However when it came to sourcing the blades for its new ‘Azor’ line, King of Shaves had to look beyond these shores, and exposed itself to the vagaries of the international money markets as a result.
Since the creation of its hardware range, King of Shaves has been importing blades from Japan and as a result has needed to exchange currency from sterling into Japanese yen.
The company looked to FX currency specialist Foremost Currency Group to help manage its foreign exchange risk. Initially King of Shaves used ‘spot contracts’, the simplest and most popular foreign exchange product – essentially an agreement to buy or sell one currency in exchange for another.
King of Shaves had two days to settle the contract, at a price based on the prevailing ‘spot exchange rate’ – the current value of one currency compared to another, in this case sterling to the yen. Although the spot contract lets you buy or sell currency as you need it, spot exchange rate movements are highly unpredictable – even over the course of a single trading day.
In the first instance we were not consistently exposed to foreign currency fluctuations, so spot contracts were sufficient”
says Charlie Wong, Finance Director and Company Secretary at King of Shaves.
However, in mid 2008, the relationship between sterling and yen became volatile. “The rate went from 212 to 113 in a very short space of time” says Charlie. This meant that King of Shaves was essentially paying more for the blades, a cost that came straight from the bottom line.
This required a shift in King of Shaves’ approach and, under the guidance of Foremost Currency, they decided that it would be more beneficial to set a guaranteed exchange rate in order to mitigate future negative currency fluctuations.
“We wanted to avoid a similar situation re-occurring, so I investigated other available options for foreign currency exchange. We used a forward contract, which allows you to fix an exchange rate for up to two years by paying a 10% deposit thereby eliminating the risk of fluctuating exchange rates by locking in a price today for a transaction that will take place in the future” says Charlie.
Continued yen volatility restricts King of Shaves in terms of how long in advance it can fix a forward contract. “We don’t want to fix a rate too far in advance, just in case the money markets pull in the opposite direction and we end up losing out” says Charlie. “Once we have placed an order we call Foremost Currency Group and fix a rate. The shipping terms mean that we have 60 days to pay once the blades arrive in th UK, so we set a rate for between 3 and 6 months in advance to ensure we don’t lose out due to any sudden changes in the relationship between the two currencies.”
Using forward contracts in this way has saved King of Shaves in the region of £600,000. “When you are making a payment of anything up to £1.5 million, a decrease in the value of sterling can have a considerable impact on costs”. Charlie finds that the service Foremost Currency Group provide is professional, helpful and above all, personal. “There is a caring attitude within the Foremost Currency Group. They help you to make an informed decision and are diligent. They opened my eyes to currency and helped me to understand, anticipate and respond to movements within the market.”
Charlie prides himself on making objective and informed decisions in order to ensure King of Shaves secure the best possible deal. “I still compare the exchange rate Foremost Currency Group offers me with other foreign exchange specialists and the high street banks. Banks tend to provide a less favourable rate; foreign exchange specialists are more niche and so can afford to provide more competitive rates.”
Charlie communicates with Foremost Currency Group predominantly via e-mail and receives regular market updates from his assigned broker.
Looking to the future, King of Shaves plan to continue their work with the Foremost Currency Group. “We are looking to launch our blades into the US market, which will of course involve selling foreign currency rather than buying it,” says Charlie.