LONDON — It’s sure no fun being a European these days.

This story first appeared in the May 14, 2012 issue of WWD. Subscribe Today.

Political upheaval in France and Greece, renewed worries over the future of the euro, a welter of depressing economic news, rising unemployment and no clear exit from the Europe-wide financial crisis are all taking their toll on retail — and the consumer psyche — from London to Frankfurt, Paris to Athens.

Even before the French elected François Hollande, a tax-the-rich Socialist, as their president, and before the fragmented election results in Greece — adding to concerns that the austerity-weary country could negotiate an exit from the euro — Hermès chief executive officer Patrick Thomas, summed up what he thinks the future holds for European brands.

“It is going to be a very difficult year,” he said, even as he reported a 21.9 percent spike in first-quarter revenues to $1.02 billion. “The beginning was easy…but the trend is not good.”

The most recent economic projections in Europe back him up: On Friday, the European Commission confirmed its projection of a 0.3 percent contraction in the economies of the 17 euro-zone countries this year. Growth of 1 percent is expected in 2013.

Last Thursday, the Bank of France projected zero growth for the country in the first six months of the year, compared with 0.2 percent growth in the fourth quarter of 2011.

Hermès’ Thomas warned that turmoil in Europe could weigh on revenues going forward, although he is still projecting a 10 percent to 11 percent rise in sales this year, thanks to emerging markets such as China.

Despite his gloomy outlook, Thomas will be one of retail’s winners this year as the gulf widens between strong, geographically diversified companies with cash on their balance sheets and the weak ones with debts and shrinking sales, between the still-purring luxury and branded fashion ends of the market and the endangered middle market.

The average European is in no mood to shop, and would rather save: According to Eurostat, the European Commission’s statistics office, household savings increased by 13.7 percent in the fourth quarter of 2011, while disposable income fell by 0.4 percent.

In March, unemployment in the euro zone reached a record high, hitting 10.9 percent for the first time in 15 years. But it’s not only the unemployed who have reined in spending.

People who have jobs are worried about keeping them, and often they are supporting grown kids who may still be living at home, and who may never work,” said Nick Hood, an insolvency expert and head of external affairs at the London-based Company Watch, which tracks firms’ financial health. “This is an issue right across Europe, and the fear is particularly pernicious for midrange spenders and midmarket retailers.”

Italian consumers, in particular, are feeling insecure about their financial situation, according to The Boston Consulting Group’s Global Consumer Sentiment Survey, taken last month and set to be released today.

Fifty-one percent of the people taking the survey in Italy said they felt either “not financially secure” or “in financial trouble.” The same held true for 45 percent of respondents in both the U.K. and Germany, 41 percent of respondents in Spain and 33 percent of those surveyed in France.

Armando Branchini, executive director of Italy’s luxury goods association Fondazione Altagamma, said the market is looking increasingly like an hourglass, with luxury and the branded mass market at each end, and the middle market shrinking.

According to research by Altagamma Consensus, luxury and accessories sales are expected to grow 10 percent in 2012, and apparel is forecast to gain 6.5 percent. Luxury and accessories sales in the U.S. are expected to gain 7 percent; Latin America 14 percent; Japan 2 percent; Asia 16.5 percent; the Middle East 8.75 percent, and Europe 3.75 percent.

Branchini also said that “absolute luxury,” or brands such as Harry Winston, Hermès, Brioni and Loro Piana, are growing at an even faster rate than “aspirational luxury,” or brands such as Gucci and Louis Vuitton.

There is no greater illustration of the hourglass metaphor than the PPR results last month: The retail-to-luxury reported that revenues rose 15.4 percent in the first quarter, powered by sales at brands including Gucci, Yves Saint Laurent and Bottega Veneta. Puma and the retailer Fnac, however, registered disappointing performances.

Italy offered up a case study of its own, with Tod’s posting an 8 percent spike in first-quarter revenues, while the midmarket accessories maker Geox saw sales in the same period sink 4.4 percent due to a slowdown in demand in Italy, Europe and North America.

Luxury — and branded mass apparel — are also benefiting hugely from domestic Chinese consumers and Chinese tourists who love nothing more than spending their yuan on Western brand names and status symbols, and mixing and matching high- and low-end labels.

