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That Costs How Much? Retailers and Vendors Hit by Weakened Dollar

American retailers at the Milan shows are already smarting from the anemic dollar - and that's before they even finish placing their orders.

MILAN — Ouch!

American retailers at the Milan shows are already smarting from the anemic dollar — and that’s before they even finish placing their orders. “I’ve never seen hotels so expensive, food so expensive,” said Stephen I. Sadove, chairman and chief executive officer of Saks Fifth Avenue. “I took a less-than-five-minute cab ride from the [Hotel Principe di Savoia] and it cost $15. It couldn’t have been half a mile.”

A strong euro is biting into U.S. retailers’ purchasing power and eroding profit margins at many European fashion firms. Unfavorable exchange rates are hardly a new problem, but Italian companies are becoming increasingly concerned about the longevity of the dollar’s slide and its damaging consequences for business.

“These exchange rates mean lost opportunities to expand and develop new markets,” said Luigi Maramotti, chairman of MaxMara.

Like many companies, MaxMara is limiting its price increases for spring 2008 to a few percentage points, which will only partially compensate for exchange rates. As a result, manufacturers’ margins can’t help but suffer in the current climate, forcing them to be extremely careful about cost management in areas such as communication, including advertising, and retail expansion.

“This in an industry requiring significant investments,” Maramotti said. “And our margins are also linked to the investments we need to make.”

Over the last year, the dollar has shed more than 10 percent of its value against the mighty euro, and about the same amount against the British pound, severely curbing U.S. retailers’ spending power. Buyers in Japan don’t have it much better — over the last 12 months, the yen has lost about 8 percent versus the euro. On Wednesday, the dollar closed at $1.41 against the euro.

Executives at North American retailers said they would not cut spending on European collections, but would likely purchase with more scrutiny and caution. Most cited few instances of recent sticker shock on already-expensive European goods, but warned that ready-to-wear is likely to encounter greater price resistance from consumers than luxury handbags and shoes.

Jim Gold, president and ceo at Bergdorf Goodman, said the strong euro would not affect the “aggregate amount” the retailer would devote to European goods, but rather “affect the way we approach certain collections and categories.”

This story first appeared in the September 27, 2007 issue of WWD.  Subscribe Today.

“If product doesn’t stand out, and it’s expensive, that’s problematic,” he said.

Sadove said, “There’s a limit in terms of what American consumers are willing to pay in certain categories.” He noted consumers may be willing to pay “extra dollars” for $600 designer shoes or even pricier handbags, but “they may not feel the same way about ready-to-wear.”

Italian fashion companies are taking note. To wit, most are trying to limit price increases as much as possible by relying on financial defense mechanisms, mainly hedging.

“Through treasury operations, we are well covered for this season,” John Hooks, commercial and marketing director at Giorgio Armani, said. “It is our intent to try to absorb currency variations, so we are not making any changes to retail prices for this season’s merchandise. This does mean that there is some impact on our margins, but we feel this is the appropriate approach in these circumstances.”

Jil Sander is taking a similar tack. Armin Mueller, the fashion house’s chief financial officer, said the company increased prices last year anticipating the euro’s continued strength, so it won’t need to make further price adjustments for now.

“The exchange rate is really making our lives very difficult,” Mueller admitted. “I did not expect the euro to become so strong, and the yen, at 162 [to the euro], is really worrying,” he said.

Gianguido Tarabini, ceo at Blufin, the group that includes the Blumarine, Anna Molinari and Blugirl brands, said his company is actually cutting U.S. retail prices by as much as 10 percent to exploit the currency situation and be as competitive as possible.

“But I hope [the dollar’s] devaluation stops….I can’t do more than [a 10 percent price cut]. So I hope that the dollar stabilizes,” Tarabini said, voicing an additional concern about the state of the U.S. economy given the subprime mortgage crisis.

Adequate hedging allows companies to limit their price increases to only about 2 or 3 percent, said Michele Norsa, ceo at Salvatore Ferragamo. But he said currency speculation can only protect a company so far into the future. “The problem is in the longer term,” he said.

Prada, like most others in the industry, is feeling the currency crunch, but still managing to show resiliency. This week, it said first-half sales grew 18 percent, but would have jumped 23 percent at constant currency rates.

“We are in a situation in which we are growing a little less than we would at constant currency rates, but we are still growing,” said a Prada spokesman, adding that the luxury goods sector’s hefty profit margins — often as high as 35 percent — make it one of the best insulated industries in terms of currency woes.

“We are not working in an industry that has such thin margins that we are losing money,” the Prada spokesman said.

“You cannot solve this problem with just one measure,” said Daniel Günthert, managing director of Rena Lange. Tactics include negotiating better prices with fabric suppliers and “smart collection planning.”

Despite the weak currency, he said Lange’s U.S. business is advancing at a rate of 20 percent in dollar terms, suggesting healthy demand for European apparel, particularly for such categories as cashmere and double-face.

Overall, retailers are cautious but determined to find creative ways of stocking their floors.

“It takes much more discipline and experience to buy in this kind of environment,” said Ron Frasch, Saks president and chief merchandising officer. “The excitement level of the product has to be bigger, and it means the promotion and marketing around it has to be better.”

Since American stores set their open-to-buy in dollars, that could mean fewer units on the sales floor — and certainly a fastidious vetting process.

“I think we need to proceed with some caution. [The exchange rate] does become an issue,” said Judith Collinson, executive vice president of women’s merchandising at Barneys New York. But she said Barneys likely would carry the same amount of European merchandise.

Collinson said buying decisions are not based on country of origin or its currency. “We think [about] what the designer’s done for that season,” she said.

“At the luxury level, I think we have to be always looking for the gorgeous pieces out of all the collections,” said Caryn Lerner, president and ceo of Holt Renfrew & Co. Ltd. “When you start dumbing it down and let price dictate your taste level, then it’s a self-fulfilling prophecy.”

It helps that most retailers cited little evidence of price resistance yet on European goods.

“We don’t see our customers shying away from something amazing because of price,” said Julie Gilhart, senior vice president and fashion director at Barneys. “It’s always about what’s special, what’s great quality.”

Lange’s Günthert said customers are more likely to balk at prices for a category like pants, where they’re accustomed to certain price ranges.

And Saks’ Sadove noted the weak dollar has at least one silver lining for U.S. retailers: It’s attracting hordes of European tourists to America keen to exploit their increased spending power with the mighty euro. He said European visitors have bumped up comp-store sales in Saks locations in “gateway cities.”