge for today’s shop owners is that the currency market constantly fluctuates. And since the Brexit vote and subsequent drop in the value of the pound, it can be hard to ensure that you’re getting value from any imported garments and fabrics.

Prices for fabrics are comparatively high at the moment. Fabrics from across the world including Scandinavia, Italy, France, Belgium, Turkey and China are priced in a way that is impacting the cost of producing garments – and that in turn can make it harder for boutiques to achieve a viable margin. There can be a time lag between placing an order and its completion. Then, within that time, the cost of the original order may change due to fluctuations on the currency market, meaning a previously good deal could become lower value by the time the bill is due to be paid.

While the price of fabric and wholesale cost of fashion is beyond the control of small boutiques, it is possible to ensure that margins aren’t further weakened by losses incurred during the currency exchange process.

Wholesalers are keen to push minimum orders higher to limit their risk, and this can make smaller players less competitive. It’s not all bad news, however: the rising trend for fast fashion presents an opportunity for boutiques, which can be more agile and responsive to the latest must-have fashions. New brands continue to emerge and as the pound has mounted a slight recovery, there are still opportunities for boutiques to import goods in a way that is profitable and contributes to the growth of their brand.

If you source from overseas, the changes that occurred following the Brexit vote can provide a valuable lesson in the importance of managing currency exchange risk. Indigofera, a company launching and developing international fashion brands, is a case in point. The company offers expertise in sourcing, manufacture, sales, client service and logistics. “Brexit hit us really hard, and it’s the only time in our history that we’ve made a loss,” says owner Nick Stavrakakis. “Everyone thought Brexit wouldn’t happen but it was in the back of my mind; unfortunately it was too late to mitigate it. At the time we were only able to hedge half, as we suddenly had put big deposits down to book currency forward. So we took the initial hit in autumn 2016 and started to reach out to our suppliers and asked them to meet us in the middle with pricing and discounts to help us keep prices from shooting up.”

He adds: “Luckily, by winter all our suppliers helped out and a happy medium was found. Going forward we book as much as we can without any deposits required. Moneycorp helped us get through the most volatile period and now as soon as we need to hedge we get info from our dealers, wait for the right time and book at the highest peaks for that short period.”

While this is something of a cautionary tale, it is possible to hedge against the risk of the currency exchange market. There are opportunities across the world for boutiques that are prepared to work closely with their suppliers. As Stavrakakis recalls: “I don’t think many people realise how much currency fluctuations can affect businesses, for us every point change is potentially £15,000 profit or loss. It’s also easy to get caught up in a deal, by getting greedy or waiting too long – I always just look at the bigger picture when I’m booking our currency. We don’t want any losses. If we can book with an upside then that’s good timing, but we essentially make sure the currency does not go below what we are costing our products at.”

He adds: “We stay loyal to the P&L and avoid any unnecessary risks and losses. Operationally we make a strong margin through hard work and running a tight ship and we don’t want any of that being eroded. In hindsight we should have locked in earlier before Brexit to try and negate an impact, not everyone we had spoken to leading up to the vote was certain the vote would go remain.”

Negotiation and collaboration can play a valuable role in protecting margins, but changing your processes may also help you maintain profitability during challenging times. Many boutique owners use a business bank account to settle invoices, but this may not be the most cost effective way to do so. A bank may not provide the best available rates and in addition they often charge high fees for each international payment. If your business relies on a range of suppliers, whether in one country or across the world, that means with those multiple payments you could be eating into your bottom line considerably with all the fees.

The exchange rate is always volatile and that means it’s hard to predict when the right time to settle your invoices each month might be. A specialist will be able to provide guidance and an overall picture of the market but also there are products which may help you plan ahead. You can track, target and even fix a rate ahead of time in order to settle your invoices, which means that when it comes time to make payments you’ll know how much it will cost your business.

Lee McDarby is Managing Director for Corporate Foreign Exchange and International Payments at Moneycorp, offering a corporate foreign exchange service that helps companies to manage their foreign exchange risk. Expert account managers provide guidance on the foreign exchange market and can provide an insight into market developments and how they might impact individual businesses.