lunes, 6 de julio de 2015

¿What Would a ‘Grexit’ Mean for Luxury Fashion?


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: BOF

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