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European Retailers Brace for Downturn

Department stores in Europe react more mildly than their American counterparts to financial crisis.

KaDeWe in Germany

Money is the gift most French want to find under the tree.

This story first appeared in the December 18, 2008 issue of WWD.  Subscribe Today.

Underscoring the continent’s dour retail mood this holiday season, a recent study by Deloitte in Paris said most French wanted cash as a gift and that 10 percent of the country wouldn’t buy a single present.

In other words, retailers are facing one of the harshest retail seasons in recent memory. British stores are suffering one of the toughest economies in a generation, and countries hard-hit by the credit crisis, such as Ukraine, are experiencing retail meltdown. Meanwhile, on Wednesday, Carrefour Group, the world’s second-largest retailer after Wal-Mart Stores Inc., lowered its 2008 sales growth objective to 6.5 percent at constant exchange from the previous target of around 7 percent.

In a conference call with financial analysts, Carrefour chief executive officer José Luis Duran said the deterioration of the economic environment and global consumption trends, especially in Europe, plus worsening performances in the nonfood sector, contributed to the change in guidance. “We are witnessing sharp swings from week to week, sometimes from day to day,” he said.

But even if European stores don’t expect business to boom, they surprisingly didn’t express the panic of their American counterparts.

At Le Bon Marché in Paris, for example, Thierry Maman, managing director, said he’s betting on a minor increase for this month. In Italy, La Rinascente managing director Alberto Baldan said the department store expected sales to be “at least” in line with last year. Russian stores reported brisk business, and in Germany, the holiday season has gotten off to a solid start.

“We are not in the disaster scenario of the United States,” said Maman.

Galeries Lafayette in Paris said sales in November increased 10 percent over last year and that the “sales forecast for December seems to be good. We are not feeling the consequence of the crisis for the moment in regards to sales and traffic,” said a spokeswoman.

“Overall, the season won’t be the best ever,” said Pierre Pelarry, director of Printemps in Paris. “But it won’t be so bad. We should finish with a small increase.”

Pelarry was speaking before there was a bomb scare at the retailer’s Boulevard Hausmann flagship on Tuesday, and it remains to be seen whether the scare has any long-lasting impact on shopping this season.

Most European stores said deep discounts, endemic in the U.S., aren’t on their agenda. After all, governments in most European countries closely police sales periods. Still, many stores have been offering “private” sales recently, with reductions of up to 40 percent. Luxury brands from Prada to Ferragamo also have started markdowns earlier than usual.

“We have no reason to start deep markdowns,” said Maman. “That’s not our strategy. We need to be creative to get people to buy, not mark down merchandise.”

Still, across all of Western Europe, Deloitte said shoppers planned to spend less on gifts. The Irish are expected to spend the most on gifts, with an average of 668 euros, or $911.82 at current exchange, while the Dutch are expected to spend the least, with an average of 178 euros, or $242.97, according to Deloitte.

Small gift items — books and CDs — are expected to fare best, while clothing will suffer. Galeries Lafayette said its bestsellers so far have been high-tech electronics, housewares and gift cards.

Even if the overall picture is hardly euphoric, the top end so far appears to be holding. Maman at Le Bon Marché said either “small gifts or really expensive ones are performing best so far.” He said, for example, that fur stuffed animals by Rick Owens at 500 euros, or $682.50, a pop, as well as 5,200 euro, or $7,098, minks from the brand 32 Paradis have sold out. Maman said the store’s 10 1,000 euro, or $1,365, special edition bottles of perfume by Killian sold out days after arriving at the store.

On the other end of the spectrum, Maman said 140 euro, or $191.10, private label sweaters were selling. Fragrances, shoes, bags and jewelry were other favorite gift categories, he said.

At Printemps, Pelarry said high-end jewelry — and jewelry in general — was selling well.

Most Europeans said business has started slowly. Carla Sozzani, owner of Milan’s 10 Corso Como, said she’s targeting her best clients with e-mails to lure them into the store. She said accessories and home products are selling best.

La Rinascente’s Baldan said the department store has seen slower growth since October — though revenues have not dipped below last year’s levels. He said La Rinascente would stay “at least” in line with 2007, even if sales slowed again in December, because the market for accessible luxury was still “sufficient.”

He declined to discuss upcoming promotions, but said the Christmas Fantasy event, which gave a 20 percent discount to loyal customers on a selection of brands in the penultimate week in November, had been “well received.”

Department stores aren’t the only ones dishing out Christmas discounts. If further evidence was needed that luxury is having a bleak midwinter, high-end labels have been slashing prices in their own stores to stimulate sales.

