The Australia Tax Part II: Exchange Rates

So in the previous write-up, I did a little holistic overview of the issue of Australians paying significantly more for the same products compared to our peers elsewhere. I personally think this is a debate well worth taking up, and this article will show part of the reason why.

The Australian Dollar has always been a relatively volatile currency. Using data from OzForex, and a little analysis in Excel, here's the graph I obtained for the Australian Dollar's exchange rate versus the US Dollar starting from Jan 1990 to Sep 2013:

Things are actually a lot simpler than they look. The blue line tracks the monthly averaged exchange rates, the red line takes yearly averages. The orange dotted line is the average over the entire 285 months, and the black lines are averages over 5-year periods.

There is significant volatility in the exchange rate, so this rules out any quick price adjustments. And here's where the 5-year averages are important. If the averages from the first 3 five-year periods are ignored (we are well past 2003 now), it's obvious that the AUD averages around 80-odd US cents over the 2004-2009 period. And from 2010 to date, it averages at parity with the Greenback. 

Prices for a number of products in Australia, especially those made by US-based companies still seem to be reflective of the lows our Dollar hit in the early 2000s. It seems that some brands still seem to take the worst-case rates rather than longer term averages.  And since majority of currency exchange contracts can be negotiated on a lock-in, forward-looking basis, this hardly seems excusable.

The other major source of products for the luxury sector is Europe. The Euro was instituted in 1999, and I have compiled a graph of the EUR vs the AUD here:

The AUD remained rather stable against the Euro still the late 2000s. From 2010 onwards, it really has shot up, and has remained high owing to a number of economic and geo-political causes. 

Lastly, lets have a look at the British Pound vs the AUD:

The Aussie Dollar shows a very similar pattern against the British Pound as it does against the Euro.

I am not going to dwell on why this whole pattern is exhibited; the technicalities of how and why exchange rates move is irrelevant here. The question then is: have prices in Australia reflected the fact that for the last 5-odd years, our Dollar has clocked in much higher value than its historical average would be? The distance between the orange dotted line and black lines for the 2010-onwards period is significant for every single currency. So have the Australian retailers adjusted for this, and passed some of this on to the consumer?

Yes and No. While prices for a number of brands have retreated towards more sane levels, many brands still seem reluctant to adjust prices outright. Anecdotal evidence based on my personal observation points to other methods: Gift-with-purchase (GWP) offers, bundles and packages have become a lot more common since the Aussie Dollar became dearer. This is one way of increasing the value the customer gets for his dollar while paying the same. 

Some brands, however, keep stubbornly high prices (Chanel for example). Chanel's female perfume range sells in Australia for over twice the US-market price. Even if the exchange rate against the Pound is used, a 150ml bottle of Eau Premiere should be about AU$175. The Australian price at retail is AU$70 more than that. However, the exchange rate over the 15-odd years before that would give a price of about AU$250. So they do have an excuse here.

Estee Lauder's entire lineup has a price premium in Australia of around 50% over their UK/USA pricing, sometimes even clocking in at twice the price here. Their subsidiary brands like La Mer (USD250 to AUD 365 for their "Oil Absorbing Lotion" as a singular example), Clinique (converting USD to AUD at about 2 to 1, and GBP to AUD at about 2.5 to 1), Tom Ford (converting Pounds at about 2:1) and Donna Karan to name a few are still almost obscenely overpriced here.

Singling out more and more brands is very possible, as almost every brand seems to see Australians as "soft-touches" who can be charged higher prices. However, there's hardly a need to list them. Almost every brand, in one way or the other is guilty. Cue L'Oreal's new "Shine Caresse" lip colours costing US$10 in The States, and AU$25 in Australia. Or YSL's "Cinema" costing GBP81 in the UK and AU$195 in Australia for 90ml. Brands from LVMH are similar.

There is another problem: newer product releases from the L'Oreal group (and to an extent other brands as well) seem to have better pricing. The older products seem to be stuck at the prices from the early 2000s; there is a distinct reluctance to lower sticker prices in this segment of the market, which also leads to situations where some products have much higher price premiums in Australia than others. Even if taking into account costs of freight to Australia, I think UK prices make for a decent comparison because they include 20% tax (VAT) compared to 10% for us (GST).

So this does settle one issue quite clearly: For the most part, we in Australia do pay a sizeable price premium compared to other countries if the exchange rate is the only factor taken into account. I have taken due care of not using instantaneous exchange rates; I have used the 5-year averages instead. Some of the prices we pay could be excusable at 80 US cents for every dollar, but not even close for parity.

For products that originate from Europe, it is very possible that the currently high position of the Aussie Dollar is simply seen as an aberration rather than a long-term issue. If that is the case, European brands do have an argument, but US-based ones don't.

There's another view here: Could it be that USA pays lower prices than the rest of the world? I observed pricing for some brands unusually low in the USA compared to other regions (some Chanel products for example). But that argument holds little water considering the GCC countries pay similar prices to USA too.

All-in-all, as far as the exchange rates go, we in Australia might have been paying a moderate premium pre-2005, but post-2010 we are simply overpaying. In this case, I think as far as the nominal prices for products go, the consumers do have a very valid point.

Acknowledgement: Monthly and annual currency average exchange rates sourced from OzForex. I have no commercial affiliation with OzForex or its associates.