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How Low Can It Go? Luxury Brands Battle Downfall of the Dollar

While the weaker dollar may be a boon for European consumers headed to the U.S. for cut-rate Christmas shopping, it's having a less cheerful impact on...

While the weaker dollar may be a boon for European consumers headed to the U.S. for cut-rate Christmas shopping, it’s having a less cheerful impact on luxury and beauty firms doing business outside Europe.

European companies are reacting to the weaker dollar — which on Tuesday continued to trade near record lows of about $1.98 against the pound and $1.33 against the euro — with a variety of strategies, including currency hedging, opening U.S. bank accounts and raising prices to boost sagging margins.

One thing is for certain, no one is surprised by this latest currency drama, nor the fact that Europe has become one extremely expensive manufacturing and export base.

Chloé chairman and chief executive Ralph Toledano said the value of the euro has been a problem for some time. “Visibly, the situation isn’t getting better. It shows the weakness of the EU’s common monetary policy,” he said.

Toledano said the euro’s strength hasn’t yet posed problems for clothing sales. “People buy them if they like them,” he said of designer apparel collections. But, he added, the strong euro has been problematic in accessories, particularly permanent product lines.

“It’s eating into margins,” he said. “We have been absorbing the losses, but at some point we won’t be able to do that any longer [and will have to raise prices].”

Toledano pointed out it isn’t only the euro’s value against the dollar that has been tough, but also the European currency’s value against the yen, another relatively feeble currency. The strength of the euro against the yen has been given as one reason companies are seeing a slowdown in the maturing Japanese market for luxury brands.

Bruno Pavlovsky, Chanel’s president of fashion, agreed the powerful euro has been a concern for the last few years, but Chanel has been dealing with it by regularly adjusting prices.

“We have a great advantage in that we bring out new collections every two months,” he explained. “We re-adjust our prices to match the currency values at that time.”

Prices for accessories, meanwhile, are subject to review only once a year. In November, Chanel increased accessories prices by about 5 percent, said Pavlovsky.

“[The euro] is a situation that we have to deal with,” he said. “If it’s well managed it’s not a problem. We don’t want prices to be going up and down like a yo-yo,” he added.

Patrick Guadagno, president and chief operating officer of wholesale at Versace USA, said, “Overall, our business has increased due to continued growth within our client base. However, the strength of the euro has created a challenge for all imported brands. It’s inevitable that it will affect pricing to some degree. As a result, though, it’s forced us even more so to put a strong focus on developing a product assortment with the proper price-value ratio, particularly in the areas of manufacturing cost and merchandising. It forces us to be so much better at what we do.

“You can’t just take a 35 percentage rise in currency exchange and pass it off to the consumer,” he added. “We’re watching it very closely and trying to peg it as close as possible to where it can still respect our target margins.”

Glenn McMahon, president of Dolce & Gabbana USA, took a different view. “We’re not concerned about it,” he said. “It fluctuates favorably and unfavorably. For this consumer it’s not a deciding factor at the luxury level. The swing is not that great.”

Firms are dealing with the currency situation in a variety of ways, however. “It really hasn’t impacted us because in the U.S., we’ve opened up local dollar accounts and are pricing the products competitively there,” said Lisa Montague, chief operating officer of British accessories house Mulberry. “Also, we’re buying from our tanneries in dollars.”

Montague said that in the U.S., where the company has just opened its first stand-alone store at 387 Bleecker Street, she’s also keeping an eye on what her competitors are doing.

“Frankly, I think there’s a consumer kickback anyway on accessories prices,” she said. “Our U.S. customers are telling us that $1,000-$1,200, not $1,500-$2,000, is a reasonable price for a handbag.”

Tanner Krolle, on the other hand, is not retouching prices at all to compensate for a strong euro.

“All European luxury brands at Bergdorf Goodman, Saks Fifth Avenue and Barneys are in the same boat with regard to manufacturing costs and pricing in the U.S.,” said Martin Mason, Tanner Krolle’s ceo. “But, I think, at the super-luxury end sales are not affected by currency fluctuations or inflationary change.”

Both Montague and Mason also said their companies were not affected by a decline, which began after 9/11, in the number of U.S. tourists abroad. “There are fewer Americans since 9/11, but they are still around. That said, our business is being sustained by Russian and Middle Eastern customers,” he said.

Montague said the decline in U.S. tourists has been offset by a rise in Russian, Far Eastern and European customers filing into Mulberry’s Bond Street store.

One British company that’s actually benefiting from the weak dollar is the cosmetics brand Lush. Andrew Gerrie, chief executive officer, said the strong pound will help Lush, which currently has 26 standalone stores in the U.S., with aggressive expansion plans there. He said he hopes to open an additional 20 to 30 U.S. doors next year.

“It makes it cheaper for us,” Gerrie said. “The upside is, we want to spend more pounds in the states.”

At the same time, Gerrie said he doesn’t want to take advantage of his U.S. consumers. The brand manufactures in Canada and also imports from the U.K., which has driven up the cost of goods sold in the U.S.

Gerrie said, however, that the cost increase is not being passed along to the brand’s customers there. “I think our products are at the right price in the States, a price increase would be harsh on our customers,” he said.

Emily Cohen, a founder of London-based niche cosmetics brand Pout, which generates about 50 percent of its sales in the U.S., said business isn’t easy. “I’m sure it’s having a negative effect on any company that deals in the States,” she said. “We have definitely projected in advance, it’s no great surprise. It’s not ideal, and it’s not doing anything to help our cash situation. It’s not dire for us, but it’s not the best news we’ve had.”