hnnhcronin In an industry so dependent on tourist spending, the relative strength of the euro currency can have an important impact on luxury sales. Since a majority of high fashion houses are based in Europe, namely France and Italy, a strong euro causes a decline in tourist spending, causing sales declines. In the opening half of 2017, both demand for luxury goods by Chinese consumers and tourist spending has been increasing after luxury shoppers were dissuaded from European travel after the terrorist attacks in France. Hermes, Kering, and LVMH have all reported record sales increases for the first half of 2017,yet despite their impressive strides with the millennial market, these companies remain cautious about the stronger euro and its impact on overall sales.
Big luxury shoppers, often from Asia, will purchase luxury items from places where they are able to pay the least for the same good. The euro is up about 12% compared to the dollar since the start of the year. Despite a strong euro, certain fashion companies, such as Gucci, are still doing well because of their superior branding strategies and commitment to innovative design. However, with this stronger euro taking a toll on the pockets of tourists, a majority of luxury brands that would be more popular in times of greater cash flow are being left behind. Prada group, for example, reported a 7.7% decline (6.6% with constant exchange rates) in European sales for the sixth month period ending in July 2017, and this trend is only continuing as the euro gains value.
In addition to declining tourist sales, European-based houses of luxury depend heavily on foreign sales. With this, any sales made in countries with a weaker currency will translate into less profit in terms of euros because European companies will be receiving less revenue due to currency translation but will be paying for the costs of production in the euro currency. For example, when sales in America are converted from dollars into euros, the European brands do not make as much money as they would have if the euro was weak relative to the dollar.
On the other hand, this trend is favorable to luxury brands that are not based in Eurozone countries. London-based Burberry for example may experience some positive side effects since it reports sales in pounds. In fact, with Britain’s impending Brexit, tourists much preferred British luxury brands to those of French and Italian origin because of the declining relative rate of exchange. While a strong euro is beneficial for the struggling economy of the European Union, it makes luxury products more expensive for overseas consumers and tourists.
