Beyond the holiday shopping headlines, there’s another economic story that retailers are following: the increasing strength of the U.S. dollar.
Currently on an upswing that began in the summer of 2013, the dollar shows no signs of losing momentum, delivering a windfall to American consumers, but potentially hurting cross-border sales for U.S. retailers in key markets like Europe and Canada. So will the booming dollar lead to a bust for international ecommerce?
The answer is: Not necessarily. Although a rapidly strengthening U.S. dollar does make prices at American retailers appear more expensive and may initially soften sales to individual consumers in affected countries, the good news is that the burgeoning number of international shoppers going online will likely continue to buoy sales. And by paying attention to key trends as they evolve, retailers can keep their marketing plans aligned towards optimized growth.
The reasons for the dollar’s rise are many. Here are two dynamics to watch in the coming months:
Interest rates on the rise
There is much speculation about whether the Federal Reserve will raise the benchmark interest rates sometime around their June 2015 meeting, to offset inflation risk as unemployment rates come down. Generally, interest rate increases in a country will tend to drive a corresponding increase in the value of that country’s currency. The strong dollar – and the resulting reduction in export growth that follows – has factored into the Fed’s restraint when it comes to raising rates. A rate increase could further bolster the dollar, creating more downward pressure on global demand for U.S. goods. Pay attention to the Fed’s actions at their upcoming meetings to stay apprised of this dynamic, and you’ll be better able to forecast your international growth and make adjustments as needed.
Prices at the pump
The retracting price of oil signals declining economic growth and geopolitical risk in certain parts of the world. Although falling oil prices could positively impact discretionary spending here at home, it can negatively impact international demand for discretionary goods – which drive global ecommerce sales for U.S. retailers – in certain markets where oil is a major export, like Canada and Russia. Chances are, if you’re happy when filling up at the pump, you may be less with your international sales numbers to these countries.
Smart retailers will heed these trends and adjust their international strategy accordingly. Here are some of our recommendations:
Invest in dollar-driven growth
Markets tied to the U.S. dollar will see less volatility in currency and prices than those markets affected by the exchange rate fluctuations. These markets continue to show strong growth in demand and ecommerce sales from American retailers. Retailers would do well to amp up marketing and promotional efforts in these markets in the short term, to support overall growth.
Stay the course when markets soften
The best bet for online retailers is to stay the course when it comes to selling abroad. Despite some near-term turbulence in markets affected by the recent exchange rate changes, global ecommerce as a trend is not going away – we believe retailers should commit to the longer view and ride out these interim currency and pricing trends and continue to develop these markets as a long term strategy.
The dollar may be a moving target, but the good news is that efforts to build brand awareness and market share now will pay off in the years that follow. By tying pricing offers to the changing dynamics in individual markets, retailers can encourage consumers to spend and keep international growth on course.