Freight rate fluctuations present a rather troublesome issue for companies across the world. Higher shipping costs result in higher cost of acquiring goods. Consumers are less flexible at absorbing short-term price increases, which puts pressure on the supplier to somehow make a profit whilst keeping prices low in the face of rising goods prices. Ultimately something has to give, and it’s usually the supplier’s margins. The smaller the company, the more sensitive they are to changes in freight rates and exchange rates, and the more volatile the prices become for their customers.
In the current economic climate, how do you operate a business when your customer is unforgiving and inflexible to price increases, yet you can’t predict prices from day to day?
The global economy has been running hot; with strong demand for goods. However, there’s a finite number of ships available to move goods around the globe. To make matters worse, a large number of ships became unavailable due to lockdowns around the world. The lack of ships created a bottleneck on the supply side of the equation, and this was compounded by a surge in demand. In 2021 it resulted in freight rates peaking at $20,000, compared to $2,000 a year earlier. Much to the relief of import companies, the rates are back on the decline, but these extreme fluctuations in rates result in extreme fluctuations in the price of goods. And we’re not out of the woods yet!
At the same time, currency fluctuations across the globe are also affecting the prices of goods. If you’re buying with USD, goods are getting cheaper as the dollar strengthens. But if you’re buying in GBP, goods are getting more expensive as the currency slides, further squeezing margins.
Such instability in prices gives rise to a phenomenon in which local importers are made to compete against large brands which can purchase a large number of goods at a cheaper exchange rate given that they placed the order earlier when the currency had more value.
In a span of just four months from April 2022 onwards, the exchange rate has dwindled down from $1.25 : £1 to $1.06 : £1 and now it's back at $1.13 : £1, again creating mayhem as different importers can avail different landed costs based on the time of their purchase.
Effects of freight fluctuations and currency devaluation on lighting & electrical product prices
Freight rates combined with currency fluctuations have created the perfect storm of price instability for lighting and electrical products. Different light suppliers are forced to sell their goods at different prices – not to extort consumers, but purely out of necessity. It hurts the consumer in the form of higher prices, it hurts the distributor in the form of squeezed margins, and it hurts the light manufacturer in the form of demand reduction and subsequently, negative price pressure. All sides experience trust erosion due to price instability because light suppliers and manufacturers are perpetually unsure if they are purchasing at the right prices. It is why light manufacturers often choose not to keep an inventory of goods on hand and instead choose to follow the just-in-time production approach. However, this has its own downsides, such as a substantially greater lag time between order and delivery.
Bigger is better
The economic market is a stubborn mechanism. Consumers take time to adjust their spending patterns to sudden changes in prices, subsequently putting pressure on the margins of suppliers and manufacturers. Therefore, it has become increasingly important to choose large suppliers which have the capacity to be able to adjust to such changes, hedge their investments, and have the capability to absorb margins during times of crises. Staying loyal to smaller companies puts you at risk of significant losses pertaining to volume and prices, due to their exposure to the price volatility.
Thankfully, V-TAC is one of the few companies that do not engage in such drastic price fluctuation practices. It is of utmost importance to us that we do not let economic crises affect our buyers and force them to lose market share or have to take on debt to finance their operations. Our global network, scale of operations and large stock quantities give us a strong cushion to weather short-term fluctuations and create price stability for our partners.
Contact us today to learn more about V-TAC’s portfolio and how our scale and structure facilitates price stability, to keep your margins and operations secure.