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Luxury consumers better get ready for sticker shock come fall.
After all, retailers already are swooning as they view collections in New York, London, Milan and Paris that are up to 15 percent more expensive in wholesale terms compared with last fall, thanks to the euro’s might. On top of that, the fall collections so far are laden with intricate embroideries, crystal embellishments and beading, which only add to the production cost.
No wonder Gwen Stefani’s “Rich Girl,” a hip-hop remake of the “Fiddler on the Roof” classic, seems to be the song for the season.
Not surprisingly, alarm bells are starting to go off in the retail and vendor communities, challenged already by a customer who is increasingly expecting early markdowns.
“Pricing of course is a concern, the dollars don’t go as far, so we have to be more selective,” said Sue Patneaude, executive vice president, designer apparel, at Nordstrom. “But we will absolutely still buy the most luxurious fashion. We won’t compromise what we buy because of the euro, and I encourage the buyers to convert everything to retail prices as they purchase so we maintain a realistic point of view about the intrinsic value of the clothes.”
As buyers and the fashion press try to keep from fainting as they get their hotel and restaurant bills in Milan this week, their bigger concern is how consumers will react come fall to the higher prices. On Wednesday, the dollar rose slightly against the euro to close at $1.3212.
Barbara Atkin, fashion director at Holt Renfrew, noted, “We have to partner with vendors and work on the pricing because, if it’s priced out of the ballpark, the customer walks away from it.”
Many buyers said they would think twice before committing to lines, and some expect to work with designers to figure out a pricing strategy to avoid stratospheric denominations. Luxury vendors, meanwhile, are looking to reduce sourcing costs at every turn, monitor for symptoms of sticker shock and explore new ways of pricing the line.
And come up with new handbags for less than $1,000 — pronto.
“It’s a balancing act,” said Stacey Cartwright, chief financial officer of Burberry. “We want to maintain our margins, and we’re doing that by seeking cost efficiencies with suppliers and with price increases to the collections. We’re looking at increases of 3 to 4 percent per collection each season, so about 6 to 8 percent over the course of the year. It’s an industry-wide issue, and we realize we’re not alone here.”
Antonio Belloni, group managing director of LVMH Moët Hennessy Louis Vuitton, whose holdings range from Louis Vuitton and Tag Heuer to Donna Karan International Inc., said, “For us as a group, the euro has been high versus most of the currencies since most currencies are pegged to the dollar. The challenge is to create proper value. There is value in design and in fashion. We adjust the margins and prices to be competitive.”
He noted this is the third year the euro has been high, and it won’t be different than in the past. Belloni said the burden lies on the manufacturer to price collections competitively.
Bernard Fornas, president of Cartier International, acknowledged the euro’s strength has resulted in the company increasing prices over the last year, but said sales have continued to grow in the U.S., where Cartier is out to build penetration and market share.
“Maybe Americans are traveling less [to Europe],” Fornas said. “Maybe they are spending more on the domestic market. Business is sound and growing.”
Fornas said the company would most likely increase prices again this year. “Increases are on a case-by-case basis by product,” he said. “Obviously, if you’re a consumer, a one-time 10 percent increase is a lot. We try to spread price increases out over several months. It makes it more acceptable.”
Echoing the opinion of many luxury executives, Francoise Montenay, president of Chanel SA, cited little price resistance among consumers of luxury ready-to-wear, where like-for-like cost comparisons are difficult as styles and fabrics change every season. And instead of tampering with margins in rtw — a tough category to operate profitably —Chanel is fighting back with “more and more sophisticated” products.
“It’s about creating the object of desire,” Montenay said. “We have very good results, specifically in the United States. Women in the U.S. don’t ever ask the price. They love the product and they buy it.”
However, Montenay acknowledged that handbags pose more of a challenge, since 2004 prices crept up about 12 percent, exacerbated not only by the strong euro, but by production costs in France due to the 35-hour work week. Chanel currently takes a larger margin with exceptional seasonal bags, but has had to squeeze them for evergreen styles.
