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Hamish Gillespie: Dealing with currency in the pre-Brexit world

Published:  06 December, 2017

The impact of Brexit on sterling has been a major factor in 2017 trade. Industry insider Hamish Gillespie, finance director at North South Wines, explores how best to mitigate the downsides. 

In the days following the EU referendum, there was one story that was hard to avoid – the dramatic drop in the pound, which slumped to a 31-year low in a matter of hours.

This posed a challenge for the wine industry. Producers set prices annually, with retailers often printing their price lists at the same time, months in advance of the wine’s actual delivery. When exchange rates shift dramatically in the middle of this cycle, as they did after the EU referendum, it’s a real problem.

But with the right approach, it’s possible to sail through even the most dramatic market volatility. Here’s how to beat back the risk of a volatile pound.

Understand how currency can affect your business

The wine business is built on imports. For North South Wines, that means buying from wineries all over the world to sell on to UK retailers and wholesalers. This naturally involves foreign payments – so it’s essential to have a good understanding of foreign exchange and its potential impact.

The EU referendum is a powerful example. With the dramatic change in exchange rates following the Brexit vote, the cost of European wine rose by 10%-20% for UK importers that had not locked in a better pound/euro rate before the market moved.

Beyond your own business, it’s also important to think about how currency can impact your customers. As an example, the retailers and wholesalers we sell to cannot easily put prices up for consumers – so when we’re dealing with exchange rates, we need to think about how to keep pricing stable for our customers.

Partner with an expert

A strong currency strategy can protect your business from many of these issues, shielding you from dramatic swings in the market and allowing for a more stable pricing environment.

Though shocks like the EU referendum are rare, currencies are always moving, so we recommend partnering with a specialist to take the pressure off your business. Working with an expert, you’ll gain access to sophisticated tools that offer long-term protection from the risks of currency volatility, while freeing up more time to focus on the things you do best.

North South Wines has been working with OFX, an international payments company, for over three years. OFX helped us through the challenges of the Brexit vote and provide tailored ongoing support that can flex with our needs as they evolve.

Choose your strategy

There are a number of tools available when planning a currency strategy and by working with an expert you’ll be able to identify the combination that works best for you.

Ahead of the Brexit vote, OFX worked with us to identify the areas of our business that could be most affected by any surprise hit to the pound and from there we developed a defensive approach.

For us, forward contracts were a particularly useful currency tool. These allow businesses to lock in the current exchange rate for up to 12 months, so by signing them ahead of the referendum, we were able to avoid the subsequent drop in the pound that caused so much trouble for companies that had been unprotected.

Ultimately, this meant we were able to keep prices competitive, and give our customers the stability and certainty they needed during a volatile period.

Keep on top of the news

In recent years, geopolitical factors have made the global economy less stable and predictable. To recognise the events that might impact currencies, and your business, it pays to keep a close eye on the news.

We regularly check in with our currency partner and read expert commentary to help get a sense of how global events might affect us. You don’t need to be an economist, but having a basic grip on the news makes risk management much easier, as well as helping you to capitalise on opportunities.

See the silver lining

The flip side of currency volatility is that it can sometimes benefit businesses. For example, if the US dollar weakens significantly against the pound, it could suddenly become more cost effective to import Californian wines to the UK.

While it’s important to defend your company from the risks of a moving market, you should always keep your eyes open to the opportunities that it can bring. By working with an expert, you can identify any potential areas for “upside risk”, and plot out a suitable response.

Depending on your business, for example, you may decide not to focus entirely on forward contracts, leaving some of your revenue open to favourable swings in the market that could occur later in the year.