Taylor Mason Stacy Cookley
Manager in the International Economy
Australia’s largest surf-wear manufacturer, Billabong, was founded in 1973 in Gold Coast Queensland by Gordan and Rita Merchant. Their core business entails marketing, distribution and production of clothing, accessories and eyewear. According to the Billabong website, Gordan and Rita began designing to create board shorts for local surfers, but within a few years expanded to surfboards, wetsuits and t-shirts. Consumers displayed brand loyalty because of the durability of the board shorts. By 1983, Billabong began to establish a global identity by increasing sales through distribution to the U.S. market. Additionally, in order to increase competitive advantage, Billabong began to acquire companies within the same market. To name a few, companies included in the acquisition were Von Zipper (eyewear), Element, (skate wear), Nixon Inc. (watch and tech accessories), and etc.
During the financial crisis of 2009-2009 many companies sold the AUD, which greatly benefited Billabong. With that, Billabong’s CEO announced that he expected the company to increase its profits by 10 percent in 2009. According to Hill & Hult (2017), currency markets can be difficult to forecast and sharp reversals can occur at any time. In 2009, the value of the AUD increased and for every earned USD the currency exchanged for $1.66. Later that year, Billabong CEO had to rescind his previous prediction stating that the company profits would decline by 10 percent for 2009.
A fall in the value of the Australian dollar (AUD) against the U.S. dollar (USD) is beneficial to Billabong because it allows the U.S., their largest foreign market making up 50 percent of the annual (1.7 billion) sales, to purchase more products. A weak AUD allows Billabong to easily export more products, which increases sales revenue from strengthened price competitiveness. Once payment is received from U.S. importers, the currency is converted to AUD. As the AUD declines a strong can purchase more products and be converted into more AUD. As the AUD falls against the USD, both Billabong’s products become less expensive causing American consumers to purchase more merchandise which increase sales.
While it is possible to predict the future exchange rate by using forward exchange rate, it is difficult to use that method during a financial crisis. In 2009, the market was inefficient due to the financial crisis; however, a fundamental method can be used to predict the exchange rate. Although the fundamental forecasting method maybe ideal when predicting a change in an inefficient market, it is not that effective with forecasting sudden short-term changes. Additionally, fundamental predicting analyzes variables and uses economic theories, so there are variables that may arise that was not taken into consideration. One could also use historical data to predict the trend of the currency, but there is not a clear rationale to use this method. With that, it would have been difficult to accurately predict the rise in the AUD that occurred in 2009. Primarily due to the fact that currency markets are difficult to predict and sharp reversals do occur on a regular basis (Hill & Hult, 2017).
In order to better protect itself, Billabong could have invested into other foreign markets (Asia-pacific & Europe) to decrease their dependency on the U.S. market. Also, the CEO could have chosen to better predict its possible profit given that exchange rates and the currency market is unpredictable. It is the equivalent to putting all of your eggs in one basket, which as anyone knows is not always a good thing. Billabong could have diversified its production and exports to incorporate other foreign countries, so that the negative returns could be balanced out by positive returns from another country. Additionally, Billabong could have entered into the forward market to avoid transaction exposure.
The increased value of the AUD could have long-term effects on Billabong, because currently the value of U.S. (the largest contributor to sales) currency is worth less when converted to AUD. Eventually, if Billabong does not counter act and find a way to increase profits, the rise in AUD could cause the company to potentially close. To avoid economic exposure, Billabong could enter into a forward exchange contract with the U.S. to agree on set sales prices. Additionally, there is the possibility of opening production facilities, or offices in the U.S. to eliminate the need to convert the profits. To eliminate the need to exchange currency is to eliminate possible risk and loss of profit.
Invest into other foreign markets (Asia-pacific & Europe) in order to eliminate the financial risk. Continue to restructure to include a younger demographic, and more domestic consumers.
Hill, C. W., & Hult, G. T. (2017). International business: competing in the global marketplace. New York, NY: McGraw-Hill Education.