A cold, or full-blown pneumonia?

This story first appeared in the October 1, 2008 issue of WWD.  Subscribe Today.

The old adage is that when America sneezes, Europe and Asia catch a cold. Now retail, fashion and luxury goods executives worldwide are trying to figure out whether those regions are going to need large and continual dosages of NyQuil as a result of the U.S.’ financial turmoil.

On Tuesday, initial signs weren’t good as Asian markets fell, but things improved later in the day as shares in Europe and the U.S. rebounded on hopes the U.S. government’s $700 billion rescue package could be salvaged in the House of Representatives. The Dow Jones Industrial Average and the Standard & Poor’s Retail Index rose 485 points and 12.02 points, respectively, following the previous day’s panic-stricken declines. The Senate remained in session Tuesday and today over the Jewish holiday to continue to hammer out a deal on the bailout plan, but the House adjourned and will reconvene on Thursday.

As uncertainty continued to rage, fashion and retail executives generally tried to remain upbeat, while admitting the difficulties ahead.

“The damage in the financial world is huge. We will feel an impact,” said Francesco Trapani, chief executive officer of the Italian luxury jeweler Bulgari SpA. Trapani added Bulgari had already noticed a slowdown in the U.S. and in certain European countries, and that cost control was going to be increasingly important.

“We will invest less in advertising. People aren’t receptive to it right now. Our advertising in the last quarter will be pretty slim,” he said, adding the high end of the market — usually the most resilient — would also face a slowdown. “A lot of people are losing a lot of money,” he said.

Interviewed on the sidelines of the runway shows in Paris this week, American retail executives held out hope for a bailout plan, and voiced concern about the endless flow of bad news.

“I’m optimistic, and hopefully they’ll come to some kind of agreement in the next couple of days,” said Stephen I. Sadove, chief executive officer of Saks Inc., parent of Saks Fifth Avenue. “We’ve got a risky situation and the consumer is paralyzed. The consumer doesn’t do well with volatility: Their shopping patterns are very tied to how they feel about their net worth and financial situation. It’s a very difficult time.”

Pete Nordstrom, executive vice president and president of merchandising at Nordstrom Inc., agreed. “There’s so much uncertainty right now,” he said. “It’s fair to say uncertainty is not good for business. But we’re all here; we’re doing our jobs and doing our best.”

“We’re watching the developments as closely as anyone,” Burt Tansky, president and ceo of Neiman Marcus Group, said at Jean Paul Gaultier’s show in Paris Tuesday night. “We are very concerned that all of this will reach into our customer’s interest in shopping. We hope a solution is found so the banks and the financial community can move on in a positive way and the customer can settle down and start thinking about fall shopping and the holiday season.”

And Americans aren’t alone. The financial crisis in the U.S. threatens to rattle an already fragile Japanese economy many believe is heading into a recession. On Tuesday, the Japanese government said consumer spending fell 4 percent in August from a year earlier. Department stores have been hit particularly hard. Earlier this month, Takashimaya Co. Ltd. issued a profit warning and rival Isetan Mitsukoshi Holdings Ltd. revealed plans to shutter six stores in Japan.

Harrison Bates, an analyst with KBC Securities Japan, noted how inflation has outpaced Japanese wages, stripping consumers’ spending power and convincing more people to hang out at home rather than travel or make big purchases. The U.S. crisis certainly won’t help the situation.

“If it affects exports, it eventually affects people’s jobs,” he said.

Noboru Ikeuchi, a senior research at Tokyo’s Yano Research Institute, said he hasn’t seen any signs of consumer recovery in Japan — a key market for luxury goods — and warned conditions will probably worsen next year. Many Japanese consumers, not just wealthy ones, have invested in securities and other market instruments as Japan’s state-run pension system comes under strain, he noted.

“The one light retailers see is from the foreign tourists from China and elsewhere coming into Japan,” he said.

But fashion industry executives are still trying to process how much the U.S. crisis will impact China’s rampant economic growth of past years.

Balbina Wong, deputy chairman and ceo of China-based luxury distribution company ImagineX, said business has been slowing for some time and the Summer Olympics failed to boost sales. She noted Mainland Chinese consumers are spending less and she doesn’t have high hopes for the Golden Week holiday period, which starts today, she added.

“I was with my buyers in New York and the words were ‘caution’ and ‘buy right’ and ‘stay on budget’. We were very careful. Here, I have been talking to all of my general managers about service at the shops. Customers don’t have to buy, so you need to provide something extra now,” Wong said. “Otherwise, people are asking, ‘Do I really need another dress?’ They will only buy what they really need.”

Pat Nie Woo, director of denim manufacturing firm Central Textiles and chairman of the Sustainable Fashion Business Consortium in Hong Kong, stressed the increased pressure on margins and cited how, across all industries, there have been more than 10,000 factory closures in China this year.

