UK food and drink (F&D) packaging companies are being forced to absorb currency costs from all areas of the supply chain, both above and below, as geopolitical tensions continue to cause turmoil, new research reveals.
The FX Factor Report, a report on the F&D industry by leading foreign exchange and currency risk management specialist, Lumon Corporate, showed that currency fluctuations topped the list of risks facing UK packaging companies, with business leaders also deeply concerned about geopolitical developments creating damaging supply chain volatility.
For nearly half (47%) of senior leaders, currency fluctuations created challenging timing gaps between paying suppliers and receiving customer payments. This exposes businesses to exchange rate movements, causing profit margins to be slashed by one third.
46% reported that currency instability meant they had to hold higher cash buffers than normal, while 45% said it reduced the funds available for investment and growth. 37% said it makes cashflow forecasting much more difficult, while 18% said that retail customers expect them to absorb all foreign exchange (FX) movements.
Eliot Bassett, Managing Director at Lumon Corporate, says: “Currency risk is a real concern for UK packaging companies, now more than ever. With pressure at both ends of the supply chain, businesses stuck in the middle are being forced to take on the costs, while keeping theirs the same. It is not tenable, and decision makers need to take action. Geopolitical events are not going to stop, they are becoming the norm, so businesses need to adapt to survive, and do so quickly.”
Many of the commodities required for the F&D packaging process, such as paper, corrugated board and food-grade plastics, are linked to the US dollar which, due to the current geopolitical climate, are vulnerable to sudden financial movements. Up to 50% of input costs for UK F&D companies are affected by the US dollar, causing yet more supply chain challenges and FX risk for businesses.
The report also explores a startling disconnect between the threat to business survival and action being taken to manage FX risk. Despite currency fluctuations wiping out an average of 3.33% of net profits across the sector, 74% of decision makers said they do not review their FX strategy regularly.
Just 14% of businesses plan to review their FX strategy in the next 12 months and only 22% are managing FX risk through a specialist provider. 59% suggested that they weren’t using FX hedging and other tools at all, vital for managing and reducing FX risk.
Eliot Bassett concludes: “Our findings clearly demonstrate that UK packaging companies are missing out on critical support and expert insights when managing profit margins across multiple currencies.
“And as companies, both big and small, are being forced to absorb often significant financial fluctuations from their entire supply chain, what is clear is that businesses must turn to the dedicated risk management services and tools that are at their disposal to help them understand their FX risk, set up properly managed frameworks and policies, and, ultimately, weather the turbulence that the industry is currently facing.”
Find out more about how Lumon Corporate can support you when exchanging currency for business.