It’s a case of “buyer beware” for European retailers and their investors.
This story first appeared in the May 18, 2009 issue of WWD. Subscribe Today.
According to an analysis issued this month by HSBC Bank analyst Paul Smiddy, globalization could transform weak U.S. consumption into supply chain problems for European brands. And markets might not have properly accounted for that risk.
U.K. and Continental retailers could be looking for better deals from their Asian suppliers as exchange rates pressure prices, said Smiddy.
“Falling demand from the U.S. has caused many Asian manufacturers some grief, inducing them to invite orders on a marginal-costed basis — that is, acceding to U.K. retailers’ pressures,” he said.
But the analyst noted there is still a shortage of higher-quality Chinese production and the factories that are willing to cut prices are often less capable than the facilities that can hold the line. Therein lies the risk.
“Retailers that proclaim in coming months they have secured lower input costs may be exposing themselves to higher operational risk,” Smiddy said. “Switching to lower-cost countries would increase the chances of quality and delivery problems, at least in the short term, as new trading relationships are established. That is particularly the case for switching out of China to other Asian countries.”
Smiddy has an “underweight” rating on the U.K.’s Marks and Spencer Group plc, an “overweight” rating on Inditex Group, the Spanish owner of Zara, and a “neutral” rating on Sweden’s Hennes & Mauritz.
Last week, shares of H&M slid 4.4 percent to 360 kronor, or $45.61, as Marks & Spencer fell 1.1 percent to 327.50 pence, or $4.96, and Inditex dipped 0.3 percent to 32.64 euros, or $44.36. In the broader European markets last week, the CAC 40 in Paris fell 4.3 percent and the FTSE 100 in London declined 2.6 percent.
In the U.S., the S&P Retail Index fell 5.8 percent for the week to 312.89 as first-quarter earnings season began.