The weakening of the euro in the face of the rising value of the dollar has had unexpected effects on European-based brands as well as the high-fashion audience.
Usd up euro down is the fashion market precarious?
Russia’s special war in Ukraine has led to a series of micro and macro effects, especially strong impacts on the lives of Europeans. In recent months, high inflation in the developed countries of this continent has invisibly put pressure on the luxury fashion industry. Let’s find out the effects of exchange rate differences when the USD is high as well as the coping strategies of luxury brands!
Europe is probably facing the heaviest twin crises of this century as inflation continues to set new peaks. The rate of price escalation here also aggravates an economy that relies on cheap gas supplies from Russia. To save the situation, the European Central Bank started raising interest rates to combat inflation in July.
Across the ocean, the US is also facing the possibility of a recession in the near future. The US Federal Reserve has decided to raise interest rates with the aim of preventing record inflation in the past 40 years in the United States. As a corollary, as interest rates rise, so does the value of US assets, creating greater attraction for global investors. All of this leads to a strong USD appreciation year-to-date. However, not only leaving the Euro, USD also widens the gap with many other major currencies in the world.
Contrary to what we think, the appreciation of the dollar will be profitable for fashion brands based in Europe. These are companies that pay for workers, premises and materials mostly in euros. According to CHANEL ‘s Chief Financial Officer Philippe Blondiaux: “A weak euro is a very good thing for French luxury brands.” To explain the above statement, we must consider the sales of these high-end brands in the US.
With the dollar increasing, each transaction with this currency will be more valuable when converted back to Euro. At that time, companies will use this revenue to offset the continued high cost of labor and raw materials in the EU. Not only the Eurozone, the same move also applies to fashion brands in the UK like Burberry because the pound tends to fall against the USD.
However, to minimize currency risk, brands have always used term contracts known as hedging contracts. This results in transactions still being settled at the old exchange rate, resulting in less profit, and the impact of the new rate may not be apparent.
The time of the USD appreciation coincided with the time when international tourism showed strong signs of recovery after the pandemic. While the most potential buyers of luxury products are undergoing strict lockdowns in their home country of China, Americans are choosing Europe as a vacation destination and seem to be interested in luxury brands. more than ever.
It is impossible not to mention Vietnamese tourists after more than two years of being “held up”. The reopening of flights and European tour packages led to the phenomenon of “revenge shopping” to relieve the spirit, to make up for the previous period of not spending anything. It can be said that the weak Euro is a “push” to encourage customers to shop when traveling in European cities.
A Louis Vuitton bag that sold for $2,030 in the US is currently priced at just €1,500 (or $1.528.79) in France. That means customers will save 25% if they “order” this bag at the Champs-Élysées. When tax refunds for non-EU tourists are included, the figure rises to 35% thanks to the 12% tax discount benefit in France and Italy.
This attractive price also contributes to increasing the allure of luxury brands in the eyes of aspirational shoppers (only customers who are obsessed with high fashion but do not have a solid economic potential, considering owning branded goods to enhance self-worth and social status).
Informing American customers about the tax refund policy will be one of the actions that contribute to increasing the sales of brands in Europe. Although this is one of the “basic knowledge” of Asian fashion people when buying branded goods abroad, it is not something “everyone knows” in the United States.
In addition, experts also said that the large difference in the price of luxury products could lead to the possibility of forming a tax-evading hand-carry market in the US like what has been happening in the mainland. This would nullify efforts to build a direct link between brands and consumers in the US, which brands have been trying to do after the arrival of a new wave of customers. post-Covid potential. However, this trend is unlikely given the tight import and customs policies and culture of compliance in the world’s largest economy.
With inflation, labor and energy costs continuing to rise, it is inevitable for high-end fashion houses to consider raising product prices. However, the upcoming price increases are expected to be “modest” compared to the fluctuations during the two years of the epidemic.
Typically, in March 2022, CHANEL has increased by 13% for the Large Classic Flap Bag model compared to the previous price increase in November 2021. Gucci ‘s favorite bag model, the Marmont Mini Bag Matelassé, also saw a record increase of 21.1% in the French and Chinese markets.
However, with the epidemic situation almost under control in most European countries, the wave of tourists flocking here is a good sign for these fashion brands. We will once again see the bustling shopping boulevards again throughout the ancient capitals of the old continent – the “headquarters” of the high-fashion segment.
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