Currency Exposure: a Case study on Procter and Gamble

Currency Exposure: a Case study on Procter and Gamble

International companies often face challenges when operating globally. One of the problems which they face is currency exposure. Currency exposure is defined as the vulnerability that emerges out of a particular investment, which is brought about by the exchange rate differences between different currencies. The problem is a common problem conscious of the fact that different countries have different currencies, and the rate of depreciation or appreciation also differs significantly depending on the currency. One of the companies which have been affected by this currency exposure is Procter and Gamble Co. The following analysis will involve an in-depth analysis of how this company has been affected by currency exposure. The study will further assess the steps that are being taken by the company to shield itself from the challenge or mitigate this problem. The study will also evaluate the reasons for the expansion of this company globally, which can provide a clear picture of the benefits that are derived from the international expansion vis-à-vis the risks that have been got out of the currency exposure.

The Major Foreign Currency Exposures Faced By Procter and Gamble

Procter and Gamble is an American multinational company, which was founded in 1837 by James Gamble and William Procter, who derived the company’s name from their surnames. The company sells assorted items and products, ranging from hygiene and personal care items to consumer health items. The portfolio of the company also includes beverages and different categories of snacks and foods. The company recorded revenues of close to $68 billion in 2019, which is an increase from the $67 billion recorded in 2018 and $65.1 billion recorded in 2017 (Macrotrends, 2020). The company has a presence in almost all the countries around the globe except North Korea and Cuba. Their presence in different countries around the world is a clear indication that the company is exposed to currency exposure as a result of the currency diversity and currency fluctuation differences between countries.

Procter and Gamble are often affected by weak foreign currencies, which affects their sales, production process, and revenues. In a 2015 quarterly report, for instance, the company reported a 30% drop in its income. The decline was primarily attributed to weakened foreign currency against the United States dollar. By the end of 2014, the company recorded revenue of $3.4 billion, but the revenues dropped to $2.5 billion by the end of 2015. At the time, almost all the currencies around the world weakened against the dollar, including the Russian Ruble, where the company enjoyed a significant market (MarketWatch, 2010).

The strengthening of the dollar affected the company negatively by virtual of the fact that the company must convert its sales back to United States dollars. A strong dollar, therefore, implies that they experience reduced earnings after the exchange rate. Procter and Gamble had not hedged their exposure to international equity and will, therefore, suffer from the decreasing revenues after the exchange.

The other currency exposure that is faced by Procter and Gamble is the drastic or unpredictable currency fluctuations in certain countries such as Venezuela. When the local currency is unpredictable, a company cannot plan effectively. Also, a variable currency will thwart or alter the objectives of the company and thereby affecting its operations (Lucas, 2020).

International companies such as Procter and Gamble operate on tight budgets. Therefore alteration of the local currency can mean that they may have to pay more for particular local suppliers, local taxes, and further affect the price of their products in the local market. Procter and Gamble are often forced to alter the cost of their goods and thereby affecting their local market since there is an inconsistency in the prices.

Companies always strive to have prices that are predictable and to operate on budgets that are also predictable. When there are unprecedented changes in the exchange rate between local currency and the United States dollar, Procter and Gamble often suffer from the negative repercussions. These negative repercussions can range from a decrease in the market, a negative impact on the reputation as a result of the inconsistency, and the eventual decline in sales and revenues (Lucas, 2020).

Procter and Gamble have been using the long-term hedging technique to circumvent this volatility, but there are still some challenges that exist. The long-term hedging technique includes two swapping methods. The long-term hedging can lead to a situation where there is an over-hedging. Since the company is at times involved in the process of manufacturing an inconsistent number of products and receives an uncertain number of orders, the transaction payment is often unclear. The company can, therefore, overestimate the number of their foreign sales and thereby negotiating for excessive hedges, which can impede their finances and further increase their risks (Lucas, 2020).

To avert the currency mentioned above exposure risks, the company should consider the following measures. The company should only hedge the minimum payments that are known in all the transactions that are expected to be made in the future. The above will go a long way in averting the risk brought about by the uncertainty in the cash flows. The management should, for instance, evaluate the most unpredictable currencies and focus more on them (Gray, 2019).

The other measure should be to craft a risk management plan. The plan should involve focusing on the most effective hedge currencies to use. The company should particularly consider the use of forwards, which can prevent an exchange rate for the sale or purchase of particular products at a future date. The measure mentioned above can go a long way in protecting a company against a volatile exchange rate in the future (Lucas, 2020).

Evaluate the Main Reasons for Going Overseas

Some of the reasons for Procter and Gamble venturing abroad is a result of the favorable emerging markets, which exist in countries outside of the United States. The first countries to venture into were in Europe, since it provided a market that was almost equal to that of the United States. Later on, the company ventured into the large economies in Asia. The company has, however, found a favorable market in the developing nations, which have provided some of the best markets in recent years. The reasons for venturing into the developing countries include the fact that they have one of the highest rising rates of middle-class populations. Also, they are some of the fastest-growing economies in the world and thereby provide a vastly untapped market (Gray, 2019).

In conclusion, the study has unraveled some of the currency exposures faced by Procter and Gamble. The primary exposure is the constant fluctuations in local economies, which provide an unfavorable exchange rate between the local currency and the United States dollar. Despite Procter and Gamble trying to address this challenge using long-term hedges, it has not been touted as an effective solution. Some of the solutions that should, therefore, be implemented to address this challenge include the development of a risk management plan and hedging on minimum payments.