BY HELENA PIKE
A Greek return to the drachma could seriously disrupt the luxury
fashion industry.
LONDON, United Kingdom — It sounds like something straight out
of a Sophocles tragedy. In the drama of Greece’s potential exit
from the Eurozone, lines have been drawn, sides have been taken and
the Greek prime minister Alexis Tsipras has called the Eurogroup’s
tactics “blackmail” and “ultimatums,” earning him a harsh retort
from Jean-Claude Juncker, president of the European Commission:
“You shouldn’t commit suicide because you’re afraid of dying.”
In just a few days, negotiations to save Greece from insolvency
have rapidly unravelled. The dramatics began to unfold across the
continent last Friday, when Tsipras officially rejected a renewed
proposition from creditors to extend his country's bailout package,
before calling the proposal to be put to popular vote in a national
referendum to be held this weekend. But leaders of the Eurogroup
have made it clear that if Greece continues to refuse the austerity
measures that come bundled with rescue offerings, it will be
impossible for them to remain in the Eurozone. As Angela Merkel,
the chancellor of Germany, bluntly said, next Sunday’s vote will
boil down to a decision between “the euro and the drachma.”
For now, the country’s banks will remain shuttered, while the
euro, which is already at a seven-year low against the pound,
continues to slip. With discussions about the debt crisis going
nowhere, a Greek exit is becoming more likely. What would this mean
for the luxury fashion industry?
Should Greece decide to revert to the drachma, luxury fashion
won’t feel that much pain from the turmoil of the country itself,
given its relative unimportance to the industry. Greece has neither
much involvement with the production of luxury fashion goods, nor
does it make up a significant portion of the industry’s sales. The
country’s disposable income has been falling steadily since its
economy went into tailspin in 2009 and was further cut by the
severe austerity measures that have been in place since 2012.
“A Greek exit in and of itself is not particularly relevant,”
explains Luca Solca, managing director of luxury goods at BNP Exane
Paribas, who says that Greece is not a significant market for the
luxury fashion industry. “What is going to be relevant for luxury
goods are the potential broader implications that this could have
in terms of the equity market correction.”
Indeed, a Greek exit from the Eurozone will have an unavoidable
impact on the continent’s stock market and leading currency.
Potential blow back from Greece’s refusal to accept a bail out was
already felt on Monday, when global stock markets slumped in
response to the weekend’s events. The fate of Greece will not
unfold in isolation. Other markets would be susceptible to
contagion; something that the luxury fashion industry would be
unable to escape.
Financial opinions are generally in agreement that Greece’s
effect on the global economy has been muted so far. “The markets
are still holding to the idea that the Greek’s may decide not to
get out and, as a consequence, this is still a bit of a storm in a
tea cup,” says Solca. However, he thinks that if Greek citizens do
vote ‘no’ next Sunday, opting to refuse the bailout offers of the
Eurogroup and, presumably, crash out of the Eurozone, the impact on
the value of the currency and stock markets around the world is
likely to be much more extreme and would be felt by the luxury
fashion industry.
The extent to which the fashion industry feels from Greece’s
exit would depend on how well European leaders are able to control
the fall out, according to Solca. “What happens to the luxury goods
industry is very much a function of how severe the market
dislocation is,” he explains. However, many months of discussions
and endless back and forth between the country and its creditors
should mean that Europe is at least prepared for a 'Grexit'. David
Cameron, the British prime minister, has already confirmed that he
is putting together contingency plans for such a situation, while
Solca says he would expect that the European Central Bank and its
partners might attempt to create some kind of firewall that could
protect other countries from contagion if Greece leaves.
But even with measures to dampen the damage to the rest of
Europe, the luxury fashion industry would still expect to see a
drop in sales. Times of economic instability have always correlated
with a downturn in discretionary spending. “The business of luxury
is a business that is linked to economic growth,” says Mario
Ortelli, a senior luxury goods analyst at Sanford C. Berstein, who
explains the importance of the “business of happiness” to the
luxury fashion industry, which thrives when people feel in a
position to buy goods they don’t actually need. “If the financial
market enters into a crisis and things are unstable, then luxury
goods are not at the top of the list of things that you want to
buy.”
The luxury fashion industry wouldn’t just see a drop in sales
from its European clients either. A Greek exit would have ripples
that extend around the globe, says Solca, with the effects
predominantly transmitted through stock markets. The US, for
example, would expect to see a significant downward correction in
its equity market, as their stock market is very closely connected
to the European one. This would then signal a downturn in American
discretionary spending and a drop off of luxury fashion sales from
that region as well.
The industry would also see a drop in sales in China, Solca
says, although this would take longer to come into effect.
Initially, as the Chinese market is less interconnected with the
European and US equity markets, the country and its discretionary
spending would be protected. But as two of the country’s major
customers see their growth weaken, China would feel a subsequent
impact.
Mario Ortelli says the impact of a euro downturn would have a
second major consequence for the luxury fashion industry in the
form of pricing. Luxury fashion brands are overwhelming based
within the Eurozone and conduct their business in Euros, but the
majority of the clients come from elsewhere in the world. “Any big
swing in the Euro valuation in comparison to other countries will
activate a change of the price differential among currencies,” says
Ortelli.
Companies would be left facing huge imbalances between the
prices of their items in different countries. They would have to
quickly make a decision whether to raise prices in Europe or reduce
them elsewhere, explains Ortelli. Particularly for clients in Asia,
products priced in euros — if brands do nothing to adjust
discrepancies between currencies — would become incredibly
appealing. With their market’s more limited reaction to a Greek
exit, luxury fashion companies could see an increase in sales
within Europe from clients outside of the Eurozone. “You don’t go
and buy your can of coke in Germany because it costs less there
than it does in pounds, but if you’re prepared to buy €3,000 of
bags from Chanel, you can think to spend a weekend shopping in
Paris,” says Ortelli.
Source:
http://www.businessoffashion.com/