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PARIS — It’s been a summer of discontent for European retailers.

The recent heat wave, which is being blamed for thousands of deaths in France and causing major political fallout, was only the latest headache for stores already pummeled by weak tourism, a strong euro and economic uncertainty at home.

This story first appeared in the August 25, 2003 issue of WWD. Subscribe Today.

France, particularly hard hit, also had to cope with a series of disruptive strikes by transit and entertainment workers — and lingering anti-French sentiments stemming from the country’s opposition to the U.S.-led war in Iraq.

While temperatures cooled in France and the rest of Europe late last week — from over 100 degrees Fahrenheit to a mere 85 degrees, cashmere coats and knee-high boots failed to draw crowds into the chic boutiques lining Rue Saint Honore and Rue Faubourg Saint Honore in Paris. In many stores, including Gucci, Prada, Chloé, Tod’s, Jitrois, Akris and Givenchy, sales associates outnumbered customers by a wide margin and busied themselves by straightening already pristine shelves.

“This year has been a disaster,” said Isabelle Parraud, manager at the Max Mara store on Rue Saint Honore, estimating American and Asian customer numbers on the normally high-traffic street have fallen off by 30 to 40 percent compared with last year. “The Japanese can’t cope with the heat and so they stayed in their air-conditioned hotels.”

“In general, the luxury industry has been the victim of a disaster,” agreed Jacques Flaster, president and chief executive of Societe La Cours, the store’s franchisee.

The doldrums are not the preserve of the high end. Swedish fast-fashion retailer Hennes & Mauritz put the blame partly on sweltering temperatures for a worse-than-expected rise in July sales of only 8 percent.

“In some markets, the very hot summer influenced turnover,” said Carl-Henric Enhorning, H&M’s head of investor relations. “[Sales were] down in Germany, Switzerland and Austria due to the unusual circumstances.” He added, however, that Spain and France did “quite well” in June, when temperatures were much cooler.

Enhorning also noted that H&M, wary of fallout from the conflict in Iraq and the outbreak of SARS, reduced the summer stock available in its stores, which later led to the chain being short on inventory in June and July.

“The main issue in Europe is weak tourism and that’s been impacted by several factors — the strong euro, fears of terrorism and the fact that Americans are choosing to avoid France for now,” said Claire Kent, chief luxury goods analyst at Morgan Stanley in London.

Sarah Lerfel, who runs the hip Paris boutique, Colette, did not mince words when asked about her summer business. She said there were “a lot less Americans” than in previous years and the heat wave had a “very bad” impact on sales. And the few customers who crossed the threshold were bedraggled at best.

“We do have air conditioning, but it wasn’t sufficient for the heat wave we endured,” she said. “Our staff had to be very philosophical about it. [The strikes in Paris] created a very bad atmosphere, as well.”

In a research report released last week, Paris-based HSBC analyst Nathalie Schneider estimated sales at Hermès’ Paris flagship, where tourists make up 25 percent of the customer base, were down 16 percent in the second quarter. The number of Japanese tourists traveling abroad declined 42 percent in April, 55 percent in May, 46 percent in June and an estimated 30 percent in July, according to her report.

“The magnitude of the decline in European sales exceeded our forecasts,” she wrote. “For our part, we believe that local demand was also particularly weak.”

In reporting its second-quarter sales, luxury giant LVMH Moët Hennessy Louis Vuitton cited France as the most troublesome market in Europe and acknowledged that even sales of its star brand, Louis Vuitton, were affected here.

Economic trends in Europe generally trail the U.S. and analysts say high-income workers in Europe are now beginning to fret about job security. Economic data released in France this week shows the French economy — the second largest in Europe after Germany — shed 60,000 jobs in the first half of the year, fuelling pessimism among French consumers. A recent study by the government’s Ministry of Social Affairs shows 80 percent of French citizens worry that unemployment will increase in the coming months, up from 50 percent a year ago.