“Our problem is we no longer have a handbag that retails for less than $1,200,” she said. “We have to create a handbag that retails around $800 or $900.”
Montenay said it would likely be introduced to the trade around the time of the Paris shows.
Paolo De Spirt, chief executive of Emanuel Ungaro, agreed that accessories are a tricky category — where manufacturers and retailers come up against “psychological price barriers.”
Ditto for diffusion lines, where “we have a price target to meet.” He said licensees that make Ungaro’s Fuchsia and Fever diffusion lines were working primarily on the sourcing side to reduce costs.
“Some people are talking about China. I don’t think we should go there yet,” he said. Still, he said houses must reduce “creation costs,” which include the cost of samples, and efficiencies must be gained throughout the production process.
For wholesale clients who buy Ungaro products in dollars or dollar-related currencies, De Spirt is proposing what he calls a “more dynamic pricing system,” in which retail markups vary from category to category.
Companies, which compromised margins as a first line of defense when the euro started to gain last year, said future price increases can’t be avoided. However, many stressed they can’t raise prices drastically or they risk losing ground in the highly competitive U.S. market.
Michele Norsa, managing director and ceo of Valentino SpA and president and ceo of Marzotto Apparel, said his company is raising U.S. prices by no more than a few percentage points.
“We have to work on reducing costs [to protect margins]. But we also have increasing volume sales and that’s helping us,” he said.
Still, Norsa said he’s worried the strong euro-weak dollar trend will continue, at least for this year and in 2006. Macroeconomic factors don’t indicate a shift in currencies. “There are no signs of the tendency reversing,” he observed.
Franco Pené, chairman of high-end apparel manufacturer Gibò, agreed that companies must cut costs and see how much of the currency factor they can absorb. European companies can’t increase their U.S. prices by 8 or 9 percent to account for the depreciation of the dollar to the euro since last season, or they would lose their competitive edge in a challenging market, he said.
“For spring-summer, we were dealing with a rate that was closer to one euro to $1.20 or $1.25. This season, we know too well that it is closer to $1.30,” he said. “We need to see if cost containment will allow us to absorb that much of a deterioration.”
Jean Cassegrain, managing director at the Paris accessories firm Longchamp, said the company was affected “like everybody else in Europe. We have to raise, again, our U.S. dollar prices. We also have to reduce our margins again, as it is difficult to increase the prices by as much as the exchange rate variation over the last two years.”
He said Longchamp had last increased prices in January 2004 and would increase prices next on July 1.
Dries Van Noten, the Belgian designer, ranked the surging euro as a “significant” concern. “The race of the dollar versus the euro is an existing threat,” he said. “If the euro goes higher, then it will heavily effect the economy in Europe and globally.”
And it isn’t only European designers and luxury houses being impacted. American designers also are raising prices since many of them source fabrics and manufacture in Europe.
DKI ceo Jeffry Aronsson explained that the strong euro is mostly impacting the accessories category because the company relies on Italian leathers and tanneries.
Of its sportswear, Aronsson added: “Because we don’t limit our production to any one source, we have found on occasion that even the U.S. product, which has typically been considered more costly for luxury goods, is beginning to become more competitive. It helps us not to limit ourselves to one currency and look for the best, most cost-effective sources.”
Oscar de la Renta is making an effort to broaden its price range, especially at the opening price point. “That’s not to say things are inexpensive,” said Alex Bolen, the firm’s ceo. “I think our wholesale accounts are pleased with the progress we have made.”
For the first time this fall, the company is offering an evening gown that can retail for less than $3,000. Whether that happens is up to the wholesale accounts. “We need to do more of that, in my opinion,” Bolen said.
Despite the continued pressure to jack up prices, de la Renta is trying to maintain its prices by absorbing some of the increased costs and asking its manufacturers and retailers to do the same.
