For the first time in twenty years, the dollar is breaking parity with the euro. And fashion licks its lips. “A weak euro is great for the European luxury industry, because it has most of its costs in euros and most of its revenues in dollars or dollar-linked currencies. Consequently, if the euro falls, the margin rises, “he explained to MFF Luca Solcasenior research analyst of the global luxury goods division of Bernstein (see MFF of 07/07/2022).
The euro had fallen just below parity as early as July 13, for the first time in 20 years, but was then back above the threshold. Now the trend is confirmed and the trend is fueled by various factors including the renewed energy tensions between Russia and the EU and the constant strengthening of the dollar, also driven by the aggressive rate hikes decided by Federal reserve, the American central bank. “A weak euro is very good for the profits of European luxury companies,” he said Philippe Blondiauxchief financial officer of Chanelon the occasion of the publication of the results of the brand (see MFF of 25 May).
What is the impact on travel retail? The euro’s decline comes as international travel shows signs of recovery after the pandemic. While Chinese consumers remain largely at home, Americans are flocking back to European capitals and appear to be more interested than ever in luxury brands. Last year, the luxury giant Lvmh reported a 24% increase in US sales from pre-pandemic levels. A weaker euro is likely to reinforce both trends and incentivize Americans to shop in Europe. If a bag of Dior or Vuitton which costs $ 2,000 in the US is currently being sold for $ 1,500 in Europe, a saving of 21%. The gap rises to over 30% if customers take advantage of a VAT discount offered to foreign visitors from countries like France and Italy. A similar dynamic applies to British luxury companies such as Burberryas the pound has also fallen against the dollar, and to Swiss watchmakers, since Rolex to Cartier and to the other brands of the group Richemont following the recent weakness of the Swiss franc.
For brands, many sales made to traveling customers are made up of purchases they simply wouldn’t have made at home. In this way the volume of the market becomes larger, therefore. Another relevant consequence of the weak euro for luxury concerns volumes. «With the resumption of tourist flows after the pandemic, if the euro is weak and the currency of foreign visitors is stronger, they will inevitably find themselves incentivized to go shopping. And if the products in Europe cost less, the prospects for savings will push buyers to buy more “, he explained. Paola Carboni from Equity to MFF on the eve of the holidays. An assessment more than confirmed by the events of the last few weeks. On the other hand, no negative consequences are expected with regard to the increase in raw material costs. “Considering that around 80% of the profits of luxury companies come from consumers outside the euro area, the earnings abroad are important for a global sector like this. In particular, the strength of the United States helps to increase the value of the profits generated in this market, which represents 30% of the sector’s sales (on average) when converted into the currency of the state in which the companies record their profits ” , he noted Swetha Ramachandraninvestment manager and fund manager Gam luxury brands equity from Gam investments..
The more attractive prices could also help reinforce the appeal of luxury brands to aspirational shoppers who are feeling left out after the recent hikes. How should brands react to change? To take advantage of the emerging travel retail opportunity, however, the luxury industry will need to work harder to educate U.S. consumers about tax deduction services – the fact that duty-free shopping is allowed outside airports is one something many Americans don’t realize. Of course, the benefits of a weaker euro could be short-lived: the surge in energy and food costs after the Russian attack on Ukraine meant that inflation also reached European coasts and the ECB-European Central Bank it could raise interest rates faster than expected. On the other hand, the US could slow down the rate hikes implemented by the Fed-Federal reserve as the risk of recession increases. According to average estimates, the consensus of analysts predicts that the euro will settle at 1.05 dollars in a year, in line with the European model of tightening of monetary policy which is slower than in the States.
Luxury brands are also aware that a weaker euro carries some risks. The price gap between the US and Europe could incentivize retailers and lead to a parallel luxury goods market, as has been the case in China for years. This would undermine brands’ efforts to establish direct and regular contact with customers, a particularly important goal for American customers, where brands are keen to keep the ranks of new customers on the rise after the pandemic. The risk remains small, however, as most Americans are reassured about the authenticity of a product when buying directly from brands, as well as simply finding it more enjoyable. Considering that exports account for about 30% of gross domestic product for the Italian economy, this could be a new way to give new impetus to our country, also in view of the turbulence linked to the upcoming elections scheduled at the end of the month. (All rights reserved)