Luxury fashion brands can be especially impacted by exchange rate shifts, because they often earn revenue and generate costs in many currencies. When Switzerland unpegged the Swiss franc from the euro in 2015, the Swiss luxury watchmaker Swatch experienced a 15 percent rise in costs, and its shares quickly dropped by roughly the same amount. Another Swiss luxury brand company, Richemont – owner of Cartier – lost 14 percent in market capitalization.
Luxury producers, unlike other fashion companies, may not have the option of shifting production in response to exchange rate fluctuations. Their brands are intimately linked to location; luxury Swiss watches generally still need to be “made in Switzerland.”
When the euro’s exchange rate fell against the dollar in 2015, European luxury fashion companies whose costs are disproportionately denominated in euros benefited because their costs of production dropped. At the same time, LVMH Chief Financial Officer Jean Jacques Guiony told Business of Fashion, American consumers paid less for these luxury fashion products, both at home and when touring Europe. Conversely, while this was occurring, the New York-based luxury jewelry chain Tiffany & Co. was missing analysts’ estimates due to lower sales overseas and reduced purchases by tourists in its U.S. retail stores.
Of course, much of the fashion industry doesn’t source from relatively high-cost regions such as western Europe. China remains the number one location for apparel manufacturing, with Vietnam second. Shifts in the exchange rate of the Chinese yuan or the Vietnamese dong can therefore impact the costs of manufactured apparel from these locations. The U.S. dollar’s exchange rate rose against the yuan from mid-2015 into early 2017, but the yuan recovered somewhat during mid-2017.The dollar’s value against the dong rose roughly 10 percent between 2013 and early 2017, but has remained roughly stable since.
Since much fashion and apparel manufacturing is regional, volatility in other currencies can also complicate life for fashion companies. In early 2017, Guido Schlossman, President/CEO of Synergies Worldwide Sourcing, cited Brazil, Mexico, and Turkey as major manufacturing locations especially at risk of exchange rate volatility.
Schlossman said exchange rates shape sourcing decisions alongside several related and unrelated factors, including the revision or abandonment of trade agreements; geopolitical and security risks; worker availability; technology transfer, and growing consumer expectations for social responsibility. These factors often operate in tandem with currency fluctuations, magnifying their impact: for example, greater geopolitical instability often leads to lower currency exchange rates. Occasionally, however, other factors can offset or outweigh currency shifts.
It’s often overlooked that small firms at the other end of the supply chain are impacted by exchange rate volatility at least as much as their first-world trading partners. For example, a 2013 study of Vietnam’s apparel industry found that ongoing devaluations of the dong were making it more difficult for them to import raw materials, fabrics, or machinery, to sign long-term contracts with customers, or to move up the value chain.
Large fashion and apparel companies have sought to compensate for currency shifts in a variety of ways, including adjusting supply chains and regional priorities for retail growth. Many also turn to FX hedging instruments. As Business of Fashion observes, “The most instantaneous line of defense available… is currency-hedging. At a cost, companies can fix exchange rates at pre-agreed values with banks, thereby offsetting any negative fallout caused by fluctuations in currency values.”