“Now that commodity prices have come down it’s not as bad, but there were some commodities that were at all-time high levels. We’re asked to give the same prices as last year and it’s impossible. So now, volume is there, but margins are small to nonexistent,” Woo said. “It’s like ‘Survivor’ now. We’re still an export-oriented business, so whatever happens in the U.S. and Europe affects growth in the part of the region tremendously.”

Despite the impending doom, many industry executives are taking a long-term view and believe the credit crisis will offer an invaluable opportunity to build brands.

“Clearly the external environment is increasingly challenging and volatile,” said Angela Ahrendts, chief executive of Burberry Group plc. “However, we remain firmly focused on our key strategies to drive growth through innovation across products, channels and regions, while delivering operational improvements.”

Analysts, too, believe the high end of the market should motor through. “Right at the very top end of the market, people operating in that rarefied atmosphere will be insulated,” said David Stoddart, retail analyst at Altium Securities in London. “But we’re looking at recessions in the U.K., Europe and the U.S., so the middle market will be impacted.”

François-Henri Pinault, president and chief executive officer of PPR, allowed the financial crisis in the U.S. has affected a few banks in Europe but stressed that the impact on the Continent is limited to the banking and financial sectors. “We’re not suffering from the crisis that impacts the banking and financial sector,” he said on the sidelines of the Balenciaga show Tuesday morning. While he didn’t rule out the risk of a credit crunch in Europe, Pinault said he’s certain of swift government action to fend off threats to economic stability on the Continent. He added: “We don’t have any short-term issues as far as financing goes.”

Principals at Jimmy Choo said Tuesday they are forging ahead with their expansion plans and even plan to increase advertising in some glossy magazines.

“We don’t have our heads in the sand,” said Joshua Schulman, Choo’s ceo. “Together with our majority shareholders we’re taking a long-term view and we will continue to elevate the brand.”

He added that in 2009 Jimmy Choo would increase its pages in American Vogue, continue with planned store openings and look for new real estate opportunities.

Tamara Mellon, Choo’s founder and president, said shoes and bags are often the last things a consumer cuts from her shopping list. “They’re not big-ticket items, and they’re a good way to update an old outfit,” she said.

To wit: Choo’s $1,295 zip-front stilettos have been a bestseller so far this season, and were sold out by Sept. 1.

Westfield Group, the retail property firm, is steaming ahead with its plans to open a 1.6 million-square-foot shopping mall in west London that will include a 200,000-square-foot luxury area as well as high street shops, department stores and a cinema complex.

The luxury area, known as The Village, will showcase brands such as Dior, Louis Vuitton, Valentino, Prada, Versace and Tiffany. A Westfield spokesman said the opening is on track for Oct. 30, and that Westfield remains undaunted by Britain’s recent banking and credit woes.

“We are not immune to economic circumstances, but we take a very long-term view on our assets, and this particular investment is based on sound macroeconomic fundamentals,” he said. “And we believe that if you build the best mall in the best location, it will perform well.”

Optimism about the future isn’t limited to France and the U.K., however. Many Italians also are hoping to steer their ships through the stormy waters.

“Certainly making full-year forecasts in a context like this, and above all in the last few days, is truly a little traumatic. But I have to say that if we look at our results today, they are in line with our budget,” said Giancarlo Di Risio, chief executive of Gianni Versace SpA. “We expect to continue accordingly until the end of the year, and the company will definitely post growth.”

Cristiana Ruella, group managing director of Dolce & Gabbana Srl, said emerging markets — such as Eastern Europe, the Middle East and Asia — were making up for weaknesses in more established ones like the U.S. and Western Europe. “In these new markets we are registering significant growth rates and we are investing greatly both in terms of direct presence, in China, Hong Kong and Taiwan, and through further consolidation of commercial relationships with local partners in Korea, Singapore, Thailand, Russia and the Mediterranean Basin,” she said.

 Other markets across Europe are holding steady, and adopting a wait-and-see approach. “There has been no decline in ready-to-wear sales in Moscow, and the market is growing very steadily,” said Anna Lebsak-Kleimans, head of the Moscow market research firm Fashion Consulting Group.

“The Russian market is getting to be saturated, but it’s still not there yet. Moscow is the main consumer, though now all the big cities with a population of over 1 million are starting to get civilized boutiques and shopping malls. All these people are still hungry for international fashion,” she added.

While the high end of the market appears to be insulated — so far — it looks as if the middle and high street brands will suffer more.

On Tuesday, speculation was swirling in the British press about the future of Baugur Group’s fashion and retail businesses in the U.K., after Stodir, the Icelandic investment company that was set to take a 39 percent stake in Baugur, filed for administration (the equivalent of bankruptcy) on Monday.

