Europe’s New Woes

PARIS — Amid an international economic slowdown, uncertainty hangs over European fashion houses and retailers like a menacing black cloud.

With stock markets nose diving and the credit crisis prompting emergency measures from governments across Europe, the next months promise to be pretty bleak on the Continent.

That said, high-end fashion continues to show certain resilience, though the real measure of the crisis may not play out to its full extent before the beginning of next year, when the credit crisis is expected to hit shoppers even harder. And even if luxury is performing better than other price segments, executives at many of Europe’s top firms know they are in for a bumpy ride.

“It is not one of the most comforting global scenarios,” said Cristina Ruella, group managing director of Dolce & Gabbana. “All the mature markets are in difficulty.”

John Hooks, deputy managing director of Giorgio Armani, agreed. “We are expecting a tough season,” he said.

“We need to be realistic,” added Ralph Toledano, president of Chloé. “The economic situation is tough.”

Indeed, the global fashion and luxury goods market is bracing for turbulence, according to industry experts speaking at the Altagamma conference in Milan last week. Retail consultancy Bain & Co. said it expects the sector to contract 1 percent in the fourth quarter and by as much as 7 percent in 2009, which would make it the worst 12 months for the market ever.

Claudia D’Arpizio, a partner with the consultancy’s fashion and luxury goods practice, said it could be a far-from-merry Christmas for the industry, despite currency appreciations against the euro that have provided some cheer. And she said the financial crisis would likely have a major impact on consumption in 2009.

Bain predicted Europe will bear the brunt of the slowdown next year, and the U.S. and Japan will remain flat, while emerging markets will continue to grow substantially, though not enough to offset the deceleration elsewhere. Bain said that so far in 2008, watches, shoes and leather goods have been the most resilient categories.

At least one Paris-based firm still feels positive. François-Henri Pinault, president and CEO of PPR, majority owner of the Puma brand, acknowledged that the financial crisis in the U.S. has affected a few banks in Europe, but stressed that the impact on the Continent is limited to the banking and financial sectors.

“We’re not suffering from the crisis that impacts the banking and financial sector,” he said during the recent Paris fashion shows.

While he didn’t rule out the risk of a credit crunch in Europe, Pinault said he’s certain of swift government action to fend off threats to economic stability on the Continent. He added: “We don’t have any short-term issues as far as financing goes.”

But in the U.K., the outlook has certainly dimmed. “There’s a tough period ahead of us, with fuel, food and higher energy bills forcing people to cut back on household goods, footwear and clothing. A further factor is that people are worrying about job security,” said George Wallace, CEO at consultancy MHE Retail.

Though Wallace expects the luxury market to “feel the chill,” he said, “established brands such as Jimmy Choo, Gina Shoes, Christian Louboutin and Kurt Geiger will probably continue to do well.”

Gerard Levy, an independent shoe retailer who owns 23-year-old Spice Shoes, with stores in London’s Primrose Hill and Islington neighborhoods, said his customers, the real estate agents that line Islington’s Upper Street, have been hit the hardest by the economic downturn. “People are looking and thinking, but not impulse buying as they were before,” he said. “We were very busy at the start of the season, but it has slacked off in the last couple of weeks.”

Still, Levy feels confident. “I am low on stock and waiting for reorders to be delivered at the end of the month. So far, our sales figures are as good as they were last year, and that was a really good winter.”

Meanwhile, Elche, Spain-based shoe brand Pedro Garcia is worried about the state of the global markets. “Our level of concern is quite high, full-alert in the U.S. and around the world,” said a spokesman. The financial turmoil “will definitely affect business. Everybody is crossing their fingers.”

Though the spokesman said Pedro Garcia has not had any order cancellations, the brand, which has 90 U.S. accounts, is cutting back its sales expectations.

Elsewhere in Paris, both good and bad sentiments filtered through the recent fashion shows. Many retailers suggested they would be cutting orders by as much as 20 percent, even as top fashion houses believe that emerging markets — such as Eastern Europe, the Middle East and Asia — should help make up for weakness elsewhere.

A Chanel spokeswoman said orders placed by retailers are “definitely decreasing” this season. “However, we are well established in emerging countries and do not depend only on retailers, as we have a very important network of boutiques on our own.”

D&G’s Ruella shared that thought. “In these new markets, we are registering significant growth rates and are investing greatly both in terms of our direct presence in China, Hong Kong and Taiwan and through further consolidation of commercial relationships with local partners in Korea, Singapore, Thailand and Russia.”

In Moscow, there is no sign of a slowdown in fashion sales either, said Anna Lebsak-Kleimans, head of the Moscow market research firm Fashion Consulting Group.

“The Russian market is getting to be saturated, but it’s still not there yet,” said Lebsak-Kleimans. “Moscow is the main consumer [city], though now all the big cities with a population of more than 1 million are starting to get civilized boutiques and shopping malls. All these people are still hungry for international fashion.”

Europe’s fast-fashion giants — Hennes & Mauritz, Inditex and Mango — are also expanding in emerging markets, including China, Russia and the Middle East. Despite the global economic trouble, none of the firms expect to cut growth forecasts.

“We’ll continue with the expansion plan we had; there is no change in plans,” said Mango’s Isak Halfon, president of expansion.

“We have a positive outlook for future expansion,” said a spokeswoman for Sweden’s H&M. “We still have the goal for 10 to 15 percent [growth in] new stores per year. In the current market environment, it can also be an opportunity for us to sign store contracts in prime locations. This year we plan a net addition of 190 stores.”

Jimmy Chan, owner of Rue du Mail by Martine Sitbon who also runs a Y-3 shop in New York and Evisu boutiques in Hong Kong, said more niche businesses have better prospects. “Smaller boutiques catering to the niche are doing well and are actually increasing their orders some,” he said of Rue du Mail. “Department stores are adjusting their budgets. For the holidays, I think there will be a decrease, but it won’t be over Christmas [that] the crisis is played out.”

Like many, Chan said he expects the bigger impact on the luxury market to hit next season, when the credit crisis should reach consumers. “In countries dependent on credit cards, such as the U.S. and the U.K., the impact will be more. France and Italy, where credit is less important, should do better,” he said, adding that the Y-3 boutique in New York has beaten expectations so far.

Jean Touitou, owner of French sportswear brand APC, said he’s found a bright spot to the crisis. “Paradoxically, I’m happy because for the last three years I’ve been killed by the value of the dollar and the yen,” he said. “With those currencies gaining value, I’m making up for the money I lost.”

Nevertheless, his general outlook is not good. “It’s going to be catastrophic. There is a difference between what I call the true rich, whose wealth is in homes, jewelry and art, and the fake rich, whose value is calculated in stock. There will have to be less business from the fake rich.”

Still, for Touitou, business is “better than ever,” he said. “People are going for the most expensive and most exceptional pieces. People with cash won’t disappear.”


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