MILAN — A strong euro and weak dollar are creating trans-Atlantic trauma, hammering European balance sheets and threatening Americans’ abilities to purchase European goods.
European companies are taking the swings — a function of both economic and political uncertainty — philosophically, employing a combination of hedging and restraint to get them through the current period of volatility. Reluctance to raise prices has tended to limit the abilities of Europeans with U.S. distribution to pass along increases.
After approaching an unprecedented exchange rate of $1.20 at one point last week, 12 cents more than in early September, the euro backed off. Still, it remains at or near historical highs, the dollar-euro parity of late 1999 a distant memory. That means American dollars translate into less revenue, and ultimately less profit, when collected on the European side of the Atlantic.
The currency has appreciated 13.2 percent against the dollar over the past year, closing at $1.19 on Friday, and there is concern over how long the situation will last. Still, most observers say it’s not yet time to panic.
“The most important thing is price stability, not tricks, and our prices are stable,” said Hugo Boss spokesman Philipp Wolff, who added it’s better to sacrifice some revenue in the short term than risk losing customers. “You get it back. You can’t play with the consumer.”
Robert Burke, vice president and senior fashion director at Bergdorf Goodman, agreed it’s best to think long term. The store hasn’t cut back on orders, due to the strong euro.
“I don’t anticipate…that [the euro] could stay at this level. If it does, we’ll have to regroup,” he said. “You hope to weather the storm, but if you cut everything, basically you’re limiting your ability to do business.”
Niels Thygesen, an economics professor at the University of Copenhagen, said price hikes aren’t likely in the near term for European firms, “particularly those in the U.S. market, where they have little pricing power themselves.”
Ralph Toledano, president of Chloé, said the company has already made most price adjustments for the spring-summer 20044 season and has since then made “an enormous effort” to keep prices down.
“At retail, especially in America, there has been a lot of price resistance,” he said. “We have been very concentrated on working on this.”
Burberry, which buys raw materials in euros, said that hasn’t altered its sales or marketing strategy since the surge of the euro against the dollar.
“Currency fluctuations are part of life as an international business — and all international companies are facing the same currency problems right now,” a spokesperson said.
Joseph Boitano, senior vice president and general marketing manager at Saks Fifth Avenue, said all of the store’s key suppliers have been very conscious of the strong euro and have worked hard to keep prices stable. He said these companies “understand that this is not the moment for price increases.”
At the same time, he said currency fluctuations have forced Saks to evaluate its buying strategy.
“We have had to analyze from a unit standpoint how many units we can buy with the budget and where there are very high price points, we might choose not to buy,” he said, although he added he didn’t think higher items on particularly luxurious items would deter customers. “If it’s a really great item, she’ll spend the money.”
Instead, companies are coping with a variety of strategies: producing outside the euro-zone, hedging against currency shifts and cutting costs to protect margins when the top line is suffering.
In lowering its view of the luxury sector last week to “cautious” from “in line,” Morgan Stanley noted that the lopsided dollar-euro exchange could subtract as much as 6 percent from sales of European luxury goods in 2004.
Although analyst Claire Kent was more alarmed by increasing competitive pressures in the sector, she noted that American consumers won’t take well to currency-driven inflation. They are unlikely to tolerate further price increases for European luxury goods before turning to domestic brands like Coach, Polo Ralph Lauren or Tiffany, she explained.
A spokesman for LVMH Moët Hennessy Louis Vuitton declined to comment on how the weakening dollar would affect pricing across its myriad businesses, which span fashion and leather goods, perfumes and cosmetics, watches, wines and spirits and retailing. He noted the impact is tied closely to LVMH’s complex hedging policies on various currencies.
However, he noted a strong yen is helping to offset the impact of a surging euro, since a strong yen generally means Japanese consumers buy more at home, and travel more, as well.
A strong euro-to-dollar exchange rate “puts a lot of pressure on your margins. You have to look at cost structure and have to manage very carefully,” Gucci president and chief executive Domenico De Sole said last month as the company presented second-quarter numbers. Gucci saw its revenue for the period rise 1.1 percent, but the group said the rise would have been 2.2 percent at constant exchange rates.
Virtually all European firms with U.S. distribution reported wide disparities in their sales when compared with revenues at “constant currency” or “in local currencies.”
Gucci, like companies large and small, from Hugo Boss to niche coat manufacturer Cinzia Rocca, engages in hedging to protect its margins from currency fluctuations.
Jacopo Rocca, chief executive of his family’s firm, said the company hedged enough earlier this year to account for the strong euro and prices should remain stable for next year.
“I think we’ll keep the same pricing structure in 2004. At the most, prices will go up by a couple percentage points,” he said.
Still, other companies are drastically altering their product strategies to cope with the lost revenue. Swiss watchmaker Corum, which sells timepieces with five-digit price tags, plans to start rolling out less expensive products to offset the slowdown.
“We have lost 15 percent to the exchange,” said chairman Severin Wunderman. “Hopefully the dollar will increase, as it is causing havoc in the U.S. market.”
A spokesman for Giorgio Armani said the company has not made any changes to its pricing structure since it carried out a “single-digit” percentage price increase for the fall-winter collection.
“Obviously, we’re watching the situation…but we’re not making any further decisions at this time,” he said.
A strong euro also is driving companies to produce more and more outside the European Union. Italy, the industry’s manufacturing hub, has certainly felt the exodus recently, although this phenomenon has been blamed on a variety of factors, including the high cost of Italy’s labor and the relative inflexibility of its workforce.
The production of textiles, apparel, leather and leather goods in Italy dropped a staggering 8.7 percent in 2002, according to figures from the Camera Nazionale della Moda. In 2001, that figure was actually positive, showing a 2.8 percent rise.
In the current volatile currency market, firms that produce or source outside of Europe are more insulated from the euro-dollar dynamic. Hugo Boss manufactures some of its men’s collections in Ohio. Cheaper dollars have benefited Hennes & Mauritz since it does much of its buying in the Far East, where prices are fixed in dollars.
“We have passed the savings on to the customers by lowering prices [commensurately in Europe],” said H&M’s head of investor relations Carl-Henric Enhorning. But he added the company had to raise prices “proportionately” in the U.S. to compensate.