How world events dictate financial performance



It has long been acknowledged that coincidental occurrences can impact greatly on a company’s results. Currency shifts, for example, are often cited as a source of dissatisfactory results for companies whose presence straddles multiple countries or continents. This is something expanded on by WPP boss Martin Sorrell, who said this week that “the strength of sterling has ravaged […] our revenue figures.” Earlier this summer, too, watchmaker Swatch said that overvaluations of the Swiss franc led to lower first-half growth. Everyone knows that political and financial situations can be primary concerns for global firms. Is there any way to minimise this kind of impact, or is it just a fact of doing business in today’s global marketplace?

One of the most interesting illustrations of this phenomenon that I can remember came up this month, with brewing giants Heineken and Carlsberg reporting their results at around the same time. Given that the companies are direct competitors, with similar operating models, it looks like an anomaly that Heineken reported encouraging volume growth of 3.1%, while Carlsberg issued a warning of impending profit reductions. However, the explanation merely lies in the emphasis each company puts on specific markets. Carlsberg’s presence in Russia and Ukraine is more substantial than Heineken’s; as a result, recent unrest in the region has impacted on Carlsberg to a more profound extent.

While unrest can impact in a negative way, as we’ve seen with Carlsberg, social stabilisation inevitably creates the reverse effect. Perhaps the best example of this comes from Burma, which has had economic sanctions loosened in the past few years. As a result, a host of big businesses are now trying to access its untapped potential. The company that has taken best advantage of this is Coca-Cola. As of this June, according to Forbes, the firm boasted a market share of over 50%, through committing to local beverage production and embracing the new economic situation in Burma. As this case shows, deliberately identifying areas of potential and associating a business with those areas can have a really positive effect.

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Burma, Myanmar

In the UK retail market, lots of press has been dedicated to the rise of discounters. Lowering prices in this way has a big knock-on effect, which affects the whole country. It was one of the prime reasons for last month’s fall in inflation, as the Guardian said last week. At the same time, wide-scale industrial factors such as falling cotton values are enabling retailers to cut in-store prices, keeping up with the likes of Aldi and Lidl. The effects of retail pricing are thus both local and global at the same time, and show the complexity that goes into how companies make their money.

This is certainly something to bear in mind for the many companies who are planning to roll out an international presence in the near future. But no one should forget that it is often impossible to control the variances of entities like the global currency market. As Allister Heath said in the Telegraph recently, “[businesses] should treat it like the weather, a variable they simply cannot control.” Because it can leave a stain on a firm’s balance sheet, it looks like any other operational factor, but in reality the best policy could be to wait for a rebound!

I’ve briefly looked at the brewing, retailing and advertising sectors in this piece – are there any other global pressures, such as currency fluctuations, that you think are particularly prevalent in affecting financial results? Let me know at moira@thembsgroup.co.uk, and have a lovely weekend.