Cash Management

The Euro: One Currency, Many Problems

The January 1 switch to a single monetary unit could be bad news for retailers on the continent.
Ian RowleyOctober 1, 2001

With less than three months to go until the full debut of the euro, how confident are Europe’s CFOs that the changeover will go smoothly? Have they converted their accounting and payroll systems? Have they prepared for the new euro notes and coins? And have they considered what hidden dangers could strike on New Year’s Day?

Figures from the European Commission paint a bleak picture. The commission estimates that just 8 percent of all companies in the euro zone currently maintain their accounts in euros, and that only 9 percent of national payments made by companies are in the new currency.

Against this backdrop, Lode Beckers, founder of Lobo, a Brussels- based euro consulting company, concludes that there’s still plenty to be done if a smooth changeover is to be guaranteed. He notes that while many businesses have allocated ample resources to their euro projects, the quality of preparation has been by no means uniform. ”Larger companies are better prepared than SMEs,” he says.

Hans-Joachim Wurth agrees with that statement. Wurth is EMU program director at SAP, the German software giant that provides ERP software to many large companies. Wurth estimates that three-quarters of SAP’s 6,700 installations in the euro zone have now successfully converted to euro accounting. And, he adds, ”We anticipate a timely conversion of the remaining customers.”

One large company that was an early converter is Thales, the French aerospace and defense specialist. Ross McInnes, CFO at Thales, says that preparing for the euro hasn’t been dissimilar from the company’s everyday business of designing, building and managing large-scale defense projects. ”I wouldn’t say getting ready for the euro has been easy. But the nature of our business — as a long-term project company — means our instincts are honed for it.”

Forty Milestones

In Thales’s case, honing for the euro meant appointing a project director to ensure that each of the company’s 70 businesses met 40 milestones on the path to conversion by the beginning of 2001. McInnes adds, however, that Thales’s euro project — which cost a little over $19 million — wasn’t overly complicated because the company isn’t a retailer. Hence, the impact of new notes and coins will be minimal. ”We’re fortunate in that we deal with governments and large businesses,” he explains. ”We’re not a consumer company.”

Indeed, euro experts warn that the single currency poses the greatest challenges for those companies with sizable retail operations. For one, retailers will require cash floats up to 20 times the usual level as customers paying for goods in their old national currencies receive change in euros and cents after January 1.

For another, the introduction of the euro raises a number of pricing issues that will be felt most acutely by retailers. Increased transparency, for example, is expected to squeeze profit margins for companies operating in multiple markets. Why? Because consumers will be able to compare prices more easily thanks to the single currency. Companies that apply different pricing policies in different euro-land markets could find themselves under pressure to standardize prices at the lowest level — or risk being undercut by gray-market intermediaries.

In addition, the redenomination of lower-cost products in euros could also have an impact on earnings, since prices will be rounded up or down for simplicity. For example, management at Die Presse, an Austrian daily newspaper, announced that as of January 1 it will charge 1 euro — or 13.76 schillings— for a paper. That’s compared with its old price of 15 schillings. The cover price has already been cut to 14 schillings.

Ray Nulty, a euro specialist at IBM in Dublin, adds that while retailers may have invested wisely in the technical aspects of euro preparation, senior executives may be ill-prepared for the business risks of conversion. He says, for example, that retailers may suffer from cash-flow problems as shoppers delay making purchases in the first few weeks of 2002. Long checkout queues, he contends, caused by unfamiliarity with the new currency could cause consumers to stay at home.

But Giancarlo Bottini, finance chief of Benetton, the fashion retailer based in Treviso, says he’s not losing any sleep over the euro’s introduction. He says Benetton already harmonizes profit margins across Europe, mitigating the threat of increased price transparency. And, like Thales, Benetton has been keeping its books in euros since the beginning of the year. ”From my point of view, it will be a soft landing,” he says. ”I don’t foresee any problems.” If the numbers from the EC are correct, however, Bottini may be one of the few finance chiefs in Europe who can make such a prediction.

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