While the Australian dollar enjoys a continued period of strength against the Greenback, many IT buyers are left wondering why prices of hardware and software have been static?
When we asked the question last year, customers blamed resellers, who quickly shifted the blame to distributors.
But distributors say they're often stuck with fixed Australian dollar prices from the local branches of multinational vendors.
And those that buy products in US dollars say they nervously watch the exchange rates, often several times a day, because a big drop in the local currency could make the difference between a reasonable margin and a loss.
Don't diss the distributors
When CRN spoke to resellers last year, many were quick to blame distributors for keeping prices artificially high.
"The Australian dollar is going up all the time and the distributors do pass it on, but they definitely don't pass it on as quickly as when the dollar goes down," says Mark Gluckman, managing director of Sydney systems integrator Regal Information Technology.
"When the dollar goes down, the distributors need to manage their losses.
"Now the distributors say because they lost so much money back then, they need to make it back now."
But distributors say that is an unfair interpretation of how they operate and the risks they take in buying goods from overseas in foreign currencies.
"When you had people last year criticising distributors, they have to understand that distributors are taking the currency risks away from them," says Darren Byrnes, director of business development at security and compliance software distributor Synergistex. "We could lose quite a bit of money if the dollar fluctuated badly."
In addition, the local offices of many large software vendors set the price in Australian dollars.
"Exchange rates only affect the products that we buy in foreign currency; from most of our larger suppliers, we buy in Australian dollars," says Laurie Sellers, managing director of ASX-listed distributor itX Group.
Read on for why every product purchase is a guessing game for disties.
Playing the guessing game
For distributors, the main risk is that the Australian dollar will fall in value between signing an agreement with a customer and when the customer pays.
"That can take anywhere up to three or even six months," Byrnes says. "Even after we've got a purchase order, it's still 30 to 45 days before they pay.
"The vendor still gets paid in US dollars, it's just a question of how many Australian dollars we need to put in.
"During that time, we're carrying the currency risk. We have to guess a price to cover the risk between the exchange rate now and what it'll be at the time of purchase."
If the dollar moves substantially during that risk period, it could mean the difference between making a reasonable margin on a sale and making a small loss.
"It wouldn't necessarily ruin our business, but it can shave 5-10 percent off our margins," he says.
In addition, Synergistex has a limited ability to pass on these price rises to customers, although there are some escape routes.
"Quite often on a larger deal we'll put in an agreement with a customer that if the exchange rate varies by a certain percentage point, we'll vary the price," said Byrnes.
"We always put an expiry date on our offers - usually 30 days at most.
"However, most customers are trying to get a fixed price - they want their budgets locked in and they don't want any surprises."
Even much larger distributors can feel the heat.
"Let's say the Australian dollar is dropping and we're asked to quote on a particular product that we buy in US dollars," Sellers says.
"If it takes the reseller seven days to get an answer from their customer and get back to us, there may have been so much movement in the exchange rate that it makes it difficult for us to honour that price.
"We have to decide whether we hold that price and cover the difference or increase the price to match the exchange rate."
Read on to see how disties try to offset dollar fluctuations to keep their margins.
Hedging bets
Where itX Group differs from Synergistex is that is uses a basic form of currency hedging once resellers have agreed to buy the product.
"Once we receive the order, on the day we forward buy the foreign currency," Sellers says. "Even if it were to take two weeks to get the product, we lock it in so the exchange rate doesn't affect us."
Although Sellers is aware of more sophisticated forms of currency hedging available, he says forward-buying currency is as far as it goes.
"We don't gamble on the exchange rate, we're not in the business of buying and selling currency," he says.
"We're not doing anything sophisticated that would represent a risk to us. To some extent we don't take the opportunities we could when the dollar's on the way up.
"With the volume we do and the fact we're a listed entity, it really pays us to be conservative."
Even so, when the exchange rate is moving quickly, itX Group can get caught short.
"Last September, the exchange rate was very volatile; over a couple of weeks it dropped from the high 90s to the low 70s," says Sellers.
"We had to make some difficult decisions.
"In most cases we honoured the quotes and took the heat on the margin just to maintain the relationship with our loyal and larger resellers, so that when things stabilised, they were still our customers and we could enjoy normal margins again."
No appetite for risk
After the currency volatility of the past year, Byrnes is also looking at the available hedging options.
"The exchange rate is always a very big concern," he says. "I watch the exchange rate every day and often use a number of sites to determine whether the dollar's rising or falling over time.
"Because the number of transactions we need to do is going up, we're discussing with a currency broker how we transfer money.
"If I knew where the dollar was going to be in a month's time, I'd be a very rich man. At the moment you just hope it averages out and if you lose on one deal, you'll gain on another one."
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