Three reasons the falling Aussie dollar won’t help retailers

Bargain hunting investors should consider the impact of a lower Aussie dollar carefully

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Australian retailers have had a tough time over the past few years. They have had to adapt to increased competition from online shopping, while at the same time international retailing giants are entering their home turf.

Some might have been hoping that the falling Aussie dollar would give them some relief from the relentless competitive pressure, but things won’t be that easy.

Here are three reasons that the falling Australian dollar won’t be a saving grace for struggling retailers.

1. Any respite from the shift to online shopping will be short-lived

The high Australian dollar has been an easy scapegoat for struggling retailers. Over the past few years, Australians have embraced online shopping like never before. The high Aussie dollar has helped to make purchases from international websites such as ASOS (LSE: ASC) and (NASDAQ: AMZN) relatively cheaper, and so has often been used to explain the consumer drift away from physical stores.

But the truth is that customers have been drawn to the web for many more reasons than just the exchange rate. Online shopping offers a much wider range of products than can be found in a bricks and mortar store. There is also the convenience factor – it’s hard for a physical store to compete with shopping in your pyjamas.

There is an increasing trend toward online shopping in almost every developed market – no matter where their exchange rate sits. David Briskin, CEO of fashion brand Sass & Bide recently described the limited benefit of a falling dollar in an interview with Channel Nine: “I think the decrease in the dollar will make a slight difference, but it won’t make a huge difference”. Mr Briskin also noted the enduring appeal of internet shopping “It’s still very attractive for people to buy online”.

2. It increases production costs

In response to constant pricing pressure, most of the major clothing retailers have moved their production overseas, or are sourcing direct from low-cost countries. A falling dollar will squeeze margins further for those producing overseas, as they will now need to pay their costs of manufacturing using a weaker currency.

Fashion retailer Specialty Fashion (ASX: SFH) last year established a Shanghai office in order to have a closer link with its production base in China. The company’s strategy of in-house designers combined with overseas production has helped it to remain cost competitive. But the falling Australian dollar will only serve to undermine the relative cost advantage of manufacturing in China, and increase the cost of any office situated there.

Specialty Fashion is far from alone. Harvey Norman (ASX: HVN) CEO Gerry Harvey has said that the company expects that they will need to raise prices to cover their increased costs “We’re negotiating with manufacturers as we speak,” he said. “Our prices will go up. Everyone’s will.”

3. The falling Australian dollar makes it cheaper for international retailers to expand

There has been an influx of international retailers into Australia over the past few years, with giants such as Zara, H&M, and Williams Sonoma to name a few. For those that have already made the decision to launch here, the falling dollar will only make it cheaper for them to expand.

Typically most of the funding for a new international venture comes from the parent company, until the new enterprise can stand on its own two feet. For the international brands that have already taken the plunge, their foreign currency denominated investment funds will now buy a lot more Australian stores, staff, and marketing. All of that extra investment will only ratchet up the competitive pressure that local retailers are facing.

The Foolish Bottom Line

Some retailers have been rejoicing at the thought of the falling dollar reducing the threat from international online retailers. However any benefit is likely to be short-lived. For most retailers the increased cost of overseas production will overshadow any gains from reduced online competition. The falling Australian dollar will also present an opportunity to the international brands that have entered the market. They will be able to stretch their overseas based investment dollars further – thereby intensifying the competitive pressure. Investors looking for a bargain amongst Australia’s struggling retailers should remain cautious – the falling dollar hasn’t helped.

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 Motley Fool contributor Matt Joass does not own shares in any of the companies mentioned in this article.

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