We hear almost daily about retail and wholesale operations closing down or pulling back. Some electronics retailers in the UK have gone into receivership (bankruptcy) or scaled down operations. In general, there are few places to sell their products. Some importer/distributors who are having cash flow problems are asking us to change our relationship with them from a traditional buy-sell into an agency formula, whereby we would sell directly to their customers and pay them a commission on the sale. This is because credit is tight and they cannot finance their purchases. Retailers are very hesitant to add new product lines because of the upfront costs associated with launching a new brand as well as the uncertainty of consumer spending in the upcoming year.
The most obvious risk that U.S. companies face involve the currency: The value of the Euro has danced in a wide band during this sovereign debt crisis, and with most pundits seeing increasing downward pressure on the value of the Euro, U.S. dollar-denominated goods could prove to be very expensive in the future for European end users and consumers.
The second factor which could also raise prices in the Eurozone will occur when the larger nations are forced to raise user fees, income and social taxes and VAT (value added tax) rates in order to not only prevent deficits (which could lead to downgrading of each nation’s credit rating) but also to be able to afford the bailouts that the smaller, more troubled nations are needing.
So how does a U.S. business keep selling into an inflationary market, where taxes are high, employment could likely drop and recession is looming? From a product and pricing point of view, we need to stretch our offerings upmarket by reorienting our product lines to move into more price-inelastic categories. A product is price elastic if the sales volume of the item drops commensurately with the increase in the item’s price. We are encouraging our manufacturing partners to consider adding more upscale items; more custom finishes and designs, more innovative or technologically advanced products for which price is not the most important determining factor in the purchasing decision.
Simultaneously, internally we need to invest in innovative ways to cut our own costs, so that we can survive or thrive in a tough sales environment on shorter margins. In practice, that might mean forgoing a sales trip or two and instead investing in video-conferencing technology to do remote sales or training.
We are also actively looking at ways to reduce freight costs by working with the large carriers. This can also be accomplished by banding together with other companies to build economies of scale in purchasing freight services. Our membership in the Small Business Exporters Association can help us negotiate these costs like larger companies.
Most importantly, we need to maintain perspective and realize that it may take three to five years or more for this European crisis to shake itself out, and so we may need to invest in relationships with our customers there, support them to the extent that when things improve, they will remember that we stayed with them. Too many U.S. companies pull out of foreign markets when the going gets tough, but that usually results in them having a very tough time getting back in at a later date. We have a rocky road ahead in Europe, but some planning and good strategy can make the ride a little less bumpy.
Paul M. Sabbah is president of Stamford International Inc., an export management company based in Stamford, Conn.
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