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British companies are braced for higher costs after sterling tumbled to a record low on Monday, with the prospect of an accelerated rise in interest rates also weighing on industries such as housebuilding.
Sectors including retail, hospitality and aviation are affected by the falling pound, which will make imports of commodities and goods more expensive for many companies already facing a cost-of-business crisis.
“The dollar is very, very strong . . . and it has an effect,” said easyJet chief executive Johan Lundgren. “We have lots of expenses in dollars and we have revenues coming in pounds.”
About 40 per cent of airlines’ operational costs are in dollars, including jet fuel and maintenance. Many airlines hedge their currency exposure as well as their future fuel requirements. Lundgren said easyJet was “one of the best hedged airlines”.
Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, said: “Many of the hops used in this country are imported . . . particularly from the states. Changes in currency is worrying for our industry for sure. People drink a lot of imported beers from Europe [too].”
If the pound stayed at these levels, he told the BBC, “things will rise . . . If you are drinking a double IPA that requires a lot of hops from the States, at some point that has to get passed through to customers”.
Kate Nicholls, chief executive of UKHospitality, which represents pubs, restaurants and hotels in the UK, said “a weak pound was not helpful for companies across the sector”.
She said: “It obviously pushes up the price of imported goods — and 60 per cent of our input food and drink produce is imported — but also impacts commodities prices in euros or dollars. So, for example, milk is sold and priced on global markets in euros and coffee in dollars. Even though we are self-sufficient in milk, the price is still affected by currency. This will be the case for lots of homegrown goods.”
Smaller businesses, which are less likely to have in place hedges against currency movement, also expressed alarm about the lack of stability.
Danny Hodgson, who owns London-based clothing retailer Rivet & Hide, said that it was not just the dollar that caused problems. He accepts dollars as payment on his website so costly US dollar purchasing invoices are being offset against better margins on sales.
His bigger problem was the fall against the yen, as Hodgson imports denim from Japan. “I am much more worried as the pound has lost against the [yen] and we have £400,000 of [yen] orders on the books,” he said.
“As a business owner I much prefer to be in a strong position as a buyer of foreign goods with a strong and stable currency. Business needs pragmatism, not ideology, and when this budget based on fantasy economics was delivered on Friday I did not cheer it in spite of the lowering of both my personal and business tax liabilities. It was pretty obvious to me that we would be paying for this giveaway within days.”
The FTSE 250, which has more domestic companies than the internationally focused FTSE 100 and so can be a better indicator of the UK economy, continued its fall on Monday. The index has dropped almost 6 per cent in the past five days.
Currys, which imports a lot of electrical equipment, fell more than 3 per cent, while shares across the housebuilding sector fell sharply on Monday given the likelihood of higher interest rates. Shares in Barratt Homes, Persimmon and Berkeley Group were down more than 4 per cent on Monday morning.
However, sectors where companies sell to the US are likely to benefit from a weaker sterling.
Shares in BAE Systems, which is expected to benefit from the increase in the sterling value of its US profits, rose sharply. Dollar-earning consumer staple companies such as Unilever and British American Tobacco also climbed.
Roddy Davidson, head of research at Shore Capital, said that companies in his coverage with a “favourable tail wind” given significant dollar earnings included WPP, Informa, Future and Pearson.
Businesses with larger US businesses such as Burberry, WHSmith, Watches of Switzerland and JD Sports could stand to benefit.
Six carmakers with UK plants told the Financial Times on Monday that hedging meant they would face little immediate cost impact. Yet leading industry figures also warned that any sustained fall in the value of the pound raised the overall cost of doing business in the UK — making it less attractive for international businesses such as Toyota or BMW in the long run.
Other parts of the industry could benefit. Luxury names such as McLaren and Aston Martin buy many of their parts in euros but sell large numbers of cars to the US, making their exports more competitive.
Additional reporting by Sylvia Pfeifer and Jonathan Eley
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