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European Firms Grapple With Weak Dollar

The weakened dollar and the stronger euro are forcing European firms to raise prices, shore up shrinking margins and hedge their forecasts.

LONDON — The increasingly feeble dollar and the mighty euro are forcing Europe’s fashion, luxury and textile companies to raise retail prices, shore up their shrinking margins and hedge, hedge, hedge.

The dollar has reached new lows against the euro and the pound, closing against the euro at 1.2967 on Friday. Overall, the dollar is down 11 percent against the European currency in the first half.

“We cannot keep squeezing our gross margins,” said Ralph Toledano, president of Chloé, which to date has absorbed about half of the losses from currency fluctuations. Toledano said there have been price increases, especially for permanent and more basic items. He said further increases in the euro will be passed on, in part, to consumers.

Burberry is another company that has been forced to raise prices over the past year due to the weak dollar. Burberry’s prices have risen by 6 to 8 percent year-over-year due to the currency fluctuations.

“We don’t like to take prices up if we don’t have to, but maintaining margins is an important objective,” said a company spokesman. “So you try to do things cheaper by working with suppliers and manufacturers and by hedging.”

Burberry locks in dollar-pound exchange rates six to nine months in advance of paying for goods and services. “Through dollar-sterling hedging, we’re generally better able to smooth or absorb any potential price increases that would be passed on to the consumer,” he added.

Bulgari, too, makes a habit of hedging. Francesco Trapani, chief executive of the Rome-based luxury jeweler, said the company traditionally hedges against currency fluctuations eight to nine months ahead of time.

But Bulgari also benefits from a weaker dollar since it buys raw materials such as diamonds and gold in dollars. Those savings help compensate for the negative effects of a strong euro-to-dollar exchange rate.

“We have traditionally been one of the companies that has been the least affected by the issue,” said Trapani, adding that, until now, Bulgari has not increased prices in the U.S. But he cannot rule it out for the future.

Hugo Boss also is able to take advantage of the weak dollar. “We produce most of the merchandise for the American market at our production site in Cleveland, so the dollar doesn’t affect us that much. Our American prices didn’t rise in the past and won’t rise,” said a spokesman.

This story first appeared in the November 15, 2004 issue of WWD.  Subscribe Today.

He added that Boss could tolerate the currency fluctuations. As for fabric sourcing in Europe, he said: “We’re hedged, so it’s not such a drastic picture as it is for others.”

Versace is another company that is planning to hold its prices despite the weak dollar because it wants to remain competitive. “You need to be careful to protect your market share,” said Santo Versace, chairman of Versace. “If the markets allow you to alter prices, only then can you alter them.”

Marzotto is trying to cope without resorting to hedging. “We don’t execute a speculative policy on currencies. That won’t change. Pricing is the only instrument we have. For us it is rather worrying. The dollar area represents a very large chunk of our revenue,” said Matteo Marzotto, general director of Valentino and co-general director of Marzotto’s apparel division.

He added the company was trying to minimize price increases, but he couldn’t quantify by how much.

Another company with a large U.S. business is Escada, which is another fashion firm that resorts to hedging. Georg Kellinghusen, chief financial officer of the Escada Group, said that, with the U.S. market generating about 30 percent of Escada’s turnover, the strong euro is an issue. “But it’s not a top problem, he emphasized, “because we are hedged until the end of 2005.”

He said Escada’s practice is to start hedging as soon as U.S. orders come in — one year in advance — so the company has a base for its calculations. “We don’t speculate,” Kellinghusen added. “The dollar may improve, but we don’t want to be [negatively] surprised.”

Lawrence de Paris, president and ceo of Escada USA, said there were no price hikes in 2004, but that there will be “some measured price increases in 2005 in response to the exchange rates. But we haven’t passed it all along to the consumer. We tend to look at the market and where we want to be and price accordingly,” he said.

He said there’s been no negative reaction at all at trunk shows for next season. “We’re not selling basics,” he explained, “and the Escada product is so luxurious for spring.”

Indeed, while the weak dollar may be a drag on prices and margins, it’s not keeping company managers awake at night. “We’re all in the same boat, and we can’t do anything about it,” said the Burberry spokesman. Companies are also confident that their products will continue to win over the consumer.

“When the Americans come to Europe, they’re looking for something special,” said Chloé’s Toledano. “The positive thing is that, when you have a great item, price doesn’t matter. So far, we haven’t had a problem.”

“If a consumer already has the ability to buy certain [luxury] brands, she won’t have a real problem with the increase in prices,” said Moritz Mantero, chief executive of the Italian silk firm Mantero Seta SpA.

“Yet the consumers who had to make certain sacrifices to buy such brands probably will think twice now,” added Mantero, who has increased prices 10 to 12 percent over the past two years.

On the flip side, the weak dollar is a boon for some companies. “We benefit from the strong euro, as the majority of our production is done in Asia — that is in dollar-denominated countries,” said a spokeswoman for Adidas, adding the group also hedges foreign currency risks typically up to 15 to 18 months in advance.

Allyson Stewart-Allen, a director of International Marketing Partners Ltd., a London-based consultancy, said companies that produce in the U.S. or Asia and sell in Europe are playing the weak dollar to their full advantage. “There is no trickle-down effect from the weak dollar over here, as companies like the Gap and H&M are not lowering their prices — even though they can afford to,” she said.