In recession-plagued Germany, where consumer confidence has been practically in free fall since 2000, stores have hardly had a stellar year. Retail sales in the first half were down 4 percent, compared with an 8 percent drop in the first half of 2002, according to the German Apparel Retailers Association.

At the 189-unit Karstadt department store chain, part of the Karstadt Quelle Group, second-quarter sales inched up 1.2 percent to $1.75 billion (1.6 billion euros) from $1.72 billion (1.58 billion euros) a year ago. Dollar figures have been converted from the euro at current exchange. The company said German retail sales “stabilized in the second quarter and the planned tax reform and longer Saturday shopping hours were a positive signal.”

Sales at the 149 Kaufhof, Kaufhof Galeria and Galeria-Inno stores were down 0.7 percent to $908.5 million (831.9 million euros) in the second quarter.

In Italy, the number of foreign visitors dropped by about 1.5 percent in the first five months of the year, according to the most recent data from Italy’s national tourism organization, Enit. Of that, the number of Americans dropped 12 percent, while the number of Japanese visitors fell by 10 percent.

Before war broke out in Iraq last March, Italy was seeing a 10 percent jump in foreign visitors on depressed 2002 figures. But the military conflict ended that growth trend quickly. More tourists, especially big spenders like Americans and the Japanese, decided to stay home in April and May.

Figures from Global Refund, a private company that administers refunds of value-added tax to tourists, show steep drops in refund-qualifying shopping in June. Japanese tourists spent 43 percent less; Americans, 32 percent less, and Chinese and Hong Kong residents, 54 and 50 percent less, respectively. Sales in Europe account for about 95 percent of the sales that qualify for VAT refunds.

“Most people believe that the rock bottom has been hit and it’s coming back slowly,” said Marie Bergfelt, Global Refund’s marketing coordinator. She agreed that Japanese and American tourists, the ones most likely to seek VAT refunds from European shopping trips, are behaving cautiously.

“We are looking very much at Japan. The Japanese are very important shoppers in Europe and they seem very hesitant to come,” she said, adding there was a “slight chance” of a tourism pickup this autumn.

Kent at Morgan Stanley said she expects tourism to recover slowly in the second half. “Japanese travelers tend to book well in advance so any positive sentiment towards long-distance travel will take six months to come through,” she said. “We imagine American tourists are bound to return to France as the memory of the diplomatic fracas recedes.”

“There are some reasons to be optimistic going forward,” agreed Michael Hume, senior European economist at Lehman Brothers. He said there are enough macroeconomic instruments in place to support a recovery of spending. Tax cuts from governments, lower inflation and relatively low interest rates could all potentially spur spending.

The question is whether Europeans are confident enough to open their wallets. “There’s something out there preventing consumers from spending,” Hume said.

There is no doubt that consumers across the Continent are angry about what they see as gratuitous, post-euro price increases.

While prices on big-ticket items such as cars and appliances may not have changed, it’s the smaller purchases — like restaurant meals, bottled water, taxi fares and tolls — that are eating away at Europeans.

This summer, in the popular Italian tourist resorts of Capri and Spoleto, restaurant owners are now charging 6 euros ($6.54) for a plate of spaghetti with tomato sauce that in pre-euro days cost only 6,000 lire ($3.00). “The restaurants especially are taking advantage of the euro conversion. They want people to think that one euro is 1,000 lire. But one euro is more like 2,000 lire,” said one angry Italian tourist.

Adding a celebrity voice to the ire, actress Joan Collins raged against post-euro price hikes in France in an editorial that appeared last week in London’s Daily Mail. She warned her fellow Britons that if they decide to swap the pound for the euro, they should expect to see prices spiral upward.

“I have a house near Saint-Tropez and, since the French adopted the euro last year, the cost of running it has risen by nearly 30 percent,” she wrote. Shopping and eating also are taking a bigger bite out of her wallet, added Collins, who has just returned from a summer break there.

