Swiss companies are struggling against the might of their own currency

Swiss companies are struggling against the might of their own currency

The strong Swiss franc has caused difficulty for the country's retailers and food producers. Sam Webb takes a look at the problems surrounding the powerful currency and speaks to Swiss companies that are feeling the pressure.

Last week, the Swiss National Bank rolled up its metaphorical sleeves and stepped out of the saloon to tackle the allegorical wild bull that is the soaring Swiss franc.

It has taken the unusual step of attempting to weaken its own currency, which has surged in value as investors, spooked by turmoil in the Eurozone, see it as an attractive port in a currency storm. The SNB has vowed to enforce a target value of 1.20 francs per euro and chairman Philipp Hildebrand last week made a speech that left no one in doubt of its dedication to this course of action.

"With immediate effect (the SNB) will no longer tolerate a EUR/CHF exchange rate below one Swiss franc twenty. The SNB will enforce this minimum rate with the utmost determination. It is prepared to purchase foreign exchange in unlimited quantities," he thundered. "We have to accept the fact that the costs associated with it might be very high. At the same time, doing nothing would almost certainly inflict tremendous long-term damage on our economy."

Swiss companies have welcomed the move. The might of the franc has damaged the economy as a whole and food companies are particularly feeling the pinch. Swiss exports have become more expensive for buyers outside the country and local shops have been hit by Swiss shoppers leaping the border – like a bargain-hunting Steve McQueen – to seek out cheaper goods priced in euros.

The effects are already being felt. The Wall Street Journal today (14 September) reported that the Swiss producer and import price index for August slid 1.2% from the previous month, the steepest decline since November 2008, and fell 1.9% on the year, according to the Swiss Federal Statistics Office.

Denner, the discount chain of Swiss retailer Migros, says certain products over the border in France, Italy and Germany are between 30% and 50% cheaper.

To combat this, Denner sent letters to 200 of its brand producers asking them to pass on their foreign exchange gains to the retailer so customers can profit from the currency advantage - with mixed results.

Monica Weibel, a spokesperson for Denner, says: "The negotiations with these suppliers were hard and have not fully satisfied us. Many of the suppliers had no understanding of our request. Nevertheless, we also had some success which led to price cuts for several brands."

“Migros has its own [manufacturing subsidiaries] in Switzerland, therefore we produce most food products by ourselves. We do not import as much as our competitors but we are permanently looking for possibilities to lower prices by optimising processes and increasing the efficiency of production."

Rival retailer Coop estimates that "shopping tourism" to neighboring countries has nearly trebled.

A Coop spokesperson says: "Swiss consumers normally spend an estimated CHF1bn (US$1.1bn) to nearly CHF2bn on food in neighboring countries. The latest estimates indicate that this year it will be about CHF3bn. The closer a shop to the border, the more it loses. In addition, we feel the absence of foreign tourists because of the strong franc, especially in tourism regions."

Producers have also been hit by the high value of the Swiss franc. Swiss dairy company Emmi recently announced record sales in its H1 results but said currency fluctuations had "posed a major challenge for companies exporting from Switzerland in recent months".

A spokesperson for Emmi tells just-food that exports out of Switzerland, had a "tougher life" in the first half of 2011. Emmi, she explains, has seen its cheese and yoghurt sales fall in Europe.

The Swiss franc has had a mixed impact on Emmi's commodity costs. "Our main raw material is Swiss milk and there is not much we can do with regard to the price. We had some currency advantages for packaging, coffee and fruit, but these did, of course, not make up for all the negative impact of the strong Swiss franc," she says.

Jon Cox, head of Swiss equity research at European finance company Kepler, says Emmi is likely to be the most exposed of the country's food producers. "The problem has probably been the biggest for Emmi, with around 14% of sales from products made in Switzerland and then exported abroad. It has been raising its prices but obviously some German and French retailers are resisting and Emmi has said it will quit unprofitable business."

Chocolate manufacturer Lindt & Sprungli says its customers are willing to absorb price increases. "We never have and never will make any concessions with regard to the quality of our raw materials because of price issues. As a result of our premium strategy, our consumers appreciate the uncompromising quality of our chocolate. This is the reason why selective price adjustments are generally accepted," a spokesperson says.

Some retailers are taking a harder line. Earlier this month, Coop announced the withdrawal of 35 Procter & Gamble products from its shelves after it was unable to thrash out a price cut with the US company.

So what does the future hold for Swiss food businesses? More of the same, according to the spoksperson from Emmi. "The Swiss National Bank's introduction of a minimal exchange rate of 1.20 Swiss francs for one euro does not make us extremely happy but it is a good start and it helps us gain more stability and security in our short-term planning," she says.

"As long as the economic insecurity in various member countries of the European community goes on, investors will continue to look for a safe haven, which means that a significant weakening of the Swiss franc is unlikely to happen in the near future."