LONDON — The plummeting euro and the pumped-up dollar have made for one strong cocktail of pleasure — and pain — for businesses and consumers on both sides of the Atlantic.
The new currency normal has left European companies rejoicing about cheaper exports, fatter bottom lines and the potential to expand in the U.S. market, even as their anxieties grow about global pricing, the gray market and sourcing.
American firms, used to operating with a weak currency, are now feeling the sting of falling sales and expensive exports while U.S. tourists, who suffered for years with a feeble currency, are preparing to press their plastic into action on the Continent and in the U.K., where the pound has lost substantial ground against the dollar.
Back in January, Morgan Stanley predicted the euro would reach parity with the dollar by 2016, but earlier this month Goldman Sachs went even further and said parity could now happen as early as September.
The last time the euro and the dollar were matched in value was more than a decade ago, in late 2002.
Goldman’s latest three-month forecast for the euro is $1.02, and its 12-month projection is 95 cents. By the end of 2017, the bank expects the euro to hit a record low of 80 cents. The euro is currently trading at $1.10 while the pound equals $1.49.
Italian brands including Tod’s and Salvatore Ferragamo already saw their European holiday sales rocket due to tourists — and in particular the Chinese — taking advantage of the weaker euro, while airport retailers, hotel groups and the tax-free shopping firms Global Blue and Premier Tax Free are bracing themselves for a wave of Chinese and U.S. tourism to crash over Europe this year and next as the American economy gains steam and the dollar strengthens.
Prices for soft luxury goods are now 60 percent higher in Mainland China than they are in the euro zone, compared with the traditional 50 percent, according to a report earlier this month by Exane BNP Paribas. The price gap between the U.S. and Europe for soft luxury is also at an all-time high.
In the U.K., Global Blue is already drooling at the prospect of a spike in American tourism. While the pound remains more powerful compared with the euro, it has lost about 10 percent of its value against the dollar over the past 12 months.
Gordon Clark, country manager for the U.K. and Ireland at Global Blue, said the U.S. is already one of the top 10 spending nations in the U.K., with an average 575 pounds ($876) per transaction. “As the exchange rates sway in their favor, American shoppers will flock in,” he told WWD.
Retailers are at the ready.
Earlier this year, Selfridges unveiled a customer-services space catering specifically to the needs of foreign tax-free shoppers. The store said it invested “multimillions” in the new fourth-floor space, which has its own Tax Refund Lounge, two Tax Free processing halls, and VIP areas for high-net-worth individuals.
In February, Harvey Nichols organized its largest-ever Chinese New Year celebrations, with a special edit of products across fashion, beauty and food. It also worked with top Chinese chef Ching-He Huang on a special “Yin & Yang” menu at its restaurants.
A spokesperson for the store said that for the month of February, Chinese customers were “the most significant in terms of footfall and spend of all our international customers.”
According to Global Blue, the Chinese were the top-spending nationality worldwide in 2014, with an 18 percent increase in spending last year. According to a recent report from HSBC, the Chinese now represent “close to a third” of all luxury sales, with more than two-thirds of their purchasing happening outside China. The stronger yuan — the Chinese currency has risen 21 percent against the euro over the past 12 months — and ongoing political tensions in Hong Kong are driving more Chinese tourists abroad, to Europe and other parts of Asia.
The rising spend of the Chinese in Europe is the main reason brands such as Chanel, Patek Philippe and most recently Tag Heuer have revealed plans to readjust their prices. Chanel will harmonize prices worldwide next month, slashing them in China by 20 percent and raising them by the same amount in Europe. Chanel doesn’t want to see a run on its European stores, or a gray market develop where Chinese buy the merchandise on the cheap, and sell it at big markups back home.
Analysts are divided about whether other companies will follow Chanel’s move. Luca Solca, managing director at Exane BNP Paribas, said in a recent report that most European luxury brands are reluctant to increase prices in the euro zone in order not to “close out” domestic consumers in a climate where demand remains weak.
In addition, he said: “They are also reluctant to reduce prices in China, lest the [yuan] also devalues, and to prevent harming the brand image. This state of affairs is likely to prompt more purchases to emerge in Europe, and fewer purchases to be carried out in China.”
The analysts at HSBC are of a similar mind, saying that price harmonization à la Chanel is a “neutral game eventually” and that the benefit of a weaker euro in terms of profits is far greater than the issues around pricing. The bank estimates that European companies will see a 30 percent positive impact from the weaker euro on earnings before interest and taxes, spread over 2015-2016.
“We believe that price adjustments will happen for listed companies under coverage, but we do not expect something as extreme as what Chanel just announced,” HSBC wrote. “We are not convinced many other brands would significantly increase price points short term as there is a risk of alienating what little is left of local European consumer interest.” The report added that luxury price increases in the euro zone could be about 10 percent at most, and be gradually implemented over the next 12 to 18 months.
Hermès has already said it cannot afford to alienate its local European customer. “Raising prices significantly in Europe at this stage would involve sacrificing to a degree this local clientele for reasons of global strategy, and for the moment, we don’t want to do that,” said Axel Dumas, chief executive officer of the group, adding the company would take a further view on pricing toward the middle of this year or in early 2016.