“Before the euro, a pair of moccasins in the Saint-Tropez market in the Place Des Lices cost the equivalent of $39; now these same shoes are $55. I was charged $9 for half a dozen lemons in the same market. And this is a country that produces them. Dinner at the village bistro, which used to cost $16, is now $22. We’re talking simple country fare here, not Le Caprice,” added Collins.

Keith Wills, retail analyst at Goldman Sachs in London, said, “Over the past year there’s definitely been a resistance to the euro price changes, although resistance is a difficult thing to measure. In many cases, though, consumers feel they’re being ripped off.”

Indeed, not even the latest round of sales in Italy managed to generate much buzz. Revenue from the summer discount season dropped by between 10 and 20 percent compared with the same period of 2002, according to preliminary data from Fismo, the fashion arm of Italian retail trade organization Confesercenti.

Economists awaiting a recovery in the euro zone are now closely watching the French economy, where gross domestic product fell 0.3 percent in the second quarter.

Occupancy rates for hotels in Paris stood at a meager 66 percent for the month of July, according to the French ministry of tourism, down 12 percent year-on-year. Rates continued to drop in early August, as hotel occupancy dropped to 53 percent compared with 69 percent the previous year.

Paris department stores sales fell 6.9 percent in June, according to the most recent figures from the city’s Chamber of Commerce and Industry.

Continental Europe — and the euro zone — is suffering considerably more than its neighbors in the U.K., which is not part of the euro zone. In the U.K., the Office of National Statistics last Thursday said July retail sales fell 0.4 percent versus June. And while some stores reported steep drops in foot traffic and sales during the heat wave earlier this month, the ONS said year-on-year sales were up 4.4 percent in July.

“On a Europe-wide basis, retail sales in the U.K. are growing faster than anywhere else because our economy is in better shape — and more flexible than those of countries in the euro zone,” said Richard Hyman, chairman of Verdict Research, a London-based retail consultancy.

“Luxury is having a slightly more difficult time because of the drop-off in tourism, the congestion charge [in London to control traffic] and the terrorist threats. The luxury companies are also getting a run for their money from the high-street retailers,” said Hyman. “In the U.K., the value-for-money trend has pervaded every segment of the fashion and luxury goods market. Compared with five years ago, price is way up on the agenda of the most affluent shoppers. They are the ones asking for better value for money.”

Hyman said Verdict expects overall retail sales in the U.K. to grow 3.7 percent in 2003 compared with 4.4 percent last year.

Rhys Williams, retail analyst at Seymour Pierce in London, calls 2003 a “cautious” year for U.K. retail and is projecting growth of 2 to 3 percent. “The economy and the retail sector cannot sustain year-on-year growth of 6 percent — which we’ve seen in the past — so we see the slowdown in a positive light.” Harrods, Harvey Nichols and Joseph all said they can’t complain about the summer’s sales trends.

A Harrods spokesman said the store took in more money in July than in any other month in the history of the store. “Year-on-year in July, sales were up 5 percent with women’s wear up 8 percent,” he said. “In August, sales are up 6 percent so far, with an 8 percent rise in women’s wear.” Because only about 25 percent of Harrods’ sales come from non-U.K. residents, the spokesman added any drop in tourism did not have such a big impact on sales.

Julia Bowe, marketing director for Harvey Nichols, said sales are “generally back to normal” after what she called a difficult first half. “SARS, terrorism threats, the war in Iraq and the congestion charge all had an impact, but now we’ve returned to normal trading with sales flat against last year.”

Sandra Madi, manager of the Joseph flagship on London’s Fulham Road, said there’s been a very good start to the winter season, despite the recent bout of hot weather and slow tourist market.

“Many of our customers are buying transitional items such as midseason tops and dresses. Some are already buying the heavier pieces such as ski jackets and sheepskins,” she said.

On and around Oxford Street, the mood was similarly upbeat at stores such as Zara, Topshop, Fenwick and Selfridges. “The store is really busy at the moment, and has been over the past few weeks. You would have thought the heat would have deterred some people, but it didn’t at all,” said a sales assistant.

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