Last month, the Italian luxury men’s wear and textile label Ermenegildo Zegna posted record sales of $1.47 billion, with nearly half coming from Asia, and China in particular. During China’s 2012 Spring Festival in January, the Chinese spent 6 billion euros, or $7.8 billion, on luxury goods, the bulk of which was purchased outside China.

Meanwhile, midmarket retailers in the U.K. and Continental Europe that depend on domestic consumers — rather than flush foreigners from growing economies — are suffering.

Over the past six months, U.K. retailers — including Argos, French Connection and Arcadia Group — have all reported they are ready to re-negotiate rental agreements or shutter unprofitable stores in the wake of falling sales and profits.

And those U.K. companies are not alone: In April, euro-zone retail sales fell at their strongest pace since November 2008, according to the financial information services firm Markit, which highlighted a “worryingly steep downturn on the high street.”

In a separate report published earlier this month, Markit’s chief economist Chris Williamson said, “Business and consumer confidence appears to have deteriorated markedly across the [European] region since the uplift seen at the start of the year, suggesting that stimulus measures implemented by the European Central Bank have not had a lasting impact on the real economy.”

While many countries in the euro zone are suffering the pain of austerity and unemployment, others are still working — and consuming.

Lillian von Stauffenberg, managing director of the branding, consulting and public relations firm Finch & Partners in London, said luxury brands are investing heavily in China, but are also putting their marketing dollars into Germany.

“It’s not a new market, but it has a healthy economy — comparatively speaking — and has very little unemployment. People are still spending. And not all of Germany’s cities have been saturated with brands,” she said.

According to Germany’s Federal Statistics Office, the country’s exports grew for the third month in a row, rising 0.9 percent in March and helping to steer the country clear of recession, which has blighted so many other European economies.

As for the longer-term impact of the euro-zone storms, the jury is out. In France, it is unclear how much the fiscal policies of president-elect Hollande, who has vowed to slap a 75 percent tax rate on high earners and raise taxes on luxury goods, will damage the economy.

In London, the Evening Standard newspaper is already talking about an exodus of rich French to the British capital. In a recent story, “Paristocrats are Coming,” ES said real estate agents in London have seen a substantial uptick in French citizens hunting for high-priced homes in South Kensington, Wandsworth and Battersea Park in an attempt to get their money out of the country and avoid the dreaded tax increases.

Others are not so concerned about the left-leaning Hollande, who on Tuesday will meet German chancellor Angela Merkel to discuss their respective views on how to lead Europe out of its crisis. Hollande favors growth and job creation, while Merkel continues to favor fiscal discipline and beat the austerity drum — although the Germans have begun showing signs they might be willing to compromise somewhat on their penny-pinching ways in order to help boost the European economy.

“A lot of what we heard during the past months in France was electioneering,” said Hood of Company Watch. “I don’t think a luxury-goods tax hike is going to stop French women from buying gorgeous lingerie. And even if Hollande does slacken off austerity and enact measures to boost growth, French businesses will do just fine. The French are very good, very flexible businesspeople and they have always performed well despite deeply restrictive labor laws.” He does not believe there will be a mass exodus of the rich, either: “The French love being in France,” he claimed.

Jamie Merriman, a research analyst who specializes in European general retail at Sanford C. Bernstein in London, is not fussed about the threat of a luxury goods tax either. “A tax could actually help value-oriented retailers if consumers decided to trade down,” she said.

Tax or no tax, Merriman and her team believe the branded mass market still has substantial growth ahead of it. In a conference call earlier this month, Bernstein’s analysts said they believe Inditex and Hennes & Mauritz will be “long-term winners, given superior business models, higher emerging-market exposure and sustainable space growth.”

Merriman also said she’s expecting the 50 percent drop in cotton prices to filter through to retailers in the second half of the year, possibly driving retail prices down.

Other industry observers are less sure about the future of retail consumption in Europe.

“We learned that in 2008 the luxury market was not completely insulated from turmoil in the financial markets,” said James Lawson, a director at Ledbury Research, the market research firm that tracks wealthy consumers’ behavior. “For the wealthy, it’s not simply about whether they can afford to buy, but whether they can be seen to be buying, whether they are comfortable consuming when there are cutbacks from austerity measures,” he said.

Paul Alger, director of international affairs at the U.K. Fashion and Textile Association, believes there are more hard times to come.

“There is still a lot of insecurity, and I don’t think we’ve seen the end of the contraction in the market,” he said. “People are hurting across the boards, and the political elite do not have the answers.”


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