Currency swings create inequalities for buyers in the luxury market

A U.S. ten dollar bill sits alongside a twenty euro banknote in this arranged photograph taken inside a Travelex store, operated by Travelex Holdings Ltd., in London, U.K., on Monday, Jan. 12, 2015. The euro approached a nine-year low against the dollar as European Central Bank officials fueled speculation the institution will start a program of government-bond buying as early as next week to stave off deflation. Photographer: Simon Dawson/Bloomberg

A price war is raging among the world’s largest luxury groups. Aggressive currency headwinds have battered parts of the industry, inflating manufacturing costs and spreading large pricing variations among sales regions.

The gulf between prices for luxury handbags, watches and jewellery in Europe and in China is the widest it has been for three years, according to Sanford C. Bernstein, a research company, as weakness in the euro upsets the pricing strategies of high-end brands.

The knock-on effect of the euro’s slide and the stronger US dollar and Swiss franc has led to the likes of Richemont, Burberry and Chanel raising prices in Europe, while cutting them in dollar-denominated markets, including parts of Asia. This is an effort to reduce a disparity that has transformed the global luxury retail landscape.

For example, Japan has seen an 83 per cent rise in Chinese tourist numbers this year, as has South Korea, as the widening price difference of up to 40 per cent with mainland China sends shoppers to new markets. Meanwhile, the US, the world’s largest luxury market by sales, has seen a fall in traveller spending, as Chinese, Latin American and Russian tourists stay away.

There are notable exceptions that are resisting the currencies tide — at least for now. Swatch Group said last month that it would not change prices on the basis of short-term currency swings, and would rather lose on margins while retaining market share.

Meanwhile, Kering and Hermès have shied away from a levelling of prices, saying that increasing them in Europe would risk affecting domestic sales.

“We have a very strong French and European customer base,” Axel Dumas, chief executive of Hermès, said in March. He said he expected sales this year to grow 8 per cent in constant-currency terms.

“If we significantly increased our prices at this juncture, that would mean giving up on local customers, and that is something we do not want to do.”

We can’t get 20 per cent back simply through creativity, so the only thing to do is to raise prices

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Given that many luxury consumers buy products as long-term investments, price stability has been considered a core characteristic of the sector, with any falls running the risk of eroding faith in the value and exclusivity of purchases by core clientele.

But some executives insist that narrowing the gap is essential if the industry is to regain control over where and how millions of customers choose to spend their money.

“We need price equilibrium around the world,” Jean-Claude Biver, president of LVMH’s watch and jewellery division and chief executive of Tag Heuer, said this year. “If you have a 20 per cent price difference between countries, there are lots of clever people out there who will take advantage of it by creating a grey market, buying 100 watches in one country then selling them in another. We can’t get 20 per cent back simply through creativity, so the only thing to do is to raise prices to maintain equilibrium.”

Some experts say brands such as Tag Heuer and Montblanc have used the currency fluctuations to revise their current pricing approaches, which had risen too far towards the market’s high end, affecting sales.

They say the likes of Patek Philippe and Cartier appear to be using shifts as a chance for wholesale partners to ease inventory levels.

But one industry watcher describes Chanel’s price cuts as “drastic”. “I don’t see other players following them,” he says. “It potentially signals the overwhelming exposure of their handbags business to non-European consumers.

“If you have a little domestic business in Europe, or sell predominantly to Chinese tourists, then increasing prices won’t hurt you. But for bigger European brands such as Prada, Hugo Boss or Gucci, it is a different story.”

The pressure on luxury brands may ease, however, as the Chinese government attempts to boost onshore consumption by cutting tariffs on select consumer goods from June 1, including for luxury products.

This measure alone will not significantly affect pricing, but luxury houses hope it may force digitally-savvy Chinese shoppers, aware that details of global prices are a click away, to think twice before spending abroad. And, while the weaker euro is still a problem for many European companies, sales made abroad count for more when converted back. The weak euro has also given a huge boost to tourist flows into western Europe. However, in spite of this, few luxury brands are saying what they think may lie over the horizon.





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