Yen Worries Luxury Companies Even More Than Weak Dollar
International Herald Tribune, February 5, 2007
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MILAN -- The dollar's decline against the euro over the past year has led European luxury goods companies to reduce costs and squeeze out savings. But in recent weeks, the real worry for many chief executives has become the Japanese yen.
The yen is now trading near all-time lows — ¥157 to the euro, or $1.28— and many foreign exchange experts do not expect it to strengthen significantly this year.
"As long as the dollar stays at $1.30 to the euro, we can deal with that," said Ermenegildo Zegna, the co-chief executive of the high-end Italian menswear company that bears his name. "The yen has already passed our benchmark of ¥150 to the euro and, at the current level, it's becoming a headache and a problem."
Most of the high-end luxury companies in Europe, including Prada, Gucci, Zegna and LVMH (Moët Hennessy Louis Vuitton), do the bulk of their production on the Continent, incurring costs in euros. Yet many have a high percentage of their sales in countries that use the dollar, the yen or a currency linked to one of the two.
So when sales income from overseas is converted and matched to expenses, revenues shrink, although luxury companies do hedge by investing in financial instruments to protect themselves against currency fluctuations.
Last week, Bulgari, an Italian maker of high-end jewelry, reported a 1 percent drop in Japanese sales in the fourth quarter when compared with the same period in 2005. When figures are converted to euros, and the weakened yen is taken into account, the decline widens to 8.3 percent.
Francesco Trapani, the chief executive of Bulgari, echoed Zegna's concern about the Japanese currency.
"With the yen at the current level we can more or less defend ourselves, though if it continues to fall, we'll have to study the situation and see what the competition does and figure what consumers are doing," Trapani said. "From there, we'll have to see what to do."
The Japanese currency dropped 13 percent against the euro last year. In contrast, the dollar lost 12 percent against the euro last year to close at $1.32 per euro, although that was slightly better than the record low of $1.36 in December 2004.
In the past month, the dollar has clawed its way back to about $1.30 per euro, an exchange rate that many analysts expect to be the average for the rest of 2007.
Many luxury goods companies are cutting costs to deal with the strong euro, but Zegna's company is doing the opposite. It intends to spend twice as much on marketing and expansion as it did in 2006 to open three U.S. stores, including a flagship store on Fifth Avenue in New York, and three in Japan, including a flagship store in Tokyo.
Bulgari also is opening two large stores in Tokyo this year.
"Our approach is to attack and become more aggressive," Zegna said. "You can't have woken up in January 2007 and said, 'I want to do something about the weak dollar and yen.' You have to have started a long time ago. You need careful planning; you can't just push a button and do it."
The company is aiming for a 10 percent increase in sales this year, the same percentage increase as in 2006 — Zegna said they would have expected better numbers with a stronger yen. About 60 percent of its €782 million revenue last year came from the United States, Japan and countries with currencies linked to the dollar or the yen.
In addition to the weak currencies' effects on sales in the United States and Japan, a strong euro also means fewer travelers to Europe and, according to Zegna and Trapani, fewer sales to tourists visiting Milan, Paris and Madrid. "We sell much, much less to the Japanese when they are outside of Japan because, with the falling yen, they don't have the same purchasing power," Trapani said.
Predicting currency movements is an inexact science at best and experts who make a living at it spend their time looking at the effects that politics, macroeconomics, interest rates and general consumer sentiment have on exchange rates.
"The political pressure from Europe will likely put a lid on the yen-per-euro rate at 160 this year," said Brian Dolan, research director for the New York- based Forex.com, a division of Gain Capital. "The euro against the dollar is more of a sideways outlook because interest rates are higher in the U.S., but seem likely to rise faster in Europe.
"We aren't expecting much of a deviation from the range of $1.28 to $1.33 per euro. As we approach $1.35, euro zone officials aren't pleased and talk about intervening," he said.
