Luke Fisher, CEO of U.K.-based Steribottle Ltd., had a lot to feel proud about as he led a group of industry partners and colleagues on a tour of his company’s new manufacturing facility in Chicago. The nine-year-old firm - a maker of single-use, recyclable baby bottles - was already a market leader in Britain, where its products were a hit with harried new parents. Now his company was on the cusp of entering the North American market. In the past 12 months, it had opened a head office for U.S. and Canadian operations in London, Ont., and commissioned a state-of-the-art, global manufacturing facility in the Windy City.
Fisher exuded confidence as he led the group around the plant. “In the field of infant feeding, we’ve come up with the equivalent of a disposable diaper,” he proclaimed to a colleague from the packaged-goods industry as they watched case upon case of bottles roll off the production line, destined for the U.K. market.
Soon, those bottles would be hitting retail shelves in North America, too. Behind the scenes, however, Fisher was struggling with an important business question: How would he establish a pricing strategy for his company’s baby bottles? It was a complex and multi-faceted issue for such a simple and familiar product. But Steribottle’s move into North America meant that it was now an international company, and would have to factor myriad market forces into determining how its bottles were priced. This wasn’t news by itself, and Steribottle had already taken several steps to mitigate these forces. But with the collapse of the markets and the arrival of recession, the company, like so many others, was in uncharted territory. Oil prices were a major issue due to their influence on the cost of plastics used in Steribottle products. And oil prices, though always volatile, had been swinging wildly for the past year. More significantly, Steribottle would soon be doing business in multiple currencies - U.S. and Canadian dollars, as well as British pounds - and recent steep fluctuations in their relative values had the potential to disrupt margins. This had become a particular concern in the second half of 2008 as the pound - the currency in which Steribottle reported - suffered significant declines against the greenback and the loonie.
In dealing with these issues, Fisher had a few things working in his favour. The first was Steribottle’s decision to locate its new global manufacturing facility in Chicago. That meant its products would be made and priced in the currency of its largest potential market, thus creating a natural hedge for a substantial amount of its future business. On top of that, Fisher had experience in managing through periods of volatile oil prices, dating back Steribottle’s launch in the U.K. in 2000.
Some of his initial challenges were mitigated by the fact that Steribottle’s products were an immediate hit, standing out as a go-anywhere, sterile product that helped spare parents the time-consuming chore of sterilizing their own bottles. But the backbone of the company’s strategy rested on product redesigns that reduced the amount of plastic, and therefore costs.
By the middle of the decade, Steribottle had become an unqualified success, with products in major retail chains across the U.K., and international expansion on the drawing board. The decision to move into North America came early in 2008, when public health concerns over a chemical known as Bisphenol-A (BPA), a component used in some plastics, inclduing some baby bottles, reached a crescendo. In Canada, the federal government put an outright ban on the use of BPA plastics in baby bottles, while major retailers in the U.S., including Wal-Mart, vowed to remove those products containing BPA from its baby-product aisles. The shift in public opinion gave Fisher a marketing opportunity, and he jumped, with plans for a launch in Canada, followed by a U.S. push.
Getting the Chicago plant up and running had occupied most of Fisher’s time during 2008. But his thoughts never strayed far from the issue of how to price his company’s products, especially as oil prices soared, then crashed, and as the pound tumbled against North American currencies. As the year progressed, he came to the conclusion that he had two options. On one hand, Steribottle could set a fixed price. That would allow retailers to make long-term pricing decisions, and stable prices would be more appealing to consumers. The risk was that if the pound continued to slide against North American currencies, or if oil prices took off again, Steribottle would lose it margins. The alternative was to let the price of Steribottle float with changes in currencies and oil prices. That would protect margins, but Fisher worried that retailers and consumers wouldn’t accept frequent price revisions.
Back at the plant, Fisher ended his tour. After saying his goodbyes, he stepped outside to catch a taxi to Chicago’s O’Hare airport and a flight to Toronto. He was eager to get Steribottle products on to North American retail shelves, and confident that it would be as successful in Canada and the U.S. as it had been in the U.K. - just as long as he could get his pricing strategy right.