Prada is offering reductions on some shoes of up to 50 percent, and on some bags, of 40 percent, in boutiques in Milan, Paris and Tokyo, although there are no sales signs in the stores. Some apparel, including black wool jackets, cocktail dresses and lace suits and dresses, also are selling at half price. A Prada spokesman confirmed that discounts on private sales of certain items varied by country and that this was normal at this stage of the season. He added there was no change in company policy in this respect compared with previous years.

Other labels discounting merchandise in Milan include Salvatore Ferragamo, Tod’s and Juicy Couture. Gucci was among the few resisting such a move.

In Germany, retailers hope Christmas will compensate for poor consumption during the early part of the year. They said packed stores and unexpectedly high spending at the official opening of the holiday season, on Nov. 29, bodes well for Christmas business even as Europe’s biggest economy struggles. The HDE, the German Retailers’ Association, predicts that business over the Christmas period could increase by 1 percent compared with last year.

A recent cold snap in Germany encouraged shoppers to spend on warm clothing, although, as is usual in Germany during the holiday season, electronic articles, such as flat-screen TVs, laptops, digital cameras and navigation systems, are doing particularly well.

Business at the upper end of the market remains particularly strong. According to managers at the luxury department store KaDeWe in Berlin, business is busy. The mid- to upper-price categories are selling best, along with expensive durable goods, such as watches, jewelry, cutlery and crockery. Casual fashion and leisurewear is proving more difficult to shift. “The big trends for the holiday season are fashion accessories such as handbags, scarves, belts, clutch bags and purses,” explained KaDeWe’s head of communications, Petra Fladenhofer. “Also selling well are cocktail dresses, worn not only to a formal Christmas dinner but also dressed down for everyday wear with a thick cardigan.”

Economists, however, are not sure whether pre-Christmas business can make up for a poor year. Sales throughout 2008 overall so far have been low, and only a strong holiday season will leave businesses with a positive yearly result. Government figures, meanwhile, show that consumption just before the start of the holiday season actually dropped.

In Russia, retailers are largely optimistic despite the crisis and say the country’s financial problems have yet to have a significant impact on their customers. “Come and take a look at our Christmas displays — you’ll see how many people are in the store,” said Alla Verber, vice president of prominent franchiser Mercury Distributor, which also runs the upscale Tsum department store.

Roza Kamenev, who owns Cara & Co, a concept store that specializes in Belgian and Australian labels, said she was feeling the pinch less than other stores, thanks to her lower pricing. She added that she’d have only moderate markdowns in January sales. “Last year, we had 70 percent because we overbought — it was our first year. This year, the maximum will be 40 percent.”

According to a recent Deloitte study, Russians plan to spend 12 percent more on presents this year than they did last year. Residents of six major cities said they intended to purchase goods on average worth around $693. That puts them on a level with residents of France and Switzerland and ahead of Germany.

In Ukraine, meanwhile, the picture is bleaker. The country was hit especially hard by the financial crisis: Its currency has fallen to an historic low against the U.S. dollar, and it has received a $4.5 billion IMF loan. According to the Deloitte study, Ukrainians will spend $303 on Christmas and New Year sale shopping.

It’s also tough in the U.K., particularly, where consumers have been hit hard by the credit crisis. Retailers are facing their roughest trading conditions for more than half a century, with early discounting expected to bite into margins.

Richard Hyman, a strategic adviser at Deloitte, said lower prices won’t necessarily tempt consumers to spend more, but they will certainly impact the bottom line. “This level of discounting certainly wasn’t planned,” he said. “It sends out the message to the consumer that, if you wait a little longer, there will be more and greater discounting.”

As early as mid-November, 30 percent discounts started appearing at the likes of Gap, Marks & Spencer, Debenhams and Selfridges. Karen Millen, Ted Baker, Armani Exchange, Hackett and Tommy Hilfiger are on sale at 30 percent off, while Levi’s, Hobbs, Clarks and Jaeger are offering up to 50 percent off.

Fabio Guidetti, who recently was named director of sales and international business development for Liberty of London, said, “During the festive season it is important for us to remain competitive by being aware of what is going on in the marketplace. Our average depth of markdown is 38 percent — a combination of 30 and 50 percent.”

For three days, starting on Dec. 10, Debenhams offered its third 20 percent-off sale throughout its stores. Even Marks & Spencer has discounted stock, having recently held two one-day sales.

The British high street has become very polarized with clear winners and losers. It was a telling sign that high street retailers including H&M, Zara, COS and Topshop were not advertising sales.

This week, Selfridges said sales from its international customers have been thriving and are, on average, 30 percent ahead of last year. “Spending by U.S. customers has soared as the dollar has strengthened against the pound,” said Anne Pitcher, Selfridges’ buying and merchandising director. “Our stores are very busy, and the pace of Christmas shopping has stepped up in the last 10 days, with strong sales in all our gift areas, from fine jewelry and fashion to toys and festive food.”