Case Scenario:
Use the example of Benny Baby below. In international terms, what were the effects of currency fluctuations on the Mexican consumer during that time period? What do you think were the effects of that devaluation on Benjamin Cabrera? What would have happened had Benjamin been the exporter and I had been the importer?
Here is the description on the Benny Baby story:
Let me give you now an example of the risks both exporters and importers face when doing international transactions. At Safeline Children's Products, I had a distributor (a very good one) in Mexico City called Comercializadora Benny Baby. I may have told you about him before.
Benny Baby, because they had been with us for a good amount of time, and because they normally paid in advance for their goods, asked us for a special dispensation for a second container load of the product (they usually only ordered one container at a time). They had a large promotion going on and needed the extra units. The time of the year was close to Christmas and things were going well.
We allowed them to purchase the second container on a 30-day lead time. In other words, they paid in advance for one container and had 30 days to pay for the second. The first was pre-sold to large department stores, the second was to be used for their promotion at Christmas.
Just a few days after the goods were on the road, Mexico devalued the Peso. Essentially what that meant was that whereas Benjamin Cabrera, owner of Benny Baby had gone to his bank, purchased the dollars needed for the first container, and sent the money to us before the shipment. Benjamin is an exporter, per say.
He calculated his selling price based on his costs. The cost of buying dollars to purchase the goods was a big factor in the price to his customers.
When the currency was devalued by 50% or more, this meant that for the second container he had to spend that percentage amount over the original amount just to pay us. When he purchased the units at $99 each he paid $99 x the value of the peso plus the transaction charges by the bank. For the second container he had to pay $99 per unit still, but in order to get the $99 US equivalent he had to fork out over 50% more of his hard-earned pesos.
Because both containers were on the road the shipments went through. However, Benny was in a fix because he simply didn't have the cash. We were in a fix because we were not going to get the cash until Benny corrected his situation. The process took over six months. We put Benny on a payment schedule and he paid all of the dollars he owed us. He had to raise his prices of course over that same 50% in order to pay us.
The consumer in Mexico, still earning the same amount of pesos regardless of what the currency was worth on the market, looked at the price one day and then nearly fainted the next because it had gone up almost 100%.
This is an example of risks that both importers and exporters face. I had been told by our bank here in Denver that a devaluation was going to take place and I strongly urged Benny to buy the necessary dollars for the second container before the devaluation. He did not do it. As a result . . . well, I think you can see how this one went for him.