Dollar Exports and Won Revenue Are Parting Ways

What is the signal?

The export figures themselves are good. Cosmetic exports over 1–10 September came to USD 401 million, up 46.1% on the same period last year and up 17.4% on the previous month. Over that stretch exports to Europe reached USD 92 million, up 88.6%, and to North America USD 82 million, up 33.6%, with U.S. exports reported at an all-time high for an early-September period. K-beauty's export growth rate for the first half also came in at 27.3%, 12.7 percentage points higher than last year.

Over the same weeks, though, the exchange rate moved the other way. The average won-dollar rate for the third quarter, measured from 1 July to 8 September, was KRW 1,436, more than 4% below the second-quarter average. That current was also cited as the reason the share prices of the three domestic ODM companies and APR, which had been setting new highs through August, stalled in September.

Financial News reported a scenario in which the rate falls 10%: APR, whose North American business accounts for about half of revenue, booked KRW 647.9 billion in North American revenue in the first half, and a straight conversion would bring that to the KRW 580 billion range. APR and Dalba Global, each with overseas revenue above 80% of the total, were placed among those taking the hit head-on, while Amorepacific and LG H&H, with domestic revenue above half, were placed on the more sheltered side.

The scope of this signal is worth narrowing. That KRW 647.9 billion calculation is a straight conversion assuming a 10% drop, not an earnings forecast, and because settlement currency, hedging and local cost structures differ by company, the same rate produces different results. Average rates also shift with how the period is cut. What can be taken from this reaches only as far as the direction: a phase has begun in which export growth and won-denominated revenue growth pull apart.

1. Export value and revenue were never the same number

Customs-cleared exports are tallied in dollars; revenue on the financial statements is written in won. The exchange rate sits between the two. So 'exports rose 46.1%' and 'revenue rose 46.1%' are not the same sentence.

Most of the time the gap is invisible. When the rate holds steady the two numbers track each other closely. It shows itself only in a stretch like this one, where the won moves in a single direction — and the trouble is that targets and incentive thresholds were set before that stretch began.

It is safer, then, to write the export target as two lines: a dollar target and a won target. The dollar target is a number sales and channel teams can be held to; the won target has the exchange rate mixed into it. Collapse them into one line and a team can sell well and still miss, and the cause gets misread as a sales problem.

2. Costs paid in foreign currency absorb part of the shock

A falling rate does not only shrink revenue. Costs spent abroad in foreign currency, such as advertising and selling commissions, shrink alongside it. For that reason the effect of won strength does not print on profit in full measure with the revenue decline.

A Shinyoung Securities analyst held that while the impact of a strong-won environment is unavoidable, the decline in profitability for the cosmetics industry is limited, and that the third quarter is more likely to deliver solid results. Foreign-currency income and foreign-currency spending move together and partly cancel out.

What a brand should look at when applying this to itself is the difference. The gap between money coming in as foreign currency and costs going out as foreign currency is the portion genuinely exposed to the rate, and without knowing its size there is no way to choose a response.

• The share of total revenue that arrives in foreign currency
• The share of total costs that leave in foreign currency
• The difference between the two — the amount actually exposed
• The size of costs paid only in won (domestic production, labour, logistics)

3. Domestic production with overseas selling is the most sensitive combination

What produced the difference between companies was structure, not scale. Those with overseas revenue above 80% took the hit head-on; those with domestic revenue above half sat in a buffer zone.

An indie brand that outsources production to a domestic OEM or ODM and sells abroad structurally resembles the first group. Manufacturing costs and components go out in won while revenue comes in dollars, so margin thins by however much the rate falls. The absence of a domestic-revenue buffer matters more than company size.

The structure itself cannot be changed quickly. Knowing it, though, at least changes the order of cost negotiation and pricing. Asking for a cost reduction after the rate has already turned unfavourable and designing the price around an assumed band of rate movement produce different outcomes.

4. Look at the contract terms before touching the price list

When the rate turns unfavourable, the first response that comes to mind is a price increase. Yet in overseas distribution contracts price is rarely an item a brand can change at will. Agreed wholesale prices, promotion calendars already locked in, and the lead time required to change displayed prices all sit in the way.

The place that can be touched sooner is the flow of payment. Which currency the invoice is issued in, whether the rate applied is the one at order or at shipment, and how many days pass before the money actually lands all change what is left from the same contract.

Collection period is the item most often skipped. On terms where payment arrives two or three months after shipment, the brand carries every bit of rate movement in between. In a stretch where the rate moves in one direction, the collection period is itself a profit-and-loss item.

• The currency used for invoicing and settlement, and whether it can be changed
• Which point sets the applied rate — order, shipment or settlement
• The real number of days from shipment to money received
• Whether a price-renegotiation clause exists, and what triggers it

5. Specification and market mix also narrow the swing

The same rate movement feels entirely different on a thick-margin product and a thin-margin one. Where margin is thin, a few percentage points push straight into loss; where there is room, a quarter can be absorbed. What creates that room is product specification.

It is risky, though, if the only method for creating room is cost reduction. Margin made by lowering the quality of the formula or the container comes back as returns and lost repeat purchase. Adding grounds that explain the price, and holding the price, lasts longer through an FX phase.

The mix of selling markets is a buffer too. Through July of this year, European K-beauty exports overtook North American exports, part of a broader diversification of destinations. When revenue sits in a single currency, the whole company moves when that currency moves; with euros and yen in the mix, the swing itself is smaller.

• Margin rate by product, and how profit changes on a 5% rate move
• Whether there is room to build margin by means other than cost cutting
• How concentrated revenue is in one currency
• Whether the coming year's new-market candidates diversify by currency as well

The first question for the brief

Rather than beginning with 'we will raise overseas revenue', try one sentence: in which currency will that revenue arrive, and what percentage of our costs leaves in the same currency? Then add one more line beneath it. If the rate moves another 5%, what can we touch first — the price, the contract terms, or the product specification?