LONDON — Earlier this month, Nick Hayek, chief executive officer of Swatch Group AG, complained about the impact of the mighty Swiss franc on sales, and especially those made in dollars. He called the franc’s exchange rate in August and September “catastrophic,” and said the problem is ongoing, although he hopes 2012 will bring better news.

This story first appeared in the November 16, 2011 issue of WWD. Subscribe Today.

Hayek is just one of many European brand owners and suppliers who are suffering the ill effects of currency ups and downs, and a trifecta of rising raw material, labor and transport costs. Although it remains unclear what, exactly, will happen to the euro in the coming months, the rising cost of doing business is one reality that won’t go away.

“One of the biggest hurdles in doing business today is the rising prices of raw materials and labor,” said Puma’s ceo, Franz Koch. “That trend will continue, so we have to figure out how to preserve our gross profit.”

Rupert Sanderson, founder and owner of the namesake, vertically integrated footwear brand, agreed. Although he’s based in London’s Mayfair, his factory, which he owns, is located near Bologna, Italy, and he does his business chiefly in euros.

“Raw material prices are creeping up, from thread to insole boards to hardware,” said Sanderson during an interview at his studio. “The man who supplies my heels has raised his prices 10 percent because he uses resins and petrochemicals, which are also increasing in price.”

According to the Platts Global Petrochemical Index, average prices in October were 3.5 percent higher year-on-year.

Justin Rhodes, founder of the British leather belt and buckle brand Elliot Rhodes, said metal prices have risen 5 to 8 percent every year since he started the business in 2004, while sterling silver prices have tripled.

“You have to pass some of that through to the consumer,” said Rhodes, who will be taking part in Scoop, the British trade show, for the first time next year.

Rhodes, who has just opened his third London store off Oxford Street, has also been grappling with another problem: the increasingly unfavorable pound-euro exchange rate.

“Our buy is euro-denominated and we sell in pounds, so it’s been a nightmare,” he said. “Since 2004, we’ve seen a 20 percent appreciation of the euro versus the pound. We’re getting squeezed from all sides.”
Rhodes said between the rise in raw material costs and the increase in the value of the euro, he’s had to raise his retail prices 20 percent in the seven years he’s been in business.

Ruth Chapman, who owns the multibrand designer boutique Matches with her husband Tom, is another London-based entrepreneur who’s grappling with the impact of the strong euro. Matches carries designer labels ranging from Azzedine Alaïa and Balenciaga to Acne and Rag & Bone, and also has an in-house women’s wear line called Freda.

Chapman said her customers don’t care if the price of an Alaïa piece rises by 200 pounds, or $320.
“It’s the in-between brands where we’re really being cautious,” she said. “If it’s not superluxurious, then we’ll make a price-driven decision on whether or not to take it.”

Simona Severini, general manager of the Italian trade fair White, said life is no different in Italy. Because of the strength of the euro relative to the dollar and the pound, buyers are inclined to splash out only if the product is a quality one with a strong identity.

“They’ll buy if there is quality and a point of view, and to offset the extra expense, they’ll invest in fewer generic products like T-shirts and sandals that don’t have as clear an identity,” said Severini, adding that raw material and labor costs were also a major issue for White’s exhibitors, which include AG Adriano Goldschmied, Faliero Sarti and Ornamenta. “Of course, the rising cost of raw materials such as cotton and wool do have an impact on final prices, and this is something we discuss, at length, with our exhibitors. The savviest ones are willing to accept lower profit margins in times like these. They’re willing to take a step backward and they know that good times will return.”

Jeweler Lucas Jack, who shows at Pure in London, is taking exactly that approach. He said despite the spike in gold prices over the past year, he won’t be raising his prices in February.

“My jewelry is gold-plated and I’ve tried to absorb the increases as much as possible,” Jack said. “My prices will be comparable with last year’s. I’m sensitive to my customers’ needs at a time like this.”

In a bid to sidestep the currency drama altogether, as well as control costs and manufacturing processes, British companies are increasingly looking nearer to home. Buyers from outside Britain are also taking a fresh look at a country that’s traditionally been considered too expensive on a variety of levels.

“It’s fair to say there’s a renewed interest in products coming from the U.K.,” said Paul Alger, director, international affairs at the U.K. Fashion & Textile Association. “The pound has been fairly weak recently and, from a Japanese and European Union point of view, British products don’t look quite as expensive as they used to.”

The UKFT has recently launched a “Let’s Make It Here” initiative that aims to hook up Britain’s manufacturers, many of which are high end and niche, with homegrown designers and brands.

“There are fewer fuel and shipping costs, the British factories can commit to smaller orders, and they are usually hungrier and more flexible than they would be in the Far East,” Alger said. “The mood in Britain has changed, and the U.K. government is keen to see manufacturing at the top of the agenda.”

The Chapmans, owners of Matches, are a case in point. They source and manufacture their in-house line, Freda, entirely in the U.K.

“We’ve been working with the British mills,” Chapman said. “It’s very easy to control what’s going on and you can build strong relationships with your factories and suppliers, which is really good. We’re not sourcing or manufacturing anything in dollars for Freda. It’s too much headache and the savings would not be great enough.”

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