Scramble to Stretch Shrinking Dollar : Importers Cut Inventories, Profit Margins and Shift to Cheaper Sources of Supply
The scene at the downtown Los Angeles produce centerreflects the world market in food: Mexican chiles. Chilean garlics. Panamanian bananas. Cape gooseberries and canned corned beef from New Zealand. Kiwi fruit from Australia.
And the food--sold wholesale at Agriculture Export/Import U.S.A. on East 9th Street--is testimony to the effects of the world market in currencies: Prices on Belgium endives are up 20% from a year ago, and shallots from France cost 35% more. Prices for the handsomely displayed red, yellow and purple peppers from Holland are up 35%, meaning consumers with gourmet tastes are paying as much as $4 to $4.50 a pound.
As prices of European items have escalated and demand has fallen, company President Richard Stone has bought less. Customers will balk at sharp price increases, so Stone has turned to other products and sources of supply, buying from countries whose currencies haven’t risen rapidly against the U.S. dollar--okra from Mexico, for example.
Stone’s company is like many other small businesses scrambling to deal with the dollar’s 30% decline since last May against major currencies--a tumble that means that more dollars are required to buy foreign goods while U.S. exports become cheaper to businesses and consumers in foreign countries.
Trader Joe’s, the Southern California specialty food and beverage chain, has simply stopped buying some items, such as jam from France. It hasn’t bought any wine directly from West Germany for nine months. And, says founder and owner Joe Coulombe, “we have cut our (wine) orders from France by 90%.”
Taking Smaller Markup
“The strong yen is hurting my business,” says Bob Y. Endo, vice president of New Meiji Market in Gardena, which specializes in food and grocery items from Japan. He has had to raise prices 10% to 15% on 4,000 of the 12,000 items that he imports from Japan. He has been taking a smaller markup on these goods and is beginning to cull out slow-moving merchandise.
At La Cite Des Livres in Westwood, which stocks nothing but French records, books, posters and cassettes--all acquired from France--prices were kept down for four years. But last December, owner Lou Plauzoles had to boost them about 11%. Even so, Plauzoles is doing OK. His is a very specialized market, he says, with only three other similar stores in the United States. “We find terrorism hurts more than the rise in the franc,” Plauzoles says. People don’t need French guidebooks when they’ve suspended vacations to France.
While some small businesses have responded to wholesale price increases on imports with hikes at the retail level, consumers haven’t yet felt the full effects of the dollar’s fall. Competition among suppliers, creative buying by importers and an environment of lower inflation have helped to keep retail prices down.
“In an economic time of deflation rather than inflation, you just can’t pass on those price hikes,” explained Clark A. Johnson, president and chief executive of Pier 1 Inc. in Fort Worth, which imports household items.
If prices on porcelain or copper from France are too high, producers in China, South Korea and other developing countries are ready, willing and able to fill the pipeline with cheaper alternatives. Prices on clothing imports haven’t changed much because of intense competition among producing countries. Despite some wholesale price increases on consumer electronics items, retail price hikes have been blunted in hotly competitive markets such as Southern California.
For exporters--many of them small businesses--the effect of the dollar’s decline also has been muted. While the dollar’s decline should help make U.S. exports more affordable overseas and has contributed to a spurt of nearly 12% in U.S. exports during this year’s first three months, foreign sales have been slow to pick up for many American firms.
Distribution systems were allowed to wither when the dollar’s high value stymied U.S. exporters doing business overseas. Many U.S. exports, agricultural commodities in particular, also face a vastly different market today. China, for example, which once imported huge quantities of U.S. cotton and grain, is now nearly self-sufficient in those commodities.
The dollar has plummeted since last September, when officials from the United States, Japan, West Germany, Britain and France agreed on a currency adjustment strategy that was largely designed to help correct the imbalance in the U.S. trade deficit, particularly with Japan, and to blunt U.S. protectionist sentiments.
Since then, importers have contended with the dollar’s decline with nimble purchasing, tough bargaining and simple stubbornness at times. Stone, for example, refused to stock Holland peppers until recently because the price was too high. He is buying them again because softening demand forced Dutch farmers to bring their prices down.
Consumers can still find many good buys in imported wine, cookware, food and other goods, thanks to smart buying by importers. Chains such as Williams-Sonoma and Trader Joe’s that buy in large quantities are able to negotiate price breaks with foreign manufacturers and suppliers who are eager to keep customers happy and to maintain market share.
Timing of purchases is important, too. Williams-Sonoma, for example, typically orders merchandise for its retail stores and a mail-order business one year ahead of delivery from France, Italy, Portugal, West Germany and Britain. That has enabled the San Francisco chain to hold down prices on most items so far.
Prices, however, on porcelain and copper imports from France are up 10% to 15%, but the chain is protecting itself from further hikes by securing price guarantees for a period of six months to a year.
Importers who deal directly with manufacturers have the most control over costs. Laura Ashley, the Wales-based fabric maker and boutique operator, is able to contain the dollar’s impact because it does all of its own manufacturing and distribution.
But some U.S. companies that are manufacturing overseas are having to pass on their higher costs. Cuisinarts Inc. of Greenwich, Conn., creator of the food processor, subcontracts its production in Japan. On April 1, the company raised prices on the Cuisinart by 10% and will increase prices on its cookware, imported from France, by 10% on May 1.
Hasn’t Hurt Sales
Carl G. Sontheimer, co-founder and president of Cuisinarts, says the price hike hasn’t affected orders for the food processor. Cookware orders are up, too, because customers want to beat the May 1 price hike.
