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Not everyone's getting a bargain as kiwi dollar sinks to new low

By Michele Simpson

Friday 8th September 2000

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The double whammy of escalating costs of crude oil and the comatose dollar is cutting into retailers' bottom lines, with the country's biggest retail chain The Warehouse owning up to price hikes and more expected in the run up to Christmas.

The Kiwi dollar hit an all-time low yesterday of 42c against the US currency.

The Warehouse announced its pre-tax profit of $108 million this week and has taken a conservative approach to managing its foreign exchange exposure but has not been able to stave off some price increases.

The Warehouse's director of merchandising and operations, Neil Plummer, said the company had been "buying better" but had had to increase prices on some of its 60,000 item codes over the past three to four months.

"If the product has 'Made in New Zealand' on it then you have a better chance of keeping down the price a bit longer than the imported lines - but there will be some prices [at The Warehouse] that will increase," Mr Plummer said.

The Warehouse changed its policy two years ago and now hedges 35-65% of its forecast US dollar needs for the next 12 months.

The Warehouse treasurer and risk manager Mark Fennell said there were no immediate plans to change its policy on foreign exchange, but the company did err on the upper end of its percentage and had the option to hedge up to 80% if necessary.

Foreign exchange hedging varies widely among retailers but an importer would commonly cover 25-50% over 12 months.

The Warehouse's current foreign exchange policy would give the retailer more stability in cash flows, said one broker.

"Importers do typically have a shorter time horizon for foreign exchange hedging," Bancorp economist Stuart Marshall said.

He said wholesalers, retailers and importers were stuck with rising costs from foreign exchange and crude oil but had not yet passed on these to the consumer at the risk of lower sales or drop in market share.

"The pressure is on them to recover the cost through profit margins and I'm amazed at how resilient importers have been over the past two years.

"Despite the higher costs, the New Zealand consumer has not had to dig deeper into their pockets," Mr Marshall said.

But there is a growing feeling that retailers aside from The Warehouse have already started edging prices up.

The Warehouse's share price sat at $6.15 immediately after Monday's results announcement but dropped back to $6.11 later in the week.

Competing retailers believe The Warehouse prices started to climb slowly in the past six to nine months but were hardly noticed by the consumer. Rising transport costs, owing to the $US32 a barrel crude oil prices, were also pushing retailers to the brink.

Economists were surprised that even second-tier discounting stores like The $2 Shop had managed to absorb rising costs and survive.

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