Expanding Small Firms Discover
The Pitfalls of Foreign
Exchange
ROBERT E. CALEM
| The
Wall Street Journal
September 21, 1998 |
Greg Roper has international aspirations for MicroStar Research
& Trading Inc., a tiny financial-market-trading software company based
in Sarasota, Fla., where he is sales manager.
He plans to use the Web to expand beyond North America and into Europe. Trouble is, Mr. Roper has already discovered a real-world obstacle that could stall MicroStar's expansion plans. Despite the Internet's open borders, foreign-currency exchange rates have presented stumbling blocks for small businesses. Because of fluctuating exchange rates, American goods or services could be more expensive in another country's currency, whether they're sold on-line or door-to-door. And someone, either the company or the customer, has to absorb the cost. If a company prices items in each country's respective currency, the company itself will feel the impact of an unfavorable exchange rate on its bottom line. So some companies pass the cost on to the consumer by selling the product in U.S. dollars, but that isn't necessarily a detour from trouble for the merchant, Mr. Roper says he's found. The strategy can drive away customers when exchange rates become less favorable. Sales May Suffer During the past year, the Canadian currency declined about 8% against
the U.S. dollar. And MicroStar, which prices its items only in U.S. dollars,
has weathered a spectacular drop in sales to Canada of its professional
investor software and Web site subscriptions, both of which offer daily
"buy" or "sell" recommendations on pre-programmed stock and mutual-fund
portfolios,
The sales fell in spite of a 25% increase in advertising expenditures in Canada in the period, and an accompanying increase, of almost 25%, in responses from potential customers. But fewer of the inquiries resulted in sales. In 1997, 24% of respondents became customers. This year, only 11% were converted, Mr. Roper says. Web-site subscriptions, which cost $700 per six months, were especially vulnerable to the falling exchange rate. But sales of MicroStar's $2,700 software, which can be paid for over five or six months, were also hurt. "The Canadian buyers, although they can see the value in the program, are reluctant to commit to a purchase that is going to keep getting more expensive as they pay," Mr. Roper says. But while selling into a foreign market for the local currency can insulate the customer, it hurts the merchant, who absorbs the cost of exchange-rate fluctuations, as evidenced by the currency crisis in Asia. "Any small business that has any receivable denominated in a foreign currency could see a reduction in value of that receivable as a result," says Stephen Flett, senior vice president of foreign-exchange services at American Express Co. in New York. Big multinational businesses can afford to hire private bankers and currency traders to protect their revenue and profits if they choose to accept a foreign currency instead. But small firms don't have that luxury. And the number of small businesses using the Web for international sales is growing, according to Raymond Boggs, director of small-business and home-office programs at IDC/LINK in Framingham, Mass. Of the 350,000 small businesses with Web sites, 25,000 generate 20% or more of their revenue from international sales, up from 22,000 at midyear. Safety Nets So how can a small business take advantage of the Internet's international reach and still protect its profits against currency fluctuations? There are some safety nets available, say financial professionals like Mr. Flett and entrepreneurs who have explored their options. By accepting credit or charge cards for payment, Mr. Flett says, the merchant can place any exchange-rate burden on the customer -- because while the merchant receives consistent payment in U.S. funds, the customer receives the converted, or variable, charge in his or her local currency. "It's a very fair system," says Nicolas Darveau-Garneau, president of
CustomDisc.com, a 16-person, Stamford, Conn.-based purveyor of customized
music compact disks. "They're all paying the same price," Mr. Darveau-Garneau
says about his customers, who typically pay $20 for discs containing approximately
15 songs, which can be selected from a menu of more than
And CustomDisc hasn't been hurt by accepting only American money, Mr. Darveau-Garneau says. Half of the Web site's orders have come from more than 75 other countries since CustomDisc went on-line three months ago, he says. Maintaining prices in U.S. dollars does seem to work for low-priced items that are sold in small quantities. like CustomDisc's product, or for high-priced items that are paid for right away. But for large, long-lasting monetary commitments, the plan could still drive foreign customers away, Mr. Flett says. Taking Credit Alternatively, a credit-card acceptance program available from Paymentech Inc. of Dallas, Texas, allows a merchant to price products, bill consumers and be paid in foreign currencies. With the service, Paymentech will place the foreign funds in a special bank account. The merchant can then use those funds to pay international suppliers or employees, or "repatriate" the money whenever the exchange rate turns favorable, says John Shirey, senior director of electronic commerce. Paymentech is a credit-card transaction clearinghouse, a company that funnels money between the customer's credit-card issuer and the merchant's bank. It is the third largest company of its kind in the U.S. Paymentech's international payment processing service supports seven currencies -- the pound, franc, mark, yen, guilder, punt and Canadian dollar -- and Mr. Shirey says more currencies will be added as demand occurs. Merchants can use the service to accept payments in all of the currencies at once, if they choose to, he says. Another option, under consideration at Kirkland, Wash.-based FactoryMall.com, is to open an international central office, which would manage transactions through a group of sites based in different geographic regions world-wide. FactoryMall.com currently conducts business only in U.S. dollars. In a hypothetical scenario, a customer in Japan might order a set of
American golf clubs from a FactoryMall Web site based in Japan, and pay
in yen, explains Mark Tucker, vice president of technology and a co-founder
of the 22-person firm. The order, written in Japanese and priced in yen,
would travel from the FactoryMall Japan headquarters to the FactoryMall
International
When the payment arrives at FactoryMall International from the customer, the yen would be converted to U.S. funds by a bank working with the foreign headquarters. Then, FactoryMall USA would ship the golf clubs directly to the customer in Japan, Mr. Tucker says. Reducing Exposure FactoryMall could partially protect itself against exchange-rate fluctuations by adjusting foreign-currency prices in the databases underlying its Web sites as often as necessary -- perhaps as frequently as every five minutes -- to maintain its profit margins. That would cover FactoryMall's risk to currency fluctuations occurring between price changes, Mr. Tucker says. To reduce its exposure after the foreign funds are received, FactoryMall would need to work with its bank to quickly convert the money to U.S. dollars. Although FactoryMall hasn't made any moves toward building an international e-commerce infrastructure, Mr. Tucker says the company is looking to the future. Foreign customers account for less than 15% of sales, he says, but "we expect that to increase, if we can localize properly." It is a goal that could be easily achieved, says Ed Jenny, manager of HomePage Creator, a Web site development and hosting service from International Business Machines Corp. The multinational technology company will host a small business's e-store for $25 to $200 per month, and stores can be set up using languages of 26 countries and monetary symbols for 13 currencies. Most packages also include credit-card transaction processing for the merchant. URL for this Article:
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