Luxury In Thrall to the Currency War

The currency wars that are dominating the attention of the world’s central bankers are also playing out in the niche world of luxury goods.

About 75 percent of luxury goods are manufactured and produced in Europe, while about the same amount is sold to consumers in markets outside the continent, especially the U.S. and China.

That makes the sector especially sensitive to the sharp devaluation of the dollar and strengthening of the Chinese renminbi .

Louis Vuitton Store
Louis Vuitton Store

Luca Solca, a senior analyst at Bernstein Research, says overall the weakening dollar and strengthening euro will be bad for European luxury goods companies, which have this year benefited from a weak euro.

Global luxury goods sales are forecast to grow about 10 percent in 2010, but that is expected to slow in 2011.

“A weak U.S. dollar affects about 45 percent of sales of European luxury players and creates a headwind to top-line growth,” Mr Solca says.

He forecasts that if the dollar remains at current levels against the euro it could crimp revenues in the first half of 2011 by as much as 5 percent. Among luxury groups, Richemont and Swatch have already warned of currency headwinds in 2011.

Pernod Ricard, the maker of Absolut vodka and Perrier-Jouet champagne, exports more from Europe than it imports into the continent.

On Thursday, it said that based on current exchange rates, foreign exchange would have a much reduced positive impact on estimated operating profit for the fiscal year ending June 2011.

Due to the strengthening of the euro against the dollar, the group said the positive impact would be €30m ($42m), rather than the €120m gain it had forecast in September.

The dollar has fallen 17 per cent against the euro since early June. Analysts say that companies should be able to take some edge off the currency pressure because they are hedged on a six– to 18-month view, which means that they can overcome the movements in the short term.

The brands also have more pricing power than other global industries and therefore have a flexibility to adjust retail prices to offset dramatic currency swings.

"A fundamental strengthening of Asian currencies will strengthen the spending power of the Chinese consumer, which will favor the luxury goods industry." -Head of Equities, Swiss & Global Asset Management, Scilla Huang Sun

Nevertheless, Scilla Huang Sun, head of equities at Swiss & Global Asset Management in Zurich, believes that longer term the weakening of the dollar against Asian currencies should play to the advantage of luxury goods groups that are increasingly reliant upon Asian consumers for growth.

“A fundamental strengthening of Asian currencies will strengthen the spending power of the Chinese consumer, which will favor the luxury goods industry,” she says. Chinese consumers make up 21 percent of the global luxury goods market and contribute 52 percent to its growth.

Tension between the buying power of Asian versus U.S. and European consumers is already evident in the shopping streets of Europe.

It is visible among the increasingly influential class of tourist consumers, who contribute about 15 percent to global sales and watch currency swings as closely as hemlines.

Luxury goods executives report purchases by Chinese consumers have increased as much as 90 percent in Europe in the past year, followed by Russians, while U.S. and Japanese consumers have fallen away.

In Italy, Chinese tourists contribute as much as 15 percent of total sales for some brands, from almost nothing two years ago.

In Cova, the ritzy coffee bar on Milan’s luxury shopping street Via Montenapoleone, snatches of conversation in Russian and Chinese are as audible as those in Italian. The diverse clientele has shopping bags stashed at their feet bearing the stamp of Prada, Gucci or Ermenegildo Zegna.

Gian Giacomo Ferraris, chief executive of Versace, said the “rise of affluent Chinese beginning to travel more” could only have “a positive impact” on the luxury industry.

Additional reporting by Scheherazade Daneshkhu in Paris and Haig Simonian in Zurich.