Baugur executive chairman Jón Asgeir Jóhannesson and his family separately own a controlling stake in Stodir. A spokeswoman for Baugur declined to comment on how Stodir’s filing for administration may affect Baugur’s business.

Baugur’s retail investments include the British fashion brands Karen Millen, Oasis, Whistles, All Saints and Matthew Williamson. It also has an interest in Saks and a stake in French Connection through the vehicle Unity Investments.

Meanwhile, BHS, the mass market clothing and homewares store owned by retail tycoon Philip Green, is reported to have frozen the pay of its head office staff in response to the crisis. Green would not confirm the reports.

The Spanish high street chain Mango said it’s already suffering in parts of the U.S., and is bracing itself for a slowdown in Europe.

“We have little exposure to the U.S. market, and we have 1,200 stores in 96 countries so all our eggs are not in one basket, thank God,” said Jose Gomez, Mango’s vice president of expansion. “Consumer spending in the U.S. has slowed down considerably. It continues to be OK on the East Coast and New York area, but the West Coast and Los Angeles are slower. We’re concerned about the current financial situation; the whole world is concerned. The ripple effect could affect us, undoubtedly.”

The Germans, meanwhile, are preparing themselves for worsening conditions at retail. “We have seen market conditions worsen over the last six months, and it has become more difficult to sell,” said Thomas Rasch, ceo of Germany’s clothing industry association, German Fashion Modeverband Deutschland.

“What will certainly affect the German clothing industry is a drop in exports. So far the industry has been supported by exports, in particular to Eastern Europe and Russia. So far these markets still look strong, but we are starting to see a slight drop even in sales to Russia. Problems in foreign markets would impact heavily on the situation in Germany,” he said.

Overall, though, sentiment varied depending on the time zone. Asian stocks slid as they digested the news of the failure of the bailout plan the day before. The Nikkei 225 Stock Average fell 483.75 points, or 4.1 percent, to 11,259.86, a three-year low. Those losing ground for the day included Link Theory Holdings Co. Ltd., down 6.8 percent; department store firm Isetan Mitsukoshi Holdings Ltd., 5.9 percent; Fast Retailing Co. Ltd., 3.2 percent and Shiseido Co. Ltd., 0.2 percent.

The Hang Seng lost more than 1,000 points at the market’s opening, but recuperated later in the session, gaining 135.53 points, or 0.76 percent, to close at 18,016.21.

But by the time European markets opened, investor sentiment was on an upward swing. The FTSE 100 in London closed up 1.7 percent, or 83.68 points, to 4,902.45. Among those joining in the rally were French Connection, up 8 percent; Burberry Group, 3.1 percent, and Asos, 0.9 percent. Key industry shares gaining ground elsewhere in Europe included The Swatch Group, up 2.6 percent; Benetton Group, 1.9 percent, and LVMH Moët Hennessy Louis Vuitton, 0.6 percent.

Back in America, the Dow jumped 4.7 percent to 10,851, following Monday’s massive 777-point plummet, while S&P’s Retail Index rose 3.4 percent to 12.02 points, to 362.44 — making up some of the ground lost Monday, when the index dropped a record 6.7 percent.

Among the department stores wracking up gains were Saks (up 9.1 percent to $9.25), Dillard’s Inc. (5.4 percent to $11.80), Macy’s Inc. (4.1 percent to $17.98) and Kohl’s Corp. (1.5 percent to $46.08). Specialty chains on the rise included Caché Inc. (up 11.5 percent to $6.87), Abercrombie & Fitch Co. (10.4 percent to $39.45), Chico’s FAS Inc. (7.3 percent to $5.47), American Eagle Outfitters Inc. (7 percent to $15.25) and Pacific Sunwear of California Inc. (6 percent to $6.73).

The gains among vendors were generally tame in comparison. Two standouts were Fossil Inc. (up 6.3 percent to $28.23) and Coach Inc. (up 5.2 percent to $25.04). Other vendors on the rise were Phillips-Van Heusen Corp. (3.3 percent to $37.91), Liz Claiborne Inc. (2.1 percent to $16.43) and Jones Apparel Group (1.5 percent to $18.51).

The Conference Board’s Consumer Confidence Index, posted Tuesday, edged up slightly in September to 59.8 from 58.5 last month, but the survey was conducted one week before the current market turmoil on Wall Street. Of the two components of the Index, the present situation portion decreased to 58.8 from 65 last month. The Expectations component, however, increased to 60.5 from 54.1 in August.

John Ryding of RDQ Economics said, “The rise in confidence in September has little substance behind it. Current conditions deteriorated and consumers’ assessment of the labor market fell again, signaling weakness in the September payroll report….Moreover, given the intensification of the financial crisis and the drop in equity markets, we would expect the expectations component of confidence to drop in October.”