This is to be expected, given that such brands earn revenues and incur costs in a number of different world currencies.
When Switzerland liberated the Swiss franc from the euro’s value in 2015, luxury watchmaker Swatch immediately shouldered a 15% rise in expenses while its shares dropped by a comparable degree. Richemont, another luxury Swiss brand and the parent company of Cartier, lost 14% in market capitalisation due to the market’s volatility at the time.
How does exchange rate volatility affect luxury brands?
Luxury fashion brands will adjust their pricing strategies rapidly to stay ahead of exchange rate volatility. When the pound fell by 18% against the US dollar following Brexit, luxury brands responded in a way that increased headline prices in the UK by 5% by replacing their existing inventory with higher priced products.
Unlike other fashion companies, luxury fashion producers often do not have the option of moving their production operations in response to changes in exchange rates. Many brands are closely linked to their locations; for example, Swiss luxury watches must be made in Switzerland to retain their appeal. Luxury brands also earn revenues and generate costs in many different countries, which exposes them and their profit margins to shifts global foreign exchange rates.
Exchange rate fluctuations can also affect brands’ sales in a direct way. If, for example, the US dollar begins to perform weaker against the euro and the pound, the cost of importing products to America will increase. This will lead to a rise in the cost of luxury goods locally, which could push them out of reach of customers who would otherwise have been willing to pay for premium products.
When the exchange rate of the euro fell against the US dollar in 2015, European luxury brands whose costs were largely denominated in Euros saw significant declines in their production costs. At the same time, American shoppers paid less for their products, both locally and in Europe due to the strength of their home currency. American luxury jewellery company Tiffany and Co. missed financial projections due to lower overseas sales and fewer purchases in its US stores.
The impact of foreign exchange on global supply chains
Foreign exchange rate volatility can also have significant impacts on international supply chains. Exchange rates drive sourcing decisions along with a number of related and indirect factors, including the revision or elimination of trade agreements, security and geopolitical risks, the availability of workers, technology transfers, and growing social responsibility expectations from consumers.
All of these factors can be extrinsically tied to currency fluctuation and may expand their impacts. For example, geopolitical instability often lowers local currency exchange rates, and other factors may even outweigh shifts in currency.
Additionally, exchange rate fluctuations can increase the prices of the global currency clothing materials, components and textiles from foreign suppliers as a consequence of unfavourable foreign exchange rate shifts. This puts significant pressure on fashion companies’ pricing and sourcing strategies, which in turn generates more strategic and operational risk.
Brexit and the Covid-19 pandemic have also put strain on fashion brands’ supply chains, forcing disruption and diversification across the industry. The regulatory uncertainty leading up to Brexit caused delays in operational progress, and later, Covid-19 led to factory closures, entire supply chain disruptions, and product shortages. Many fashion brands chose to focus on eCommerce and direct-to-consumer sales methods to make up for their losses caused by widespread retail store shut-downs.
According to Ian Holdcroft, co-founder of Shackleton, consumer habits have undergone a fundamental shift in the wake of the Coronavirus pandemic: 'Now, 12 months on, consumers are so used to shopping online and courier services are so much better. Now you can get the whole works: purchase, deliver to your door, try it on, either keep it or send it back, and all within a matter of 24 hours. It has totally changed consumption habits and luxury brands have totally understood how to transition the luxury experience into an eCommerce-based environment.'
NFTs in the fashion industry
Non-fungible tokens could play a major role in the future of fashion. NFTs create digital fashion that can be authenticated and traded securely on the blockchain. This technology allows luxury fashion consumers to purchase and maintain sole, exclusive digital ownership of items on the web, while allowing brands to compete and innovate in sustainable ways. Blockchain is also revolutionising the way big brands conduct business, particularly when it comes to adopting circular business models. NFTs provide the ability to trace design rights and ownership, which can fairly credit designers and creators.
Their technology also facilitates secure cryptocurrency transactions that would essentially see online purchases of luxury goods becoming crypto investments in their own right. Furthermore, they also enable brands to effectively re-target customers to preserve their profit margins and hedge their risks against ongoing exchange rate volatility in the long term.