New Zealand exporters are revelling in the weaker kiwi dollar that makes their goods more competitive but retailers – who import all the goods shoppers buy – are feeling the pain.
"If you think of it in terms of what you can buy overseas, it's like taking a pay cut," said Hamilton Hindin Greene investment advisor Grant Davies.
The New Zealand dollar has fallen about 5 per cent during the past 12 months to around 63 US cents. BNZ currency strategist Jason Wong predicts it will be 61.50 cents by year-end while Westpac New Zealand strategy head Imre Speizer sees it at 61 cents.
That's great for exporters, with the country's terms of trade – which show how much the nation can import funded by a set volume of exports – near the all-time high of 2017.
"That's all well and good but it means that everyone else is effectively losing their purchasing power," said Davies.
When reporting flat earnings last week, the Briscoe Group – Briscoes Homeware, Rebel Sport and Living & Giving – noted the weaker currency will make it difficult for retailers to maintain margins.
They were already under pressure and Briscoe's gross margin shrank to 40.65 per cent from 40.93 per cent a year earlier.
"Most of the goods that we and all other retailers sell in this country are imported. The dominant currency is US dollars. So, that would have the effect of increasing the cost of goods," Briscoe chief executive Rod Duke said.
Retailers with substantial volumes – like Briscoe – can exert influence on producers and are able to mitigate the impact to some extent, he said. The group also has a substantial hedging programme that covers 100 per cent of committed purchases but lower levels of forecast purchases.
"The much smaller retailers find it extremely difficult and that's the sort of effect you are going to see in this country," he said. "A lot of retailers are going to face very, very tough times."
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"The larger of us will have to be clever and try to mitigate in some way, but we will still be affected."
Duke is also seeing subdued consumer confidence: "You have people thinking 'I don't need that car, or lounge suite or TV' and that permeates right through the retail sector."
Are people buying less? "Absolutely," he said.
It's not just his impression. The latest Westpac McDermott Miller survey showed consumer confidence is at its lowest level since 2012. It also showed people who came into an unexpected windfall were more likely to pay down the mortgage than go out and splurge.
Kathmandu's 14 per cent lift in annual profit was largely due to a positive contribution from the Australian business and rapid sales and profit growth from Oboz in North America.
Like Duke, Kathmandu chief financial officer Chris Kinraid said the retailer tries to mitigate a weaker currency through pricing management and sourcing actions, but "US dollar headwinds remain."
A large proportion of Kathmandu's purchases are in US dollars and "we fully hedge confirmed orders, and expected orders with rolling cover applied 12 months forward," Kinraid said.
Hedging doesn't come cheap and the company told investors that will show in lower gross margins next year, "which will also affect a lot of the retail sector."
Overall, Kathmandu's gross margin slipped to 60.9 per cent from 63.4 per cent. In Australia, it was 65.4 per cent versus 65.9 per cent in the prior year. In New Zealand, it was 59.6 per cent versus 60.5 per cent. The North American gross margin was 40.8 per cent down from 41.8 per cent.
Davies, however, said that considering the Oboz business unit operates at lower margins, "margins were holding up okay."
According to Kathmandu, its US dollar hedging rates for the June 2020 year are approximately 6 per cent below 2019 and comparable to its 2017 levels.
Martin Rudings, a currency dealer at OMF, said one of the issues for importers is that they tend to only cover what is being currently shipped.
Getting them to opt for forward cover is a challenge because in recent years the currency has been pushing higher.
"It's now well entrenched in a downtrend," he said. "They don't cover too far forward and that means they may suffer."
There is one silver lining, however, for both Briscoe and Kathmandu. The weaker kiwi suddenly makes online purchases a lot less attractive and consumers may opt to shop at home.
"It's pretty easy to convert to kiwi dollars when you buy online," said Duke, adding that the exchange rate and what that means would be one of the first things shoppers would be looking at.
The online arena has already been signalled as a key growth area for the firm.
Duke said Briscoe's continues to experience growth through its online channels, which are now approaching 11 per cent of total group sales; Kathmandu's online sales make up 10.1 per cent of sales.
Retailers will be crossing their fingers that consumers will be using theirs to shop local.