2. Take control of the risk
The dollar is expected to stay around the $1.04 to $1.06 level through the year, says Craig James, chief economist at CommSec. But it is volatile. James says: “Each year, the average range is 12 cents. You can have major fluctuations and that is why a lot of business ensure that they are protected against the unforseen by adopting derivative positions.”
Many factors impact the exchange rate. James says: “There is a range of criteria that people take into account: the level of interest rates, political stability, how the Chinese economy is faring and the observations about US economy.
“If the Chinese economy continues to recover and strengthen it will almost certainly go higher. It is hard for us to envisage that the dollar will fall below parity and we believe businesses should be factoring to business plans.”
Casella believes the impact of the GFC has not yet gone worked its way through the Australian economy; and when it weakens, so will the dollar.
After analysing their sensitivity to currency fluctuations, companies can decide how much risk to accept. Knowles says that locking prices through contracts or exchange rates through hedging provides certainty. “It gives you the opportunity to build business around known quantity. If your business can be profitable at $1.05 – today’s rate – lock it in.”
Casella says he is locking in fixed-price contracts. He says: “We have learned some lessons; I didn’t expect the dollar to be so high for so long.”
Knowles adds: “The dollar might go the other way and companies will lose the gain that a lower currency would deliver, but if you can’t afford for it to go to $1.10, you have to ask yourself, ‘Am I prepared to gamble everything?’.
“It’s the old adage: you can’t go broke making a profit.”
3. Why convert at all?
Companies can radically cut their cost base by shifting costs to the currency in which sales are received. That’s the reason many manufacturers end up with their operations overseas.
Casella is looking for ways to cut costs. He would save as much as 6% for every dollar he spends in the US by moving operations, parts of operation, or sourcing more supplies there (if the exchange rate is $1.06).
However, this is not on his agenda. “We have a base of loyal, competent staff and the capability of growing the business [to consider] rather than a short-term step of reducing costs.
“Our established infrastructure [here] will keep costing us money.”
4. Tell your staff what they want to hear
Companies facing exchange-rate uncertainty shouldn’t forget about the softer side of their business.
In times of uncertainty, employees want more communication from their leaders. This does not mean constraining the freedom of staff to get on and do their jobs, but it may mean regularly updating lines of authority, job descriptions and restatement of the company’s vision and purpose, according to Rose Trevelyan, a teacher at the Australian Graduate School of Management MBA program.
Casella says he released details of company’s loss to his 500 staff long before it went to the media, and he is reassuring them, their jobs are secure.
If the operations are in flux – Casella is planning to launch a beer in a joint venture with Coke, and develop a premium wine range, for example – leaders need to talk more about behaviours rather than hard and fast rules and structures.
A recent survey of 3,800 leaders, managers and employees by Leadership Management Australasia found that communicating where the company is going is high on the list of things staff want to hear from managers.
5. Pricing for 2013
Casella does not want to lose market share in America by increasing his prices, according to The Australian Financial Review.
However, pricing consultant Jon Manning says a price hike can sometimes be just what the doctor ordered. Last year, American DVD rental and video streaming company, Netflix, essentially doubled its subscription prices, leading to a massive social media shellacking, and a loss of 3% (800,000) of its subscriber base.
Turned out, however, that about half the ex-subscribers were free subscribers, and revenue per subscriber increased. Manning says this is an important pricing lesson from 2012.
Netflix’s mistake was failing to warn customers of the price change and explain its reasons. It’s a problem that is well within Casella’s capacity – and that of other export leaders — to address.
Manning says leaders need to sensitise their customers to value, quality and innovation, rather than price.
Casella plans to address the pricing issue by introducing a premium wine range which will have better margins, and disputes that this is a reinvention of his business model. “[Premium wines] are part of the industry. There are wines for people who just want satisfying drinking experience and wines for people who want to know a bit more about the product.”
This article first appeared on LeadingCompany.
