When Covid-19 hit, Finnish furniture company Pohjanmaan Kaluste Oy decided to start hedging its currency risk. The move has allowed the company to set currency worries aside and focus on running its thriving business in challenging times.
Finnish furniture company Pohjanmaan Kaluste Oy had been steadily growing its American export business in recent years when the US dollar plunged in the wake of Covid-19.
With roughly 15% of its sales in USD, the company quickly decided to implement a risk management plan to protect its bottom line from the wild currency swings.
“The US election was coming up. No one knew what would happen politically or what Covid would bring,” says Pohjanmaan CEO Harri Pakka. “We accepted a certain currency level and used hedging to nail our exchange rate to that.”
Pakka says the goal was “to buy peace of mind and to be able to sleep nights” without having to worry about turmoil in the FX markets.
Growth in the US market
Pohjanmaan was founded in 1964 by Pentti Viitala, who started out re-upholstering used sofas in the henhouse on his farm and selling them door to door. The company, which prides itself on quality furniture at fair prices, has grown steadily over the years, gaining market share in Finland and internationally. Still family-owned and operated, the company now runs four production facilities in Finland and Estonia with around 450 employees.
In 2012, Pohjanmaan started to export to the US under the name Luonto Furniture, setting up headquarters in Florida and a distribution facility in North Carolina. The US market was a difficult one to crack, according to Pakka, who has worked in the furniture business for over 30 years, 10 of them at Pohjanmaan.
“The US market is the toughest market in the world marketing-wise. We didn’t have any name, history or experience there, so we had to work hard to find the right products to the right partners, network and customers. But after a few years, it started to pay off,” he says.
The company has become known in the US for its high-quality Scandinavian sleeper sofas targeted to the mid-to-high-end segment. With a consolidated turnover of EUR 25 million in 2019, around 15% of its sales are in foreign currencies, primarily US dollars.
A layered hedging approach
Due to its US currency exposure, when the volatility of the dollar against the euro started to spike after the spring of 2019, Pohjanmaan decided to secure its USD currency level using a so-called “layered hedging” approach.
Under that approach, a company decides what amount of currency it would like to lock in, looking a year into the future. For example, if a company decides to hedge 100 USD, it would hedge 25% of it to three months, 25% to six months, 25% to nine months and 25% to 12 months. In a one-year approach, the company ends up having four hedges going simultaneously, each with different maturities. Each quarter consists of hedges done in different periods, in different market environments, which yields a smoother exchange rate.
“For Pohjanmaan, it means we contact them every quarter and make the new hedges,” says Nordea Markets’ Jussi Välimaa. “They get less volatility and more stable USD income.”
Välimaa says he had discussed the idea of implementing FX hedging with Pohjanmaan for a couple of years, but it was the turmoil from the pandemic, combined with the upcoming US election, that persuaded the company to act.
“We wanted a worry-free solution for the currency volatility that would allow us to concentrate on worrying about other things,” says Pakka.
Freeing up time for the core business
There have been plenty of other things to worry about, according to Pakka. In mid-March, after the pandemic hit, business ground to a sudden halt, requiring quick decision-making. The company decided to temporarily close two of its factories and cut a third back to working three days a week.
That continued for a while until business started to pick up again in the summer, and the factories reopened one by one. With people largely homebound and unable to travel, consumers were investing more in their homes, and furniture sales started to pick up dramatically.
“The market has actually been quite hot, and the autumn has been one of the busiest times ever,” says Pakka. However that quickly led to other challenges, including shortages of materials, from foams and mechanisms to upholstery materials.
Combined with disruptions to supply chains and international transport due to the pandemic, those material shortages are currently the biggest obstacle to the company’s growth, Pakka says.
“It has been quite a year, and in the end, it seems it will have been quite a good year. It has certainly helped having the currency worries set to the side,” he adds.
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Many companies are behind the ball on their FX risk
Not all small and mid-size businesses have acted to manage their currency risk. A recent study from Nordea finds that almost half of such businesses surveyed in the Nordics have not taken sufficient steps to guard against currency swings. That’s despite the large and unexpected losses many have suffered this year during the pandemic and concerns about company liquidity in the coming months.
Companies report that lack of in-house competence and lack of time are the main barriers to implementing an FX risk management strategy.
Nordea recently introduced AutoFX Hedging, allowing companies to automate their currency hedging in a simple and hassle-free way. Companies set the criteria for their hedging programs, and the currency robot does the rest. The solution is currently available in Sweden, Denmark and Norway.
Asked what advice he would give to other companies navigating these challenging and uncertain times, Pakka says it would be to analyse your risk and make decisions accordingly.
“The worst thing you can do is to not make decisions. You can always correct them if they turn out to be wrong,” he says.
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