Posted by: Will – Priority Juggler on July 1st, 2008

The last 12 months have been pretty, erm, interesting for young businesses such as our own (although not as bad as the ancient Chinese curse might suggest). We now get asked almost daily “how are sales holding up?”, “are you doing better because you’re online (or worse?)?”, “are visitors converting to customers?” and so on.  The answers are quite varied and, in most areas, everything has held up well and we even had record sales last week (thanks to all our customers!).  Having said that, the period hasn’t been without its bumps in the road and its interesting challenges.  So for those who are interested in how stormy winds in the global economy might feed through to a UK business or for those who are wondering why lots of local florists have increased prices and reduced the number of stems in bouquets (although Arena Flowers hasn’t), it all starts with this graph:

Roll Up! Roll Up! All Aboard The Euro - Sterling RollerCoaster!

The graph above shows the Euro : Pound Sterling exchange rate over the last twelve months.  You can see that in the second half of 2007 the rate was comfortably above €1.40 : £1.00 (it had been even higher for much of the early part of 2007) and that, from the end of 2007, the rate began to drop consistently until it stabilised at about €1.25 : £1.00 recently.  What are the implications of this drop?  For businesses which import products from the Euro zone this is a challenge, as a product bought directly in Euros (eg a flower bought from a Dutch flower grower) or indirectly (eg a Dutch flower bought through a UK flowers cash and carry) suddenly costs 12% more for exactly the same product.  At Arena Flowers, we cut out all the middle men through buying direct off the Dutch auctions and from growers, so unlike a local florist, we are less at the mercy of unscrupulous middle men whacking up prices disproportionately.  Because we run a lean machine and keep our costs at a minimum, we have been able to resist pushing up prices and we haven’t removed any stems from our arrangements.  However, we have heard lots of anecdotal stories on the Flowers HQ grapevine of florists that haven’t raised prices or removed stems, struggling with increased flower costs.

Has The Euro Been Taking Steroids?

Part 1. Boom! 2-0 Euro Zone vs UK

An exchange rate between two currencies is, in the broadest sense, a reflection of the perceived value of one economy relative to the perceived value of another. No one British needs me to remind them of the knock that the UK economy took with the Northern Rock crisis; a British Government spending billions to bail out a bank is spending that won’t benefit the broader economy but which will increase government borrowing, both of which reduce the economy’s competitiveness; Europe has had need of no such bailout.  The subprime issues and their impact on financial institutions in America have also disproportionately affected the UK economy when compared with the Eurozone’s, because of London’s status as a the leading financial centre in the world and its dependence on finance.  So the Euro zone has become stronger relative to the UK and the Euro has appreciated.

Part 2. Interest Rates - Boring But Important

The main levers administrators have to encourage an economy that’s struggling are slashing interest rates or issuing a “fiscal stimulus” (translation: giving taxpayers a massive handout in the hope that they’ll spend the economy back into health).  Both of these tactics have been used enthusiastically by the powers that be in the US, with some success; a kind of “throw money at the problem” solution.  The only issue with interest rates being lowered is that it then becomes less attractive to hold a currency compared with other currencies that haven’t lowered their interest rates.  So, when the UK’s Bank of England cut interest rates to try and stimulate growth in the UK economy whilst the European Central Bank kept its rates steady (as Europe was less affected by the crises and was not in need of life support), Sterling became even less attractive because of the lower interest rate returns available when compared with the Euro. So the luckless British pound dropped further.

Part 3. Inflation Rides To The Rescue. Sort of

Bizarrely, more recently the emergence of high inflation and the Bank’s of England’s primary remit of controlling inflation, has meant that the Bank has resisted temptations to cut interest rates further (as cutting interest rates further might fuel inflation).  This is one of the factors that has resulted in the Euro : Sterling rate stabilising.  But as everyone knows, inflation itself is no white knight, though you won’t hear too many UK businesses that import from the Euro zone complaining that interest rates are staying put (or going up) for now.

What To Do? What To Do?

The most obvious impact of recent financial turbulence on businesses like ours is on our European purchasing power.  For florists, an obvious solution is to begin sourcing flowers from within the UK so the bill is in sterling and there is no exchange rate risk.  This is something that we’re looking at (for a variety of reasons, which also includes the reduced carbon footprint).  Another way businesses can get round exchange rate risk is for them to start making sales in the same currency in which they purchase (similar to a natural hedge).  This is part of the rationale behind our Dutch language site (www.ArenaBloemen.nl) and our German language site (www.ArenaBlumen.de); we are now accepting Euros from European customers - Euros which can be used to pay our flower bills with no exchange rate risk.  There are other tactics open to businesses, such as buying currency in bulk and using financial instruments to hedge currency risk, but I’m no bank manager so I’ll leave it at that.

Practically, we haven’t really seen a huge dent in any aspect of our business, aside from our flower purchasing costs, and we have had some great weeks recently.  The big exception has been when there has been a veritable torrent of bad news, all in a very short space of time.  The two examples: firstly the period after the run on the Northern Rock bank, when our conversion rate dipped by 17% for several days and then magically recovered to previous levels; secondly, there were five days of unrelentingly miserable economic news two weeks ago and our conversion rate dropped by about 20% for 4 days and then recovered overnight, as if nothing had happened.  Our theory is that when there’s such a battering of bad news, people do, briefly, pull in their horns, get depressed and think they should eat beans on toast or possibly hide in the cellar.  A few days later, when they realise the sky hasn’t fallen in and they notice that the world is still turning, they revert back to their previous behaviour, or nearly so.

The first time it happened, we were fairly bemused, but the second time round we knew what was happening and were fairly relaxed (and just bought less flowers that week).  It’s funny the way people work and how up and down people can get.  Fortunately, from what we can see, the sky is still up there, the sun is shining and a Brit has made it to the Quarter Finals of Wimbledon, so it’s not all bad!  In fact, bar the odd challenge to keep us all on our toes, it’s all good at Flowers HQ.  We hope it is with you too.

Filed under: Finance & Investment, Floristry, General, Matters Webby, Mega Days, Mother's Day, Valentine's Day on July 1st, 2008

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