As concerns spread about how much, and where, the Chinese are spending on luxury, the big European players are also looking at the impact of another market on their businesses — the Russians.
According to Barclays in London, international Global Blue data for January showed further deterioration in spending by Russian tourists. Spending in the month slumped 51.2 percent year-on-year, compared with December’s 43.8 percent fall due to the plunge in the value of the ruble and ongoing geopolitical woes in the region. Overall, spending by Russian tourists fell by nearly 17 percent in 2014, according to Global Blue.
Pierre Denis, ceo of Jimmy Choo, told WWD earlier this month that the Russians, and in particular the ones who travel abroad, have “disappeared from the shopping scene. And that will have an impact on our sales in 2015 for sure.” He added that the traveling Chinese would offset the disappearance of the Russians.
In February, Solca of Exane BNP Paribas warned of a perfect storm to hit luxury companies that trade inside Russia’s borders. His report, “Russia Is the Next Shoe to Drop,” said luxury price increases in the eastern nation coupled with the falling ruble — not to mention international sanctions, a shrinking oil price and a declining overall economy — would damage already weak demand. He said luxury goods companies should brace themselves for a “tough start” to 2015 in the region.
The newly flush American tourist should offer some relief in coming years. Despite the sharp erosion in spending, the Russian market still remains more than three times as valuable as the American one, according to Global Blue, so there is clearly room to grow.
Kim Gray, Heathrow’s head of retail strategy, said the airport has been grooming itself in a bid to better serve the high-spending international shopper — and the Americans in particular. “New York is Heathrow’s biggest destination, and we’re always keeping an eye on that market,” said Gray. “What we’re working on now is cultivating ‘pre-awareness’ of Heathrow’s retail offer — and the glamour of travel. We want to get our American cousins excited about the airport shopping experience.”
In the month of December alone, Heathrow Terminal 5 witnessed the opening of Louis Vuitton’s first European airport store, a 3,240-square-foot unit; the first stand-alone boutique for Cartier inside an airport, and a Diane von Furstenberg “Wrap Shop” at Harrods, a pop-up store.
Hotel groups, too, are sharpening their game in the new environment and preparing for an influx of Americans and Asians.
Christiane Anstoetz, regional director of sales and marketing for Western Europe at the luxury group FRHI Hotels and Resorts, which owns the Raffles, Fairmont and Swissôtel brands, said there is no doubt that Europe is a very attractive destination right now both for U.S. and Asian customers.
“We saw the river cruise business pick up last year with U.S. customers, and we’re expecting a large increase this year — Americans are crazy about river cruises. We’re also expecting a rather larger mix of customers from Europe because they won’t want to spend abroad,” she said.
The newly powerful dollar is creating myriad new dynamics: It’s not only pumping up the dreams of the American tourist abroad, it’s also fueling the fantasies of British companies looking to set up shop in the U.S.
According to a recent study by Royal Mail, the U.S. has overtaken Europe as the top target for international expansion for the Brits, with 39 percent of online retailers surveyed saying they will be targeting the U.S., compared with 30 percent looking at European countries.
To wit, the British company SuperGroup has just acquired the exclusive rights to distribute its Superdry products in North America, terminating a 30-year license agreement granted to its partner SDUSA LLC in 2008. “Strategically, taking control of our product and presence in North America is an important and natural step in realizing our ambition to create a global business,” said Euan Sutherland, SuperGroup’s ceo.
The powerful dollar has been decidedly less good for U.S. companies that rely on international trade and tourist traffic. The strong dollar is expected to have a broad impact on American multinational companies that are publicly traded. Analysts said last week that about half of the earnings of companies that are in the S&P 500 are derived from foreign sources of revenue. A strong dollar against the euro and other currencies can drag down first-quarter profits by as much as 1 to 2 percent, according to analyst reports.
It is also damaging many European companies’ sourcing strategies.
American goods are now more expensive in the eyes of the traveling Europeans and Chinese, and American companies’ quarterly results have begun to suffer as they translate sales and profits made in foreign territories back into dollars.
Until recently, Burberry, Kering, Ferragamo and Richemont all suffered from — and complained bitterly about — similar headwinds when the euro and pound were at their height. Indeed, they watched their worldwide takings shrink when they translated them back into powerful home currencies.
With regard to sourcing, the new age of the strong dollar will have a major impact on companies’ profit margins going forward.
The luxury players are, for the most part, in a sweet spot: A significant portion of luxury goods firms’ costs are euro-based, while nearly half of sales are in dollars or dollar-pegged currencies, good news for those companies’ profit margins.
Fast-fashion players, many of which have big sourcing bases in Asia, are seeing a very different dynamic since the currencies are pegged to the dollar. Last week, Nils Vinge, head of investor relations at the fast-fashion giant Hennes & Mauritz, bemoaned rising sourcing costs due to the strong dollar. “It’s difficult to offset the magnitude of the sharp increase in the dollar. The impact has been significant,” he said.
He revealed that H&M buys in different currencies, sources 20 percent of its volumes in Europe, uses dollars for its sourcing in Asia, and hedges on a daily basis from the day an order is placed to when that supplier is paid.
Asked whether the company would consider changing its sourcing plan due to the strong dollar, he said: “You can’t just jump back and forth between suppliers.”