“We’re saying, ‘If you give a little, we can give a little and the manufacturer gives a little, we can create a compelling story,’” Bolen said.
As a result, the company stands to be more competitive with its European rivals and “hopefully will pick up more open-to-buy,” Bolen said. All in all, the current situation is an opportunity to build sales internationally, something the company is determined to do as it strives to open freestanding stores abroad.
A European specialty store with which the designer has been trying to do business placed a $300,000 order earlier this month. “That’s progress,” he said. “We’re making a big push in Europe this year.”
Michael Kors sources wovens in Italian mills. Brigitte Kleine, senior vice president of women’s at Michael Kors, explained that the company has taken precautions to avoid a fallout from the euro. “We are not feeling the euro strength as much as we expected because we hedged and purchased euros in advance,” Kleine said. “We had anticipated this, and have a negligible increase in price.”
Vera Wang is in the preliminary stages of pricing, but the aim is to offer three-tiered pricing — opening, mid- and high — within each classification, said Susan Sokol, president. “As we build this ready-to-wear business, we want to assure we cover all price classifications.”
The designer’s fall 150-piece collection is more than three times the size of last fall’s collection. Eveningwear pieces, which were the bulk of last fall’s collection, are about the same as last year, Sokol said.
Despite that, the company knows some finishing touches command higher prices.
“Our pieces are so embellished with pleating, jeweled trim and all kinds of things. Those kinds of things are what they are,” Sokol said.
“When you offer an extremely beautiful product that has the design element, price does not become an issue,” she said. “When it’s something that’s basic, like a great little gabardine pant, that’s a different story.”
Some companies, especially in Europe, played down the impact of the strong euro, however.
A Bulgari spokesman said that the jeweler hasn’t altered U.S. pricing to compensate for unfavorable exchange rates. He also reiterated that the company manages to partially compensate for the strong euro through hedging. Also, Bulgari buys raw materials in dollars so a weak dollar actually bolsters its buying power.
Vittorio Missoni, marketing director and sales manager at Missoni, said the family-controlled company isn’t adjusting prices to compensate for the strong euro-to-dollar exchange rate. He said that, although margins in the U.S. are suffering, Missoni wants to stay competitive on the pricing front.
“It’s just a good corporate strategy to keep your prices in line,” he said, adding that said sales trends in the U.S. are encouraging. “If we had a more favorable exchange rate, it wouldn’t just be a positive situation, but an excellent one.”
Paris-based designer Andrew Gn said a mild increase in the euro’s strength wasn’t a major problem for his business. He said clients who buy expensive rtw won’t blister at paying more for a mink coat or richly embroidered blouse. “Quite frankly, when you’re selling a niche product that’s expensive, another price increase won’t keep customers from buying,” he said.
What’s more, the currency woes are “touching everyone,” which evens the playing field. “Even the American designers produce in Europe and buy European fabrics,” Gn said. “So their prices will be higher, too.”
Vendors also spy positive aspects to the currency situation.
“We’re very worried about the euro, but let’s look at a small positive sign from this, and that is it’s a time to invest in the U.S.,” said Ermenegildo Zegna, co-ceo of Ermenegildo Zegna, the men’s wear giant that owns women’s line Agnona. “We’ve launched a new investment plan for the next three years that will focus on more openings and a [spending] increase in marketing.”
Longchamp, which opened a new unit last November in Las Vegas, said it would also continue to open new locations in the U.S. “The only bright side is that it makes investing in the U.S. cheaper,” Cassegrain said.
But Burberry’s Cartwright added that the benefits of a weak dollar were few and far between. “We’re not expecting a spike in U.S. sales. I think the weak dollar will have a small influence on our sales there.” She also said that the weak dollar was not helping the manufacturing side of the business. “More than half of our sourcing is in Italy and the rest is in the U.K.,” she said. “We are a very Europe-focused business.”