With some import items getting too expensive, buyers are working with domestic manufacturers to develop some U.S. lines that can compete profitably with the European lines.
Others are making deft buying decisions. Trader Joe’s--while not buying wine directly from West Germany, and having cut purchases from France--is still buying French and German wines but from importers in the United States who already have the wine in stock, need cash and have kept prices down to stimulate sales.
Once those supplies have been exhausted, however, owner Coulombe expects retail prices on wines from France and West Germany to advance by as much as 40%. Macon Blanc, a French white burgundy, was selling for $24 a case last year. Wine of the same quality, according to Coulombe, can’t be replaced today for less than $38 a case. The weakened dollar accounts for most of the increase.
“We began warning our customers nine months ago that the collapse of the dollar was going to raise the prices of many of our imported products,” Coulombe says.
So far, Coulombe hasn’t had to raise the price of Brie cheese that he imports from France. “We’ve been able to contain the dollar problem by getting price concessions from suppliers and by taking a narrower profit.”
Where possible, retailers are trying to hold down price increases even if it means making a slimmer profit. “You can’t shock your customer with a 40% price increase overnight,” Coulombe says. If prices go up too much, he says, “we simply stop selling the item and sell something else, like more honey from Mexico,” which is inexpensive right now.
Stone, at Agriculture Export/Import, also is working on a smaller profit margin but selling a greater volume of produce from countries whose prices haven’t gone up. “In the long run, I’m coming out OK,” he says.
Retailers can still earn handsome profits on imports, even though they may have to pay more at wholesale and earn less at retail. For example, imported gift items ranging from decorative vases to glass and barware are still less expensive than U.S.-made goods, store owners say.
Importers also have attempted to preserve profits by shifting to items that are made in countries whose currencies haven’t risen sharply against the dollar.
The dollar, for example, has gained in value in the last year against the Mexican peso and Canadian dollar. So Trader Joe’s is buying maple syrup, cheese, beer and candy products from Canada and coffee, beer, honey and some nuts such as pumpkin seeds from Mexico.
Similarly, companies dealing with trading partners such as Hong Kong and South Korea, whose currencies haven’t fluctuated much against the dollar, are finding a buyers’ market. The Hong Kong dollar is pegged at 7.8 to a $1, and the Korean won has fallen with the U.S. dollar.
Asian manufacturers are trying to capitalize on the dollar’s decline against the Japanese yen by providing cheaper alternatives to Japanese porcelain, textiles and other products.
But the Japanese are fighting back by taking smaller profit margins to protect market share it has taken them years to build. “We still buy white porcelain, window blinds and treatments from Japan,” says Johnson, of the nationwide Pier 1 chain, which imports about 80% of its merchandise from Pacific Rim countries. “We certainly aren’t buying as much as we used to. If the unfavorable trend (in prices of imports) continues, one strategy will be to shift from Japan to other countries.”
The Asian countries themselves may soon face increased competition from some European countries, particularly those in Eastern Europe. Yugoslavia, for example, is supplying pine furniture to the Pier 1 chain.
On the export front, the picture is mixed. Hotels and motels may benefit as U.S. tourism gets a boost from the dollar’s decline and fear of terrorism overseas.
The Conestoga Hotel, a privately owned independent hotel in Anaheim, is already seeing more visitors from Japan, Australia and New Zealand because of the dollar’s decline and more aggressive overseas marketing. French-owned Hotel Ibis in Anaheim says European business is up by more than 30% from a year ago for the same reasons.
But U.S. exporters of raw materials and semi-finished products are facing tough customers, particularly in Japan. They are pressuring for price breaks on petrochemical, wood and agricultural products.
U.S. exporters generally are confronted with an intensely competitive world market. Many U.S. goods lost their positions in overseas markets during the early 1980s as U.S. merchandise became too expensive because of the dollar’s spectacular rise.
Now that exporters are attempting to re-enter or expand overseas market, they face the costly and timely task of re-establishing distribution lines. “When U.S. exporters were retrenching, they dropped some markets (and) dissolved some sales and distribution offices because sales weren’t there,” explained Michael R. Czinkota, chairman of the National Center for Export-Import Studies at Georgetown University in Washington.
Starting From Scratch
“So now that the dollar’s value has declined, you can’t just jump back in with a whole infrastructure, because it isn’t there. They have to start from scratch. When a foreign customer is buying something, they buy more than just price. They buy service, quality, delivery terms. All of these things need to be there to have a sales package that is attractive.”
Large firms with distribution systems in place are benefiting. Sun World International in Bakersfield, one of the largest U.S. marketers of fruits and vegetables, is enjoying an increase in exports both across the Atlantic and the Pacific.
In addition, Europe, where the high dollar kept U.S. produce out of reach of Europeans, is opening up after two years, according to Doug Barker, a Sun World executive vice president.
Sun World’s shipments of citrus, grapes, vegetables and dates to Europe have risen 85% to 90% over the last six months. Similarly, shipments are up almost 40% to Japan and 75% to Australia.
Other agricultural products are expected to benefit in the export market, but it is going to take time, according to Eugene J. Milosh, president of the American Assn. of Exporters and Importers in New York.
“It will be difficult to re-establish ourselves as a reliable source,” Milosh says. He says agricultural exports have been hurt by U.S. government measures such as 1973 export controls on grain under the Nixon Administration, designed to avert a livestock feed-grain shortage, and President Jimmy Carter’s 1980 embargo on grain exports to the Soviet Union after its invasion of Afghanistan.
Milosh says these actions spurred other countries to cultivate their land and “all those factors cannot just be overcome by (changes in) exchange rates.”