The soaring value of the US dollar is creating a growing challenge for Asian retailers operating intercontinentally, US retailers operating in Asia and anyone sourcing from China.
The US dollar has gained around eight per cent in value since June this year, with the greatest impact appearing to be in developed economies such as Australia and Singapore.
With a large proportion of sourcing contracts settled in US dollars, once hedging arrangements expire, retailers in some countries could face increases in merchandise of eight per cent or more – on top of increased freight charges.
The South China Morning Post this week referred to the greenback’s rise as “suddenly unstoppable” warning that it would also impact on US companies operating in Asia, “posing a triple threat to American companies’ profits: driving up the costs of doing business overseas, suppressing the value of non-US sales and – perhaps most worryingly – signalling weak international demand”.
At the same time as the dollar strengthens, some Asian economies are showing signs of stagnancy, especially Hong Kong and China, where growth is slowing rapidly and Japan, where a declining population is forcing companies to seek growth offshore.
US retailers like Gap and Abercrombie and Fitch are going to see returns from Asia, expressed in US dollar terms, falling – and worse, those markets will resist any attempt to increase prices as the purse strings tighten on discretionary income.
This, despite sourcing most of their products from within Southeast Asia – because if they discount prices to compensate, they won’t correspondingly sell more units.
And retailers in extremely competitive markets like Australia, where there is little appetite for spending, may find their stock costs rise to levels they cannot pass on to consumers.
One of the first US companies to release new trading figures in the new economic environment is KFC and Pizza Hut parent Yum! Brands, scheduled for Tuesday. Yum! derives some 77 per cent of its sales overseas.
