The managing director of Boodles, the British high-end jeweler where David Beckham famously bought his fiancée Victoria’s diamond engagement ring, doesn’t need the financial wires or the BBC to monitor the ups and downs of the British pound. Michael Wainwright can easily gauge the pound’s strength against other currencies by looking at the sales of Patek Philippe watches at Boodles stores. “You see demand slip as the pound gets too strong. People travel — and they’re not stupid,” he said during a recent industry roundtable discussion in London.
This story first appeared in the January 5, 2015 issue of WWD. Subscribe Today.
Fellow British retailer Selfridges keeps a constant eye on currency movements and their impact on consumer demand. According to Sue West, the store’s director of operations, prices for the fall-winter 2014 collections were about 20 percent higher in London than they were in Paris.
The stronger pound has been a “major headwind” for tourist spending in the U.K., making it less appealing for foreign visitors to come to shop, according to a report called “Welcome to London,” published late last year by Exane BNP Paribas.
The crash of the Russian ruble, meanwhile, has meant that swathes of high-spenders have been wiped out — for the moment, at least. According to Global Blue, Russian tourist spending in the U.K. declined 34 percent year-over-year in the month of November.
In addition, major travel companies in the country have gone bust as Prime Minister Vladimir Putin has been encouraging the Russian people to holiday at home — not that the ruble will take them very far abroad in the coming year.
Wainwright is right: The traveling shopper isn’t stupid, and over the years, currency fluctuations — as well as the transparency offered by the Internet — has made them experts in securing the best possible prices.
“Tourists will buy J. Crew in New York, if they can. Who doesn’t arbitrage prices? That happens worldwide,” said J. Crew Group Inc.’s chairman and chief executive Millard “Mickey” Drexler on a recent trip to London.
“People arbitrage hotel and airplane prices online. They drive to New Jersey to avoid the New York sales tax,” he added.
With the pound and the euro losing strength against the dollar, European brands and retailers are now looking at better times ahead.
The movements over the past six months have been extreme: At the end of June, the euro was worth $1.37, and by mid-December, its value had fallen to $1.25. During the same six-month period, the pound dropped from $1.70 to $1.57. On Friday, the euro traded at $1.21 against the dollar while the pound fetched $1.56.
Luxury brands that report their earnings in pounds, Swiss francs and euros are relieved at the turn of events: Having suffered from translating revenue and earnings back into their powerful home currencies quarter after quarter, they will soon start to feel the benefits of a weaker euro and pound.
“Up until August, exchange rates were against us, but in September they turned positive, and they were positive in October, too. There may be good times ahead,” said Gary Saage, chief financial officer of Compagnie Financière Richemont, whose profits took a hit in the first half due in part to currency-hedging charges.
Carol Fairweather, cfo at Burberry Group, said currency headwinds are definitely dying down, and she is not expecting any major impact from exchange rates in the second half. Meanwhile, according to one of Morgan Stanley’s latest FX Pulse reports, the euro is expected to “extend its decline.”
Bernstein Research in a recent report said it is expecting the new foreign exchange “uplift” to support revenue growth in cash terms as well as margin expansion in the personal luxury goods category in the fourth quarter and into 2015.
In a follow-up report released in December, Bernstein Research said foreign exchange headwinds will reverse for companies including Inditex, parent of Zara, and will “recede from very high levels” for Asos.com. Hennes & Mauritz, however, is another story. While the bulk of revenues are received in euros, the cost base is in Asia, and the Swedish company pays for its products in U.S. dollars. As a result of the stronger dollar, it is expecting a foreign exchange drag and lower gross margins.
The good news for most of Europe’s luxury goods producers and retailers comes with a powerful sting in its tail: The pound and euro are weakening against the dollar because their economies cannot keep up with renewed growth — and consumer spending — in the U.S.
After returning from the G20 summit in Brisbane, Australia, in mid-November, British Prime Minister David Cameron warned of a looming economic downturn in Europe in an editorial published in The Guardian newspaper.
“The euro zone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices, too. Emerging markets, which were the driver of growth in the early stages of the recovery, are now slowing down,” he wrote. “Despite the progress in Bali, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East, and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”
Cameron said that while the British economy may be growing, it cannot flourish in isolation. “In our interconnected world, wider problems in the global economy pose a real risk to our recovery at home. We are already seeing that, with the impact of the euro zone slowdown on our manufacturing and our exports.”
While the U.K. economy may be faring better than its European counterparts, real wage growth remains an issue, as does consumer spending. Deflation is also a very real threat for both the U.K. and the euro zone, now that oil prices have dropped below $60 a barrel. In November, the U.K. rate of inflation hit a 12-year low of 1 percent due to the falling oil price and its impact on road and air transport.
In October, a deputy governor of the Bank of England admitted during a speech that he is stumped by the country’s most recent economic indicators. “There is now a new puzzle: Why, despite this rapid fall in unemployment…have we seen such weak pay growth in the official data?” said Sir Jon Cunliffe. He added that he is in no hurry at all to raise British interest rates from their record low of 0.5 percent or amend current monetary stimulus measures.
No cause for celebration there.
Meanwhile, in early November, the European Commission was forced to slash its growth rates for the single-currency bloc for 2014 and 2015, due mainly to the floundering German and French economies. Growth will be 0.8 percent this year — down from the 1.2 percent forecast in May — while 2015 should deliver growth of 1.1 percent, down from a previous projection of 1.7 percent. The U.K. is set to grow by 2.7 percent in 2015 after projected growth of 3.1 percent in 2014, according to the European Commission.
“The economic and employment situation is not improving fast enough,” said Jyrki Katainen, European Commission vice president for jobs, growth, investment and competitiveness, unveiling plans to put forward a 300 billion euro, or $376 billion, investment program to kick-start and sustain economic recovery. “Accelerating investment is the linchpin of economic recovery,” he said in November.
The big hope now is that a vicious circle will turn virtuous, for tourists such as the Chinese to spend more across Europe because of better exchange rates, for production and wages to increase, and for the European shopper to start spending more like the American one.