The dollar-euro exchange rate is back to parity for the first time in 20 years, making European products and shopping in Old World boutiques more attractive to American consumers. But in New York, they fear that their current magic moment will be deflated by (also) the highest inflation in 40 years
How long will the US magic moment last? The parity of the euro-dollar exchange rate is pushing Americans to come to Europe, even for luxury shopping. But in New York, due to the highest inflation in the last 40 years, pessimistic sentiments for the future are already emerging. Inflation raises prices and squeezes consumers’ purchasing power. In a survey by FDRA (Footwear Distributors and Retailers of America), 87% of member companies expect revenues to fall between now and the end of the year. And if sales aren’t there, imports of euro-zone products, Made in Italy in the front row, are set to fall. Even in the face of currency parity.
The euro/dollar parity scenarios
For the first time since 2002, the euro and the dollar have the same value. The all-time low was reached at 0.83 in 2001. While in 2008, the year of the financial crisis, the average exchange rate was 1 euro against 1.47 dollars, up to a maximum of 1.60. It is easy to see how today it can be convenient for a US consumer to shop in Europe.
Take Chanel, for example, which applies its worldwide price harmonisation strategy. Take its Classic Flap: from February to today, it could cost an American customer buying it in Europe $1,000 less. Back then, one euro was worth $1.13, and the 7,800 in the receipt, translated at the exchange rate, was worth $8,800. Quite an advantage for those arriving from New York, at least until Chanel decides to intervene and raise European prices. (Yes, harmonisation always involves adjusting the lower price upwards and never the other way around).
In the case of products of other brands, which already sell more cheaply in Europe, such as Hermès and Louis Vuitton, the savings are even higher. So, between currency parity and the VAT refund, US buyers spending on European luxury goods could approach historic lows. And if the pandemic is kept at bay, the Chinese will also start travelling again, and a favourable scenario for Europe will emerge. It would be hard not to assume a consumption boom. Even if, on the EU front, the unfavourable side is importing goods and services from dollar-zone countries. They will cost more, driving up production costs.
What they say in Italy
In Italy, the brands well positioned in the stars and stripes market are rubbing their hands together. Everyone else would like to imitate Christopher Columbus, not so much to discover America as to land there. In the first quarter of 2022, Italian exports to the USA recorded a roaring +76.6% for leather goods and +70% for footwear. The parity between the euro and the dollar could give a further boost. As Salina Ferretti (Calzaturificio Falc, US Laboratory Manager for Assocalzaturifici) points out, “The favourable exchange rate is not a pass to enter the challenging US market.
In the short term, the parity between the two currencies offers an advantage to Italian companies, partially reduced by the predictable increase in imported materials and services prices. But parity is not (yet) a booster for orders. First of all, because in four to six months, when the delivery of the ordered product takes place, it is not known what the exchange rate will be. Secondly, we will have to consider the trend of sales of fashion products in the US, which, more than the exchange rate, will influence the repurchase.
The magic moment of the United States?
William White, the founder of Di Bianco (a US brand of footwear made in Italy), confirms the magic moment in the US as ‘consumers want to spend to travel and live well‘. But then he warns: ‘Inflation is a problem. I think there will be an economic crisis in 2023 because the cost of living will be high, and people will have to adapt’. An opinion finds initial confirmation in the FDRA survey and analysts’ opinions. HSBC predicts that US growth will slow down in the second quarter of 2022.
The post-pandemic booster
In the US, the surge in purchases coincided with a return to workplaces, ceremonies, events and formal occasions. NPD Retail Tracking found that between January and May 2022, high-heeled shoes gained market share, particularly pumps and open-toe sandals. Sales of evening bags also grew. For men, shoe purchases focused on business casual, hybrid models that mix the comfort bottoms of trainers with more formal silhouettes. Americans, therefore, saw the need to update their wardrobes that had stood still during the pandemic period. Once updated, it is easy to assume a reduction in purchases, destined to return to normal levels or even contract due to inflation that will increase consumer prices.
But does reshoring gain?
The parity between the dollar and the euro offers European production greater competitiveness vis-à-vis Asian production. In other words: in addition to luxury, European premium could also become more attractive. The sine qua non is that the currency exchange rate remains at current levels for at least 6-12 months. But even if Europe could become affordable, the cost is not the only deciding factor in facing a costly and complicated supply chain relocation. Right now, the strategy that more and more brands are adopting is to ‘produce where I sell‘ to contain costs and risks, enhance sustainability and increase distribution speed. In short, a few weeks of parity is not enough to immediately affect the relocation of production in Europe. (mv)