At the end of last week Venezuelan President Hugo Chavez announced the devaluation of the currency in an effort to shore up demand for locally produced goods.
The move serves to prop up the Venezuelan economy. As a major exporter of oil worldwide, the country’s economy has been hard hit by falling demand for oil in the light of the global recession.
Exchange rate is halved
Chavez cut the exchange rate of the Venezuelan bolivar against the US dollar – the main currency for international trade in the country – to 4.3 bolivars per dollar to 2.15, while maintaining a subsidized rate of 2.6 per dollar for essential products such as food and medicines.
Cosmetics and personal care products have not been classified as essential products by the government and as a result this is likely to lead to a long list of imported cosmetics increasing significantly in price. Indeed, many analysts believe prices could more than double.
Following the announcement, Venezuelan consumers cleared store shelves of some of the most popular imported goods, with big brand personal care products such as toothpaste and skin care reported to be amongst the most popular purchases.
Avon and Colgate likely to be hardest hit
Having become a major oil exporter the boost to the economy has led to a significant increase in consumer spending power that has led to big growth in the market for imported personal care and cosmetic products.
Although all the big global personal care players have seen sales increasing in the country on the back of this phenomenon, both Avon and Colgate-Palmolive look set to lose out the most.
Avon has been aggressively growing its market share in the country and has evolved as a major player as a result, doing millions of dollars of trade in the country through its army of door-to-door sales staff.
Doing business in dollars just got expensive
Financial analysts BMO Capital Markets estimates that at the end of its third quarter Avon had as much as $135m in local currency, a situation that left it ill-prepared for the currency devaluation and financially vulnerable.
Likewise, Colgate-Palmolive dominates the oral care market in Venezuela to such an extent that it is estimated that 6 percent of its global sales are derived from the market.
As a result of the currency devaluation Colgate has announced that it expects to take a series of charges throughout 2010, starting with a one time gain of $60m due to its current unpaid taxes and balance sheet in the country.