Most importers spread their buying across the year. Orders go in monthly, exposure accumulates gradually, and a bad few weeks in the currency market affects one shipment rather than all of them.
Food and drink importing often doesn't work that way.
Wine is bought by vintage. Coffee follows harvest cycles. Olive oil, honey and seasonal produce are available when they're available. Specialist ranges are allocated, and if you don't commit when the allocation is offered, it goes to someone else.
So a business may commit a large share of its annual purchasing within a short window — at whatever exchange rate happens to apply during those weeks.
Why that concentration matters
Spread buying averages your exchange rate across the year. You get some good weeks and some bad ones, and the mean is usually tolerable.
Concentrated buying doesn't average anything. You get the rate that existed when the allocation was offered, applied to a large proportion of your annual cost base, and you live with it for twelve months of selling.
Two businesses buying identical wine, with identical margins, can end up several percentage points apart on gross margin purely because one committed in a good fortnight and the other didn't.
That's not commercial skill. It's timing luck being allowed to determine profitability.
The second problem: you can't reprice quickly
Food and drink has unusually sticky retail pricing.
If you supply retailers, your price lists are agreed in advance and changing them mid-term is a commercial negotiation, not an adjustment. If you supply hospitality, wine lists are printed and menus are set. If you sell direct, your customers notice price changes on familiar products immediately.
So the margin set at purchase is largely the margin you keep. An importer who buys at a poor rate can't recover it through pricing for months, and often not at all within the season.
This is the opposite of a business that reprices weekly. It makes the purchase rate decisive.
Duty and excise add a layer
For alcohol importers particularly, the cost stack is more complex than goods plus freight:
Goods, usually in euros
Freight, often in dollars
UK excise duty, in sterling, calculated on volume and strength
Customs duty where applicable, calculated on a customs value converted at HMRC's published rate
VAT on top of the lot
The HMRC customs rate and your commercial rate are different numbers, which surprises people. Your duty is calculated on one; your actual cost is at the other. Both need to be in the model.
What to do about it
Hedge before the buying window, not during it. This is the key practical shift. If you know you'll commit €1.5m of purchases during a six-week allocation period, you can take cover in advance of that period rather than converting as each order lands. You're fixing the rate on a forecast commitment, which is exactly what forwards are for.
If the forecast is uncertain — you don't know whether you'll get the allocation, or how large it will be — an option gives you protection with the right to walk away, and the premium is the entire cost if the purchase doesn't happen.
Layer across seasons. Rather than hedging a whole year in one go, build cover progressively as visibility improves. More cover on the next harvest, less on the one after.
Set a budget rate and price off it. Agree an internal rate for the season, build your price list from it, and hedge to protect it. Then a currency move is a variance against a plan rather than a surprise in the management accounts.
Match flows if you export. Importers who also export — UK gin, beer or specialist food going to Europe — may have euro income that can fund euro purchases directly. Worth checking before hedging anything.
The seasonality question
One more thing specific to this sector: your currency requirement is seasonal, and that's useful information.
Most businesses have roughly even currency needs across the year. If yours concentrates in February and September, you can plan around those months specifically — monitoring rates ahead of them, setting limit orders at target levels in advance, and arranging working capital to coincide.
A business that knows its currency calendar can prepare. One that discovers its requirement when the allocation email arrives is converting under time pressure, which is reliably the most expensive way to do it.
The question
Look at last season's purchasing. What proportion of your annual foreign currency commitment was made within a single eight-week period?
If it's more than a third, your gross margin for the year was largely determined by the exchange rate during those eight weeks — and that's worth managing deliberately rather than accepting.
William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622
Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621