A Testy Time For U.K. Wholesalers And Dropshippers: Surviving The Currency Fluctuations

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Amit Basu is the founder & CEO of Artisan Furniture, the world’s first artisan marketplace.

The tumbling pound and soaring costs have focused minds on supply chain flexibility and price elasticity in recent weeks as more businesses shift into crisis mode.

The wave of instability caused by the short-lived former British chancellor Kwasi Kwarteng’s “mini-budget” at the end of September had more than a ripple effect on small businesses. New policies—most of them reversed later—impacted everything from the cost of government borrowing to the value of the pound, which plummeted to an all-time low against the dollar at one point.

Moreover, Britain’s long-held credibility for fiscal responsibility took such a battering that rating agency Moody’s put the country on a negative outlook, though it was saved the embarrassment of a downgrade.

For wholesale businesses, the crash in sterling automatically increased imports costs, and while the pound has made a recovery (hovering at around $1.12 in mid-October), it is still well below the $1.35 mark seen at the start of the year.

The problem is that prices had already shifted upward this year on the back of rising shipping and raw materials cost post-pandemic. On October 19, Britain’s Office of National Statistics said that the Consumer Prices Index (CPI) had reached 10.1% in the 12 months to September. Passing on further rises to retail customers at this point looks risky.

Wholesalers In The Firing Line

Within the supply chain, the consequences for U.K. wholesalers are much greater than for dropshippers, for example. The latter are buying off-the-peg and usually dealing in the same currency because they are working within their own country markets in most cases.

Wholesalers take on extra risks in turbulent times versus dropshippers. They operate on slimmer margins, usually in single digits, and are already dealing with high shipping costs, simultaneously adapting to new but essential sustainability models. By the same token, if wholesalers get into trouble, their dropship customers lose a product supplier if they do not have an alternative one that can step in.

The point is that outgoings—or the costs of doing business—have already been stretched this year. There is some comfort in scale: players like TJMaxx, the subsidiary of American apparel and home goods company TJX Companies; Restoration Hardware; or Hobby Lobby and the like, who buy goods directly from factories, are often hedged against currency fluctuations. Smaller players, in general, are not, so a falling pound means a price increase if they are importing from India, Vietnam, Indonesia and, to a lesser extent, China. It hits them directly in the pocket.

While dropshippers are somewhat insulated from currency shocks, they are not off the hook completely. Once their wholesale partners, who hold the stock they order, run out, the cost of new shipments will be reflected in price hikes to them. Sometimes wholesalers will absorb these rises caused by currency flux—as this can go both ways. However, with the current circumstances in the U.K., I don’t see strong rebounds in the pound on the horizon.

Larger wholesalers may have the scale—and established contacts—to switch their supply sources for certain products to countries where the exchange rate is more favorable. Even for big players, this is complex and time-consuming and really the last resort for items like furniture, which are not commodity products that can be substituted easily.

But smaller wholesalers have to go with the flow, perhaps cutting orders while margins remain under pressure and waiting until things settle down. This has the knock-on effect of out-of-stock situations for consumers. Smaller players are limited in what they can do to mitigate these effects. As CEO of a British dropship and wholesale company, I recommend considering the following options.

• Scaling up to a trade account. This would decrease the cost price per item but would require a bigger outlay upfront and an ability to store the products.

• Looking for a better deal. There may be other suppliers that have the same/similar product that you need and at a better price.

• Reviewing your product mix. If you have always ordered solid wood furniture, you might look at cheaper MDF alternatives for a short period. However, your margins would fall, and you would also have to think about your brand image and reputation. Once you move into a cheaper price segment, it may not be that easy to switch back.

This year’s early waves of price rises have been inevitable due to inflated costs at every stage of the supply chain—something that was seen worldwide. Britain is now facing a second, self-inflicted wave due to currency impacts alone. Unfortunately, it has come just as retailers and suppliers are preparing for the biggest selling period of the year: the “golden quarter” comprising Thanksgiving, Boxing Day, Black Friday, Cyber Monday and Christmas.

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