NEW YORK — European designers are holding the line — for now.
Facing a soaring euro against the dollar, designer companies are absorbing price increases and living with smaller margins, rather than passing the higher costs on to an already-resistant consumer. Retailers, meanwhile, said they aren’t seeing any dramatic increases and believe that, in the end, the consumer will respond to strong product no matter the price.
However, a few European firms have already raised fall prices by up to 5 percent. Several others said that, while they are holding prices for fall, they’ll be forced to increase them for their spring-summer 2004 collections.
The euro has gained 21 percent in value versus the dollar since January 2002. Over the last three months alone, it has risen 6.5 percent against the dollar. On Monday, it settled to close at $1.07 against the dollar.
Still, there’s growing concern that rising prices could put a dent in European apparel sales, both in the U.S. and in Europe, and consumer resistance could hamper any signs of an economic recovery.
Claire Kent, luxury analyst at Morgan Stanley in London, said: "Obviously a strengthening euro is bad news for the European luxury companies. In 2002, some quoted companies countered negative currency moves by raising prices; we don’t see that opportunity in 2003 — we think there would be customer resistance to further price increases. Therefore we will possibly see some companies suffer gross margin pressure in 2003."
Italian firms predict there will be problems if the euro keeps rising.
"The stronger euro is certainly not going to help sales in the area of the world — the U.S. — where sales are already suffering," said Franco Pene, chairman of the Italian designer clothing manufacturer Gibò. "We’ve calculated an exchange of $1.05 to the euro, which translates, for those paying in U.S. dollars, into a five percent rise in prices compared with last season. This price increase comes on top of a less than buoyant market, and will have a particular impact on men’s wear, which is more sensitive to price changes."
"If the dollar continues to stay at this level or becomes weaker against the euro, it could have an impact on our income statement policy," said Riccardo Stilli, chief financial officer of Prada, which normally hedges one season in advance and so is fine for now.Robert Triefus, executive vice president for worldwide communications at Giorgio Armani, said, "As of today, we have not made any price adjustment. We invoice in the U.Sin dollars, in Europe in euro, in Japan and South America in euro, so there is a balancing-out effect; in some parts we lose, in some we gain. We sold some of our fall-winter collection prior to Christmas, so it would be strange to change our prices mid-season. We are watching the situation and if we were to make price adjustments, it would be at the very beginning of the spring-summer 2004 sales, so that it would be consistent."
Vittorio Missoni, financial director at the family-run company, said, "Such a strong euro does not help us, especially because it creates panic among our clients and distributors, who automatically consider us more expensive. It’s a psychological mechanism. A weaker dollar affects not only the U.S., but also Russia, China, South America and Arabian countries, where we sell in U.S. dollars. In the end, I think you should continue to follow your price strategy honestly, but with no discounts."
Missoni downplayed the importance of the fluctuations of the exchange rates, though, and praised the euro, which he thinks brought "more clarity on the markets and a price alignment."
Are the bargain-hunting Americans, who exploited a favorable lira-dollar exchange rate in the past, steering clear of Italy? Prada says no. "As of today, we have not noticed any decrease in the number of Americans shopping in Europe during the Christmas season," Stilli said.
But the strength of the euro has some Europeans concerned about the long-term impact on the economy. A strong euro is "another factor pushing us and others to believe the Eurozone economy is not going to perform particularly well this year," said Robert Prior, a European economist with HSBC. His bank says the euro has risen about 8 percent in trade-weighted terms since the spring of last year. (That means the euro rise against other currencies is weighted to account for the amount of business the Eurozone does with each country.)
Prior said such a rise is likely to trim the Eurozone’s gross domestic product by about half of a percent and is likely to prompt the European Central Bank to slash interest rates in the coming months. But he said a strong euro isn’t the only factor depressing economic growth in the EU, citing weak consumer spending, particularly in the key German market.In Paris, Ralph Toledano, president of Chloé, said he plans to hold prices on the upcoming fall-winter 2003 collection, in spite of the strength of the euro. "In euros, [prices] will definitely be lower," he said. "Converted into dollars, they should be stable."
Toledano stressed that market share in a "product-driven" industry will still be won based on the quality and creative design as opposed to price. But he said tough economic times require diligent cost controls, without sacrificing quality. "Clearly with the economic situation less favorable, pricing becomes a more serious issue," he said. "For that reason, we have worked extremely hard on the pricing."
