As the Global Financial Crisis began to unfold in late 2008, Importers and wholesalers operating within Australia took a real hit as the Aussie dollar began its tumble down the currency scale.

One of the biggest challenges for importers during the global downturn was to maintain equilibrium of stock, this is where the supply precisely meets the demand, and does not leave the wholesalers with excess stock levels that would be devalued with the unpredictable currency fluctuations.

To put it simply, wholesalers risked bringing goods in at higher prices when the Australian dollar was weak. Once the currency’s value had increased by the slightest of margins, the value of the stock decreased. So let’s say a wholesaler imports a container of electronic speakers in at $20USD a piece, which equated to $28 AUD when the dollar was hovering around the 60 cent US mark. Once the dollar recovers to trade at 70 cents US, the stock that was worth $28 AUD at the time of purchase is now worth only $26 AUD.  This is an estimated 7.1% loss, per item that the wholesaler had to absorb. Now if you consider that a container load of goods can cost anywhere between $10,000 and $30,000, the losses start to escalate into the thousands of dollars.

These fluctuations in currency have left a lot of the smaller wholesalers driven out of business, while the survivors simply left with overpriced stock still on their shelves. For example you can still walk into Harvey Norman and find a pair of Logitech speakers priced $799, same pair of speakers that you can purchase elsewhere for about half that price.

This particular example is using a Retailer, but the principle remains the same. Harvey Norman cannot sell the stock any cheaper as it means a loss to their assets.

Forward Cover

Forward cover is a system used by larger import companies to guarantee a steady purchase price from manufacturers. You can ask for forward cover when the currency is performing well and lock that in for a period of up to 3 months. So now that the Aussie is travelling quite well in comparison to the USD, if a wholesaler was to take out forward cover and the Aussie currency dropped down again, they would still be able to obtain the goods at the locked in exchange rate.

As mentioned before, the longest term manufacturers agree to forward cover an agreement is 3 months, and therefore susceptible to expiry. In the case of the elongated GFC, the Aussie dollar took a tumble around September 08 and it was down way below its previous trading peaks for a period of well over 12 months. Forward covers expired, wholesalers were forced to pay higher prices for the goods, those higher prices had to be passed onto the consumers.

Thankfully the worst is over and were on our way to a recovery. The Australian dollar trades higher today than it did for the past 24 months and this is great news for wholesalers, importers, retailers and of course the end consumers.

Release By: Quincy Cheng – Australian Wholesale Network 24/09/2010