Falling pound is dragging down smaller businesses

Charlotte Jamme is not the sort of person to be put off by a fight. Her company Mia Tui saw off TUI Group, the German travel giant, in a trademark row last year.

She won by convincing TUI, the owner of Thomson Holidays, to back down in its claim that the name of her small business would cause the two organisations to be confused. Now, however, Mia Tui could be facing an even bigger threat and this time her foe is not one on which she can hope to land a blow.

The collapse in the value of sterling is hitting her Milton Keynes-based company, which designs and makes women’s bags, and Ms Jamme says she has limited ability to respond. Mia Tui makes its bags in Vietnam (the company’s name means “my bags” in Vietnamese ) and is one of countless small businesses fretting about the pound’s nosedive after Britain’s vote to leave the European Union. “All our costs for both production and materials are in US dollars, [so the fall in the pound] has seen our costs go up by 18 per cent,” Ms Jamme says.

“We have held our prices at pre-Brexit levels, but as it looks like there is no let-up in the pound’s weakness and we will have to review prices in the new year.”

She is reluctant to pass price rises on to her customers, who buy via her website and from television shopping channels, but her hand may be forced. “We have looked at ways of cutting costs, but this just compromises your quality, [which] would just be devaluing the brand.”

Since the EU referendum in June, the pound has fallen from almost $1.50 against the dollar to just above $1.20 last week, its lowest level in 31 years. Against a basket of currencies, sterling is as its weakest point for more than 100 years. Small businesses are bearing the brunt of the resulting higher import prices, according to Fexco, a foreign exchange business.

In July the total number of foreign currency purchases made by small and medium-sized businesses was down by a modest 7 per cent on the same time last year. However, the average transaction size was 29 per cent lower than in July 2015, as companies sought to rein in their spending, research by the company has revealed.

In August, before the marked drop in the value of sterling last week, things had recovered a little, with the average transaction size 11 per cent lower than last year. Nevertheless, Fexco said that two successive months of reduced import spending pointed to nervousness among smaller companies. According to David Lamb, head of dealing at Fexco: “The behaviour of small and medium-sized businesses suggests they are feeling more pain than most.”

Large companies tend to have sophisticated and often longer-term currency hedging strategies. Fexco’s research suggests that, by contrast, their smaller counterparts appear to be mitigating against the impact of the weak pound simply by reducing their imports, which could constrain their growth.

Ms Jamme says: “[The weak pound] will stifle growth for a while. We may not be able to recruit that extra person or take the business to the next level until we see what the true effect of Brexit is.”

For small businesses pessimistic about the pound’s prospects, Peter Theuninck, head of foreign exchange market strategy at Earthport FX, believes that it is not too late to hedge against further decline: “Speculation for higher US interest rates and a ‘hard Brexit’ are two events that could very well create the right circumstances for further weakness in the pound. At the very least, they have the potential to stall any recovery from current levels.”

However, Paul Smith, managing director at Duff & Phelps, the financial advisory firm, suggests that hedging merely offered short-term mitigation for what could be a long-term issue. “Companies that had been savvy will have some currency hedging in place, but this will not last for ever and we need businesses to face facts that a volatile or decreased value of the pound could be the new reality.

“Companies need to start thinking now about planning for these conditions in negotiating with their suppliers, managing overheads or passing on some of the higher costs.”

With small businesses often sitting in supply chains that end with much larger customers, negotiating can prove easier said than done. Barney Mauleverer, co-founder of Fresh Marketing, can testify to that. The company used to make most of its money from helping British food and drinks companies, including the makers of Nairn’s Oatcakes and Eat Natural Cereal Bars, to find new markets abroad. However, it now earns about three quarters of its £7 million annual turnover from its own branded food products, ranging from breakfast cereals to soups, which are sold in UK supermarkets.

With most of the manufacturing taking place in France, Italy and Germany, Mr Mauleverer says that he is starting to feel the pinch. “My dad keeps texting me up to say: ‘Are you all right?’ I think: ‘Dad if only you knew.’ ”

The company enjoyed a “spot” exchange rate against the euro of about €1.35 last year. This has fallen to about €1.09. “We haven’t put a price increase through yet, because we don’t dare do that.”

While large companies often have natural hedges against volatility by earning income in various currencies, Mr Mauleverer says that the hedging positions Fresh Marketing had taken have run out. “Manufacturers are saying: ‘Well, our prices haven’t changed.’ Supermarkets are saying: ‘It’s not my problem.’ ”

Some economists have welcomed the weaker pound because it makes British goods and services cheaper for international buyers. They hope that the fall in sterling will help to address the trade deficit.

Fresh Marketing hopes to mitigate its margin squeeze by building the export agency side of its business back up again. “When we were a 100 per cent export business and the pound was getting hammered, we loved it,” Mr Mauleverer says. “The ones who will win are the UK brands that are exporting, which I suppose drives the behaviour that some think Brexit is all about. Let’s manufacture here and sell to the world.”

Fresh Marketing is considering moving some of its manufacturing to Britain, but Mr Mauleverer is sceptical about how ready the nation is to capitalise on an opportunity to close its trade gap, which was £5.1 billion in June. “People forget that our labour costs are much higher and all those sorts of things.”

The weak pound also means that even commodities that are produced in the UK could become scarcer and more expensive.

“You can still lose on milk prices, for example,” Mr Mauleverer says, “because they will go up in price as more is exported [in response to greater overseas demand]. You can’t really win. In the end, price increases are inevitable.”

If exporting is a problem, then simply do it more
Behind the scenes

For those exporters relying on raw materials from overseas, some of the gains from their products being cheaper for customers abroad are likely to be wiped out by higher costs (James Hurley writes).

Tiny Rebel is a brewer that has grown from a garage in Newport, south Wales, in 2010 to producing one million litres of beer a year, exporting to 14 countries and opening a chain of pubs. It buys British when it can, but imports hops from America, New Zealand and Europe.

Tiny Rebel was launched in 2012 by Bradley Cummings, left, and Gareth WilliamsNOT KNOWN

“We’re currently protected by our contracts, so our immediate cost of sales haven’t shot up just yet, but that will change in the next 12 months,” says Bradley Cummings, who founded the company with his brother-in-law Gareth Williams.

Tiny Rebel’s solution is to export even more. It is planning to increase international sales by up to 15 per cent. “We are seeing a lot of enquiries coming in as a result of Brexit, from countries such as Greece, South Korea and the Czech Republic . . . By the time the cost of imports becomes an issue, we’re also hoping the government will have started negotiating better trading agreements for Britain.”

Adam Sopher, co-founder of Joe & Seph’s, a popcorn business, also has seen import costs rising. The company has 2,500 stockists around the world and wants to export more, to the Middle East and Japan, to protect itself from rising prices: “The pound has fallen by over 15 per cent against the dirham [and more than] 25 per cent against the yen, so there’s a huge opportunity for customers in these countries to buy at a more affordable price.”