Guillaume Bousquet, U.S. director of Paris house Cacharel, said that the stronger euro meant that the brand would reduce its profit margins. "I can’t increase my retail prices in the United States," said Bousquet. "We lose some profit with the euro strong." Bousquet said that many fashion clients today are international shoppers. "They travel in Europe and they buy in Europe even if they live in the States. It’s hard to justify the prices being any higher in the States than they already are." Bousquet said tariffs on fashion entering the U.S. from Europe makes prices anywhere between 30 and 50 percent more expensive than in Europe.
Unquestionably, European retailers and luxury boutiques have already been hit by a drop in American tourism since the terrorist attacks of Sept. 11. Philippe de Beauvoir, president of department stores Le Bon Marché and Samaritaine,owned by LVMH Moët Hennessy Louis Vuitton, said business already suffered due to the weak dollar. "We were very disappointed in the lack of North American tourists during December," said de Beauvoir.
Meanwhile, de Beauvoir said that even with the dollar weaker, he doesn’t plan to boost American merchandise. He pointed out that import tariffs were very high on goods arriving in Europe from America. "Except big brands like Gap and Ralph Lauren, who get around the rules by operating distribution platforms around the world, it’s too expensive to bring in 100 percent ‘Made in USA’ products — even with the euro stronger."No wonder U.S. designer firms haven’t seen the impact of the strong euro yet.
"The change isn’t significant enough to be impactful enough from a sales point of view," said Fred Wilson, chief executive officer of Donna Karan International. "It isn’t significant enough to really impact business."
"We sell our collection line in Europe at stores like Colette and Harvey Nichols," said Robert Duffy, president of Marc Jacobs International. "But if you’re a collection shopper, the difference is neither here nor there. It’s a limited audience, and for them, price is not much of an issue. I suppose the rate does give us an advantage, but it’s not that big of a difference."
Julie Chaiken, owner and president of Chaiken, the New York-based sportswear firm, said, "It’s double-edged — we import a lot of our raw materials from Europe so that we’re having to revisit how we’re doing some things as those costs go up. On the flip side, we’re seeing our sales increase in the European market and over the past couple years, we had resistance when the dollar was so strong, and we see that resistance lessening. We haven’t seen a dramatic change yet, but we are taking more inquiries from European buyers than last year."
On the flip side, U.S. retailers aren’t making any drastic adjustments in their European buy.
"We didn’t see a tremendous amount of [price] change in designer lines," said Judy Collinson, executive vice president and general merchandise manager of women’s merchandising at Barneys New York. "When you talk to the designers about this, they don’t price their goods by the currency rates, they price realistically according to the market and competitive issues. Therefore, we’re offering the same kind of designer prices we have been offering."
Retailer Janet Brown, owner of the eponymous designer boutique in Port Washington, N.Y., said that despite a spike in prices for European brands, customers will still pay for strong product. "Any price increase always causes trepidation, but when the items are wonderful, women all over the world find a way to buy them. This season, going into the market, my formula will be very clear, very concise because there’s no room for mistakes. I will look at the product much more carefully, the scrutinization during the buy coming up; I believe I will be like an athlete going to the fashion olympics. I feel very much ‘Chariots of Fire.’"Several buyers at high-end retailers on the West Coast said they will not be paring back the dollars they generally invest in European goods. But some say they will be cutting off the "fringe," or new designers without a sell-through track record or those who aren’t performing as well as tried-and-true core designers.
Lisa Davis, a women’s buyer for seven Theodore stores in Southern California, said she’s confident her customers can absorb the raised prices of the European goods, which currently account for more than 70 percent of her merchandise mix.
"Our customer is used to spending a lot of money," she said. "When expensive becomes expensive, it’s just plain expensive. It’s not like we’re being taken from the moderate to the high-end business or anything."
In Davis’ case, fine-tuning her buys will mean investing more of a chunk of her open-to-buy in designers such as Ann Demeulemeester, Roberto Cavalli, Jean Paul Gaultier and Blue Marine.
Ron Herman, owner and buyer of four boutiques by the same name, including the well-known location at Fred Segal Melrose, said he, too, will raise prices to reflect the increasing value of the euro affecting some 35 percent of his goods rather than pare back buys. It’s the price of being in the fashion business, Herman said. "My responsibility is to present the newest, most creative items to customers and sometimes you have to pay a premium for this."
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