Closing case Billabong Essay
Closing case Billabong
Billabong is an Australian company. They make surf wear, from wet suites and board shorts to T-shirts and watches. 80% of Billabong sales are from outside of Australia. 50% of which are from the United States. Billabong is reliant on a strong U.S. dollar against the Australian dollar. Billabong relied on the fact that the rapidly weakening Australian dollar in 2008-2009 and waited for profits to skyrocket. Due to the increase in demand of Australian exports and sell-off of U.S. dollars the Australian dollar strengthened drastically and the U.S. dollar weakened destroying any competitive price advantage Billabong had. One cent movement in the U.S./Australian dollar exchange rate means a 0.6 percent change in profit for Billabong. 2009 Australian dollar gained its value, predicted 10 percent in profit decline for Billabong.
1. WHY DOES A FALL IN THE VALUE OF THE AUSTRALIAN DOLLAR AGAINTS THE U.S. DOLLAR BENEFIT BILLABONG?
Billabong relied solely on the foreign exchange market especially on the United States with 50 percent of company’s annual sales. Whenever the U.S. dollar gets strong against Australian dollar, it makes their product less expensive in United States. When product becomes inexpensive it generates sales and increases company’s profit. The company’s CEO stated that every cent movement in the U.S./Australian dollar exchange rate means a 0.6 percent increase in profit for Billabong. Whenever Australian dollar increases it value in exchange for U.S. dollars Billabong product price increase, which causes in decrease of sales and decrease in profit.
2. COULD THE RISE IN THE VALUE OF THE AUSTRALIAN DOLLAR THAT OCCURRED IN 2009 HAVE BEEN PREDICTED?
It could have not been predicted to be exact but it can give an idea of the increase by looking at the currency exchange rate forecast. The situation that cause increase in value of Australian dollar was down of U.S. economy and the higher demand of Australian products by countries like India and China. When United States economy started going down and the U.S. dollar loosing its value. The world found out the high national debt of United States causing the value of U.S. dollar to decrease. Australian dollar started increasing value at the same time. Some factors that can be studied to learn possible rise and down of Australian dollar are the currency foreign exchange rate, country’s foreign investment, employment, national debt and many more. By studying factors like this that affects country’s economy it can give a hint of Australian dollars’ value will increase/ decrease.
3. WHAT MIGHT BILLABONG HAD DONE IN ORDER TO BETTER PROTECT ITSELF AGAINST THE UNANTICIPATED RISE IN THE VALUE OF THE AUSTRALIAN DOLLAR THAT OCCURRED IN 2009?
Billabong could have protected itself from the foreign exchange risk by using forward exchange rates, which is an exchange rate governing future transaction. Billabong also could have protected it self by being less dependent on foreign currency rate change. It could have engaged in currency swaps to lower the risk that Billabong was facing as a result of Australian dollar value increasing.
4. THE AUSTRALIAN DOLLAR CONTINUED TO RISE BY ANOTHER 20 PERCENT AGAINST THE U.S. DOLLAR IN 2010 AND 2011. HOW WOULD THIS HAVE AFFECTED BILLABONG? IS THERE ANYTHING THAT BILLABONG MIGHT HAVE DONE TO LIMIT ITS LONG-TERM ECONOMIC EXPOSURE TO CHANGES IN THE VALUE OF THE CURRENCY IN ITS LARGEST EXPORT MARKET?
When the value of Australian dollar will rise by another 20 percent it will cause Billabong’s profit to go down about 20 percent. It will cause the value of product to rise in American market. When the price in American market increase, buyer value decreases because of dollar loosing its value. When sell decreases, profits for Billabong goes down. Billabong CEO stated that each cent movement in Australian/ U.S. currency exchange rate means 0.6 percent profit increase for Billabong. So when there is 20 percent movement in exchange rate between Australian and U.S. dollar, the percentage of loss can be calculated by using the ratio. Billabong could have prevented it self from the long-term economic change by using forward currency exchange rates and currency swaps. This way the company would not be affected when the Australian dollar gains its value against U.S. dollar value.