PARIS — Despite tentative signs of a turnaround at the beginning of the year, European retailers are bracing for a see-saw recovery at best, and at worst a double-dip recession.
Fears that Greece could default on its public debt have roiled financial markets in recent weeks, raising the specter that European economies, which borrowed heavily to sustain spending during the recession, could now raise taxes on their wealthiest citizens to help foot the bill.
“We are not out of the woods yet,” summed up Guy-Noël Chatelin, a partner at OC&C Strategy in Paris.
Indeed, luxury firms are maintaining a cautious stance, despite the fact many reported an improvement in the fourth quarter of 2009 — although admittedly against very weak year-ago levels.
Ralph Toledano, chairman and chief executive officer at Chloé, said business started to pick up from September, with stronger sell-throughs prompting even Russian buyers, which had retreated during the economic crisis, to return to the showrooms. He noted, however, that Italian specialty stores now seem to be suffering.
“People are feeling better, but there’s still this sense of trauma surrounding us. I don’t see any kind of euphoria. We’re still in a fragile situation. My guess would be that 2010 will see ups and downs,” Toledano said.
Recent statistics support a scenario of tentative recovery in the euro zone. The euro zone economic sentiment indicator fell to 95.9 in February from 96.0 in January, after 10 months of uninterrupted increases. Gross domestic product in the 16-member currency union rose just 0.1 percent in the fourth quarter of 2009 compared with the previous quarter. In 2009 as a whole, GDP fell by 4 percent in the euro area and by 4.1 percent in the 27 member states of the European Union.
French statistics institute Insee predicts a two-speed recovery in the first half, with leaders including Germany and France trailed by countries like the United Kingdom, Italy and Spain, which continue to struggle with weak domestic demand.
Total retail sales in the U.K. rose 1.2 percent in January versus the same period last year, according to a survey by the British Retail Consortium, or BRC, and KPMG. “This is the worst January sales growth in the 15 years we’ve been running the survey,” said BRC director general Stephen Robertson. “Customers are becoming cautious again in the face of economic and political uncertainty.”
Some shoppers brought forward purchases to December in anticipation of the British government restoring value-added tax, or VAT, to its former level of 17.5 percent from 15 percent during the recession. A further increase in VAT to up to 20 percent reportedly is being mulled over by both the ruling Labor Party and its rival, the Conservatives.
Adding to the uncertainty is the British general election, due to take place this spring. Whoever wins will have to raise taxes, cut government spending, and likely lay off public sector employees in a bid to plug the U.K. government’s budget deficit. An income tax increase is already on the cards: starting in April, those who earn more than 150,000 pounds, or $231,850 at current exchange rates, will be taxed at 50 percent.
Pringle chief executive Mary-Adair Macaire said the planned tax hike and other levies on bonus payments were further jeopardizing the luxury sector. “These people shop in London and they support craftsmanship and the luxury goods industry. To chase them away is damaging to the brands,” she warned.
The outlook in Italy is similarly lackluster. Retail sales were flat in December versus the previous month on a seasonally adjusted basis, and up 0.7 percent versus the same period last year, according to Italian statistics institute Istat.
“What I think could happen in Europe is that the negative sentiment of the past 18 to 24 months is further confirmed,” said Patrizio di Marco, chief executive officer of Gucci. However, he predicted that worries about the public finances of Greece and other southern European economies would not weigh directly on consumer confidence, although they have helped to send the euro tumbling to a nine-month low against the dollar.
A weak single currency is welcome news for European luxury houses, as it makes their goods more affordable in dollar terms — something U.S. buyers attending the Milan and Paris fashion shows over the next two weeks no doubt will cheer. “That said, it’s also true that we define our price lists six months ahead of time,” noted di Marco. Ferragamo ceo Michele Norsa said a euro rate of $1.35 to $1.38 appeared reasonable. “It’s a positive normalization,” he commented.
For brands that manufacture their products in dollar-zone countries, however, a weaker euro implies shrinking margins. “A weaker euro will have a negative impact in the long run, as our sourcing is done in U.S. dollars,” said Michael Laemmermann, general manager finance at activewear company Puma. “Long-term currency weakness would be compensated by price increases.”
Such price hikes are unthinkable at present in most European economies, as consumers cling to a bargain-hunting mentality amid continued uncertainty over jobs and salaries. Fears about employment prospects have triggered strikes across Europe, with workers from Germany to Spain protesting planned reforms.
Even in those countries that are leading the recovery, prospects are less than stellar. In Germany, the euro zone’s biggest economy, Nuremberg-based marketing research group GfK expects a slight deterioration in the consumer climate in March versus February.
“Economic expectations are declining and consumers are considering their spending behavior more carefully than in previous months. The propensity to buy is therefore decreasing slightly,” GfK said in the report.
Adding to German uncertainty is the growing pressure for it to lead the bailout of Greece, leading to an outcry in Germany against the idea.
In France, the euro zone’s second-largest economy, spending on clothes fell 4 percent in 2009 in value terms at constant exchange rates and should do little better this year, said François-Marie Grau, general secretary of the French Women’s Ready-to-Wear Federation.
“Consumers are totally confused about prices,” said Grau, blaming a change in government regulations that authorizes retailers to offer discounts between the official summer and winter sales.
Alberta Ferretti's "Rainbow Week" sweaters are back. The designer closed her #MFW show with a few day-of-the-week sweaters, which first debuted on the catwalk last January as part of the pre-fall 2017 collection. #wwdfashion (📷: @delphineachard)