The Expert View
Camilla Sutton, Co-Head of Currency Strategy, Scotia Capital
Steribottle is a new product in North America, so Fisher can’t easily pass currency and commodity risk on to retailers. He’ll need a relatively fixed pricing strategy. The best approach would be to set prices to ensure his firm’s viability, even if margins fluctuate. This a delicate balance, but it can be achieved.
On both the currency and commodity fronts, there are several financial instruments Fisher can use to help establish proper hedges, including futures, forwards and options. These are not complicated or “dangerous” derivatives. In fact, with hedging the simplest strategy is often the best. Fisher’s bankers will be able to provide the guidance he requires.
As for Steribottle’s Canadian strategy, Fisher should realize that he has a partial natural hedge as our dollar is well correlated with oil prices. When oil is high our dollar is generally strong, which will give Steribottle a gain once Canadian revenue is converted to British pounds. This, however, isn’t an exact hedge as the correlation isn’t as strong as strong as with the U.S. dollar, and it does break down.
The key for Steribottle will be in estimating its sales. If sales in Canada grow as they have in the U.K., Fisher will have a good idea of what to expect, which will make hedging easier. He would do best to hedge a significant portion of his estimate of both oil and Canadian-dollar needs, while factoring in the hedge already in place between Canadian dollar and oil prices. The estimates of costs and sales are important as overhedging leaves his firm just as vulnerable as underhedging, or not hedging at all.
The Expert View
Matthew Hannon, Chairman, Delhi-Solac Inc.
My business, which manufactures steel tubing for sale in Canada and the U.S., faces challenges similar to Steribottle’s. In our case, we deal with volatile steel prices as well as currency issues. Our view is that volatility, which has risen dramatically in recent years, is here to stay. As information becomes more available, and with the emergence of powerful financial intermediaries such as hedge funds, we expect 10% to 20% annual foreign-exchange fluctuations and 50% to 100% commodity-price fluctuations to become more the norm.
As a result, it is incumbent on companies, large and small, to use every available tool to minimize margin erosion. Unlike the steel industry, where the futures market is nascent, there is an established futures market for oil and oil-related commodities. Steribottle should talk to specialists in this area to develop a hedging strategy for its raw materials supply. Similarly, it should talk to its bank or other currency specialist about hedging strategies for the three currencies impacting its operations. While hedging strategies aren’t cheap, in our volatile markets, they can be an excellent investment.
Secondly, the company must maintain, to the extent possible, a flexible pricing strategy to help protect its margins. No company can afford to absorb the kinds of price increases that we have seen recently in most commodities. For that reason, I would recommend Steribottle develop a two-pronged strategy of using what hedging tools are available coupled with a timely, flexible pricing strategy to help weather the challenges it is facing.
The Outcome
Fisher is still weighing options in developing a price strategy, but he is considering hedging currencies and commodity costs to bring more certainty to Steribottle’s operations. Fisher is also open to the idea of adjusting prices periodically to reflect sustained commodity price changes.
“Our objective is to ensure that consumers continue to find that Steribottle is attractive for its features and price,” he says. “In today’s extraordinary international economic environment, new approaches to pricing strategy may be required. Ultimately, though, it comes down to building long-term partnerships with customers and suppliers, where all parties can be long-term winners and are focused on the goal of consumer satisfaction.”
Beyond pricing strategy, Fisher is finalizing Steribottle’s North American launch plans. Sales visits have been encouraging, he says, and some Canadian retailers have already confirmed their interest in listing Steribottle products.
This case study was prepared by Financial Post Magazine and the Pierre L. Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business (University of Western Ontario). The case method is a key learning tool in the cross-enterprise leadership approach used at Ivey. The views represented here are solely those of the case authors. Some details may have been changed to protect privacy.
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hospital bed
hospital bed
Its amazing how the things are going for you lately…
January 30, 2012