Last year, we presented our inaugural “Talking Heads: Top industry executives discuss hot-button topics.” Well, you can call this Act No. 2. We’re providing it again for your reading enjoyment.
The questions we asked this time around are:
1. What have you done to overcome the weak U.S. dollar?
2. Airlines and shipping companies can invoke fuel surcharges on their customers to help assuage high oil prices. Is there something similar you have done or can do to help mitigate the fuel price problem?
 We got a great cast of industry experts to respond. Here’s the list: Scott Emmerman, Hohner; Jim D’Addario, D’Addario; Stuart Spector, Spector Bass; Curt Mangan, Curt Mangan Inc.; Woody Moran, Namba Gear; Rudy Schlacher, U.S. Music; David Lynn, Phonic; Dick Boak, Martin Guitar; Chuck Sher, Sher Music; Paul Damiano, Kaman; Peter Janis, Radial Engineering; Chris Rose, Eminence Speaker; Jeff Babicz, Babicz Guitars; Dan Roberts, Musicorp; Joe Naylor, Reverend Guitars; Bill Xavier, Hanser Music Group; Billy Bones, Sparrow Guitars; John Hawkins, Samick; John Nady, Nady Systems; Josh Vittek, Kahler; and Don Rhodes of EM Winston.
Let’s start with our first question.
The Music & Sound Retailer: Guys, what have you done to overcome the weak U.S. dollar?
“The weak dollar has been very helpful to expand our export business,” said Damiano. “Our export sales are up in double digits in many cases. That is about the only good thing one can say about a weak dollar. The weak dollar causes severe problems for the foreign vendors whom we buy from, who, for the most part sell in dollars. This has forced some very tough discussions between us and our suppliers, and precipitated a lot of analysis regarding costs and selling prices of import products. In all cases, the costs of goods we import are going up. And in some cases, the increased costs are in the 10 percent to 15 percent and even higher range. We have no choice but to pass these cost increases along to our customers. And ultimately, dealers will have no choice but to pass the higher costs along to the consumers. Many of the products in the music business are already sourced in low-cost countries, so we do not expect a huge shift to even lower-cost source countries as a way to solve this problem. As long as the dollar remains as weak as it is, these higher costs are a fact of life no matter where we source product. How we as business people handle these increased costs at all levels will have a huge impact on the health of our individual companies.”
“Nothing really,” responded D’Addario. “We cannot control currency fluctuations and do not speculate on currency fluctuations in anyway. We take them as they come. Fifty percent of our business is export and when the dollar is weak we see opportunities in foreign markets, when it is strong we have to work harder to maintain our export levels. When the dollar is weak it affects some of the raw materials we import but for the most part we use American materials.”
“The drastic decline of the U.S. dollar against most foreign currency has it problems and blessings,” said Schlacher. “Since a large portion of our sales are export, we were able to offset our losses on the import side by the export group, thus avoiding price increases in the past. The high cost of fuel as well as other raw material and labor increases in combination with the exchange rate decline will give us no choice but to adjust pricing for the second half of the year. For example the expected exchange rate decline against the Chinese RMB (Renminbi, also referred to as the Yuan) is 12 percent in ’08.”
“Musicorp has always sought to offer its dealers the best possible value for the products that we sell,” said Roberts. “While Musicorp’s brands have certainly been affected by rapidly rising prices, our efforts to work closely with suppliers to minimize price increases have helped the company to make its products an even better value relative to other products available in the marketplace.”
“We are focusing on ways to help our customers improve their turns and profitability,” said Xavier. “The simple fact is that the dollar weakness along with many other global factors are increasing prices. This however might not be all bad news. Our industry has seen several years of average selling prices decreasing. This has meant dealers must sell more products to more customers just to stay even. A certain amount of upward pricing pressure might in fact be a good thing.”
“We have been focusing on our international customer base as well as reaching out to potential new international customers,” said Rhodes. “This should be a very good time to use the weak dollar to our advantage as it provides additional purchasing power for international customers. We are also making sure that any special offers we make are with master carton quantities in mind which helps us to sell and process these larger orders more effectively and profitably. We have also requested payment on shorter terms than usual which has not been an obstacle based upon all of the other positive aspects a weak dollar offers to an international customer.”
“As the old joke goes, ‘If we have to sell below cost, let’s get a bigger truck and make it up on volume,’” said Hawkins. “…We have used our dealer network to pool larger factory orders and asked for the best possible pricing from our own factory—even if it means being overstocked for short periods of time. This has helped us keep our prices in line with inflation. The much higher unit volume allowed us to move some production from our own more expensive factory in Korea to Indonesia. By also moving some of the highly trained personnel with the Korean tooling, we were able to keep the higher quality and reduce our dealer net pricing on over 30 SKUs in January. Our dealers have responded and rewarded our decision. We thank every one of them!”
“We have done most of our production in China for about 25 years now, and ever since the Chinese Yuan was unpegged from the U.S. dollar in late July, 2005, the currency exchange has been mostly a downhill roller coaster ride, with the RMB continually appreciating around one-half percent a month vs. the U.S. dollar,” said Nady. “According to the currency futures forecasts, this trend is slated to continue for at least another year. Complicating the issue further is a huge rapid rise of raw materials costs within China, a dramatic increase in labor rates, and elimination of many favorable government subsidies. So for Nady Systems, it has been quite a challenge over the last few years, especially since most of our products are competitively value priced. Raising prices, of course, would be the most obvious response to counteract these trends and maintain profitability, but we’re constrained to a large extent by competitive pressures within our markets. With our costs of production changing so rapidly from month to month, we’ve also had to increase our in-house inventory to higher levels than normal to lock in lower production costs. As this affects our cash flow, we’ve also tightened up our overall operations to combat these budgetary pressures.”
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