Little fairness when it comes to parity with the dollar
Anyone planning a holiday in the US will be all too aware of the effects of the rising fortunes of the dollar, the currency which has, for so long, been considered the world’s primary reserve currency and safe haven.
It’s not just an issue for holidaymakers (although it does make hire car rates in Ireland slightly more affordable for American visitors), because there are significant real-world consequences for channel partners and vendors from the dollar’s current ascendency over the euro and UK sterling.
A year ago, the euro was worth just over $1.18. Today, it’s more or less at parity. While that seems quite a steep devaluation over the course of a year, the decline has been far more marked since the start of Russia’s illegal invasion of Ukraine on 24 February when it was trading at just over $1.13. The past month has been especially painful with the euro dropping from slightly more than $1.07 to $1 as near as dammit.
Let’s start with vendors, many of which are US-based companies. When they produce yearly targets, they are set in dollars because that’s their home currency. For the sake of argument, if the dollar was worth just under 0.88 euros in January, a product that sold for €1,000 with a 10% profit margin would return $1,136 and a profit of $113. The same product today would return $1,000 and a profit of $100. So turnover would be down and so would profit.
Let’s assume the vendor planned to sell $20 million of kit during 2022 with a profit of $2 million. To hit those levels at July currency rates, the US vendor would need to sell €20 million in equipment instead of €17.6 million. That’s a sales increase of 13% just to stand still.
Now apply that to every US-based vendor trading in Europe (and Ireland) and consider just how likely it is that most of them will be able to achieve that level of increase at a time when things are not looking especially rosy economically. So it’s entirely possible some of them will fail to hit their original target. That’s bad news for them but it’s also awkward for channel partners because they’re the ones vendors are relying on to meet those higher targets.
The added difficulty for distributors in Ireland and Europe is that they often have to buy from vendors in dollars so they now find themselves paying more for the equipment than previously but for the same level of profit in their native currency. The volatility of the euro against the dollar – remember it fell 7c in just over month – makes it hard for distributors to keep a consistent level of pricing for any length of time without taking a big hit themselves.
Pain and gain
One way distributors can alleviate some of the pain associated with the currency risk is to conduct the entire transaction in dollars, buying from vendors in dollars and selling in dollars to reseller partners. As one distributor tells me: “The good old banking system will ‘screw’ you if you convert at either end and these percentages the banks take are significant in some opportunities. So ultimately, we run euro, dollar and sterling bank accounts to transact in each. The currency risk or gain is a challenge for the accounts teams.”
He adds that “fluctuations like we see currently mean the customer will see the significant risks being passed on to them. As the differential becomes larger we will see the inevitable price rises coming”.
Given the relatively slim margins that many distributors operate on, a 7% drop in the value of the euro against the dollar in just over a month can represent the difference between profit and break-even – or even a loss.
Price rises seem inescapable but potentially damaging when the market appears ill-equipped to bear them. It will be interesting to see what impact they have in the second half of 2022.
Still, there is a modicum of good news because if US vendors have to sell more in euros to generate the same dollar revenue and profit, that could be a boost to Ireland’s corporation tax receipts. In order to report the same dollar figure back to HQ from their EMEA headquarters in Ireland, they will need to generate more euros which, in turn, will mean more money going to Revenue. You could even end up with them missing their targets but still paying the same amount of euros in tax as before – if not more – because the currency rate is so weighted towards the dollar at the moment.