Saddle & tack prices and exchange rates
We recently received an e-mail from a reader asking if our blanket prices might soon be decreased to account for the recnet change in the exchange rate. This is an issue that comes up periodically because so many of our products are made in the UK or the EU and the exchange rates do fluctuate. We have not changed the Thermatex prices for several years despite many currency fluctuations, and we don’t anticipate that we will, though their prices have gone up. Incidentally, some overseas suppliers denominate their exports in dollars (including Thermatex) so what we pay for the dollar-denominated products changes only when they raise the cost to us of their dollar-priced goods.
Where we are paying suppliers for direct imports in pounds or Euros, we try to set retail prices that allow for a window to both sides for currency-price fluctuations, and we try to calculate that window so that we can absorb some loss on the exchange when the rate swings the other way as well. And the window certainly does bulge both ways.
In the world of managed floating rates, a big overnight move by central banks to come in and shore up the Euro or the pound could have a major impact on what we ultimately pay for a pound-denominated order we placed a month ago Sometimes it works in our favor – sometimes against. If we could predict this with any accuracy, we could make an overnight fortune in arbitrage and we wouldn’t need to sell tack for a living!
Many of our prices have not changed for several years, and were established when the dollar/pound rate was relatively stable at around $1.75. But we didn’t alter our dollar prices when the pound floated up to over $2, because in my estimation, given the fundamentals of the UK economy, that was not a pound price that could stand over a long period of time. Neither is the current dollar/pound rate likely to remain at this current level before it corrects to something more realistic, where I predict – drum roll. . . I’m about to foretell the future. . . so remember you read it here first. . . I predict – that over the long term the pound will return to floating somewhere in the vicinity of $1.75.
But of course I could be hideously wrong about that, which brings me to mention another consideration of why we don’t think that pegging retail prices to short-term fluctuations in the cost of foreign exchange is a good business practice. The price of foreign exchange is only one of many factors that contribute to the “cost of sales.” There are other costs that don’t move in lockstep with the fluctuations in the price of currencies, so pegging the price of individual items to exchange rate fluctuations would be a completely unworkable system, especially considering that other components of the cost of sales are independent of the price of foreign currencies. For example, if UPS imposes a shipping surcharge for fuel (this happens regularly, and it NEVER seems to go down again), we would not consider it good business practice to raise the customer’s price retroactive to the order. We also have costs of currency conversion involved in transferring payments to a foreign producer, and this doesn’t vary with the price of the currency itself.
Moreover, between the time we place an order and the time we pay for the order, the rate may have caromed all over the place. It is possible to hedge against this in the forward exchange market, but that too has a cost, somewhat analogous to insurance. If the price of the pound against the dollar rose during that time, I’m pretty sure the customer who placed the order would not be happy to pay a higher price than what she was quoted to begin with.
I hope this explains why we don’t rush to either raise or lower prices with short-term fluctuations in exchange rates. Again, I may be all wrong in my reasoning, but it is something we cope with on a significant scale with foreign producers, and whether they absorb the risk/reward of currency price fluctuations or we do, it cuts both ways. Not all of them denominate their exports in their own currency. Some years ago, when we were paying a dollar price to one of our overseas suppliers that was established at an unsustainably high pound rate, we “lost” many thousands of (potential) dollars over the course of a year when the dollar gained dramatically (though temporarily) in value. The dollar prices we paid for this suppliers exports were not adjusted to reflect this at the time. Put another way, the supplier made an enormous windfall gain at our expense by NOT altering a too-high dollar price for its exports to reflect a correction in the exchange rate. Our losses were only paper losses — a windfall that was realized by them rather than by us. Their gains were real ones. Ultimately, however, I don’t think this necessarily proved to be a profitable decision for them in the long term, but that’s a hard and complex call to make.
Bottom line: As if the business of saddle fitting weren’t complex enough, the business of business is no cakewalk either. My motto (with a nod to Calamity Jane in her Deadwood incarnation): “Every day takes figuring out all over again how to survive.”