Case Example: What can we learn from Nabisco and its success with Oreo and Chips Ahoy?
Historical Role of the US Dollar
Absence of a universal currency
Exchange of the dollar based on gold ounce
Common denominator in world trade
The Gold Standard
three major features
system of fixed exchange rates
limited rate of growth in a country’s money supply
automatic adjustment tool
problems
Development of Today’s International Monetary System
The Bretton Woods Conference in New Hampshire in 1944
ruled out return to the gold standard
free floating exchange rates could not work
need for a monetary system to recognize that exchange rates were both
national and international
Development of an International Monetary System (cont)
The International Monetary Fund (IMF)
to promote international monetary cooperation
to facilitate expansion and balanced growth of international trade
to promote exchange stability
to assist in establishment of a multilateral system of payments
to give members temporary use of availability of funds
to shorten duration and lessen degree of disequilibrium
Alternatives
SDRs - Special Drawing Rights - a weighted average of key stable
currencies: US Dollar, Japanese yen,
Franch franc,
German deutsche mark, and British pound
euro - monies of European Single Market
Countertrade, barter, and various types of goods/currency transactions
The International Bank for Reconstruction and Development - The World Bank
The Impact of Exchange Rates
The exchange rate is the domestic price of a foreign currency
If one country changes the value of its currency, firms selling to
or
from that country may find that the altered
exchange rate is sufficient
to wipe out their profit or, on the brighter side,
give them a windfall gain
Key Processes:
Devaluation: reduction in value of one currency compared to others
Suppose NJ currency is worth less that PA currency
Revaluation: increase in value of one currency compared to others
Suppose NJ currency worth more than Delaware currency
Foreign Exchange and Foreign Exchange Rates
Purchasing Power Parity (PPP); the exchange rate between
the currencies of two countries is in equilibrium
when it equates
the prices of a basket of goods and services in
both countries.
Exhibit 3-2 “ The Big Mac Index” - what does it really mean?
11,000 Rouble/$2.42 = 4545
11,000 Rouble/$1.92 = 5739
(4545-5739)/5739 = -21%, local currency is undervalued
PPP = local price/price in US
Gives the prices of a Big Mac AS SOLD IN THE US -
does not take into account what it would cost to
sell it in
that country or to get materials there - it is useful
as long
as you know what it means
What is the Asian Financial Crisis?
1994 - China devalued the yuan renminbi; China’s exports became cheaper
China and Japan’s trade deficits were paid by heavy borrowing - could
not maintain their exchange rates vs. the US dollar
Thailand, Malaysia, Korea, and Indonesia lost significant value of
their currencies
Consumers change their consumption behavior - buy necessities, name
brands
Strategies in Financial Crisis Situations
Consumer responses
Stop using some products
Use fewer, less
Use substitutes
Brand loyalty to gain value, reduce risk
Switch to value brands
Respond to daily price specials
Strategic responses
Pull out of mkt - hard to return
Emphasize value - tell benefits
Emphasize inexpensive lines, phase out expensive lines
Reduce sizes, amounts
Cheaper packaging
Increase advertising - local
Local sourcing
How did Nabisco Sucessfully Introduce the Oreo and Chips Ahoy?
Oreo supermarket sales went from 350 tons in 1994 to 755 tons in 1996
Chips Ahoy supermarket sales went from 177 tons in 1995 to 755 tons
in 1996
Wouldn’t consumers give up eating snacks if their currency is worth
less money?
The Case of the Mexican Peso
Mexico devalued the peso on Dec. 20, 1994:
attempted to end turmoil in financial markets
Peso was worth 29 cents, changed to be worth 14 cents
- some import prices more than doubled
Imports into Mexico - more expensive, while exports
from Mexico became more competitive
Firms with their investments in Mexico saw their earnings
per share drop as the dollar value of their Mexican
assets declined
1975: 12.5 peso to $1 US; 1976: 20 peso to $1 US
Devaluation - it took more pesos to make 1 $US
McDonalds in Russia
Several hundred-seat Mc Donalds’ in Moscow
Two sets of cashiers: one set accepts convertible currencies,
and one set accepts rubles
Why?
Also - consider what the price of the Big Mac is in Russia
IN COMPARISON to the average earnings - it is like
a fancy dinner out
What is the euro?
11/15 EU countries link local currencies to the euro; all local currencies
cease -7/1/2002
Changes in pricing, computer systems, ways of thinking about value
Price Transparency: price comparisons, localized prices will
become apparent to shoppers
Psychological impact: price endings? Euro eliminates price points.
Are prices in local currencies more meaningful?
Other costs - tariffs, shipping, etc.
What Types of Strategies are Applicable?
What areas in your business require changes? E.g. catalogs, web sites.
Are any of your promotions linked to certain prices having meaning?
Identify strategic price points
Single prices, features as options?
Invoice currencies and payment policies
Education programs
Timing of the changeover
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