A sharply weaker euro is giving European luxury goods makers a headache: as the price gap for their products in Europe and China widens they may have to rebalance prices globally, which could hit earnings, analysts say.
European luxury goods have always been priced 30-40 percent more in mainland China compared to Europe, partly to cope with high import duties and consumption tax, said RBC Capital Markets analyst Rogerio Fujimori in a March 31 note. But due to the falling euro, to maintain margins in China, the price differential is now 60-80 percent.
"An adverse scenario for brands would be the need to reduce prices in China (to moderate the price gap) without being able to increase prices in Europe (in order not to cut off domestic consumers)," said Exane BNP Paribas analyst Luca Solca.
Either way, rebalancing prices could be painful.
Earnings before interest and taxes (EBIT) could take a 5 percent hit if luxury goods makers cut prices by 15 percent in China and raise them by 7 percent in Europe, according to RBC's Fujimori.
"[Price cuts] would reduce the FX benefit that luxury players should receive from a weaker euro," Exane BNP Paribas' Lucas added.
As price gaps widen some brands are taking action.
Chanel, for instance, cut prices on its iconic handbags by over 20 percent in China and raised them by the same margin in the euro zone in March, according to Reuters.
"If [other] luxury brands directionally follow Chanel's price cuts in Greater China, we see downside risks… because a potential volume pick-up would not be enough to offset negative pricing and this should lead to material margin declines in Greater China," said RBC's Fujimori.