Shoppers who buy a mid-length Kensington trench from Burberry in the UK will pay 1,790 GBP or $2,052. The same coat in the US, however, is selling for $2,490. And in China, getting that signature gabardine look will cost you 20,500 yuan or $2,827—around 32% more than buying it where the luxury label was founded.
While currencies are always fluctuating, the dollar’s steep rise is distorting retailer prices dramatically. Investors have been buying up greenbacks as reserves during volatile times, and the US Federal Reserve has kept raising interest rates to slow inflation, which is also keeping the dollar high. Year to date, the euro is down 11% vs. the dollar, while the British pound lost 16%.
It’s a headache for retailers, especially those that sell luxury goods. Switching prices around is at odds with the prestige image they want to project. And while consumers won’t balk at big price differences across countries in low-cost goods like toothpaste or cookies, when it comes to $2,000 shoes or a $5,000 coat, they will seek out ways to price arbitrage.
Here’s how the price of the Burberry trench varies across countries compared to its dollar price in the US. (Typically, a brand is cheapest in its home market, since there are no export-related expenses. China, for example, levies a heavy import tax, making it one of the more expensive markets for luxury goods in the world.)
We looked at the prices of five classic Burberry products on the company’s websites in 30 different countries. We found similar trends: After converting them to dollars, items were consistently cheaper in EU countries and more expensive in China and Qatar.
Edouard Aubin, the head of Morgan Stanley’s luxury research team said the widening gap between the dollar and other currencies is the biggest it’s been in the past five years. “On average, companies tend to have around a 35% price gap in Europe versus China and around a 25% price gap in Europe versus US during ‘normal’ times,” he said. “The premium in China and the US is today more than 40% due to foreign currency movements.”
These sort of price differences have fueled a parallel gray market, with shoppers traveling outside their country or relying on traders abroad to buy at a discount. For instance, after Japan recently loosened travel restrictions, travelers from Hong Kong boosted sales at luxury stores there.
In Hong Kong, where the local currency is pegged to the US dollar, a Burberry Montage cashmere check scarf is 5,300 Hong Kong dollars, or $675. That’s more or less in line with the $620 it retails for in the US after sales tax is added in. (Tax varies by each US state but in New York the total bill would come to $675, while Hong Kong on the other hand has no sales tax.)
But given the yen’s 21% drop against the dollar this year, the same scarf in Japan costs 85,800 yen or $588, a 13% discount compared to Hong Kong and 15% compared to the US. Shoppers traveling in Japan can claim an additional 10% back from value added tax, so the total savings are closer to 25%.
It’s not just Burberry either. A Bank of America luxury report published Nov. 8 found that for luxury apparel, the difference in price between the US and Europe is about 38%.
Companies that do international business account for currency fluctuations in their business planning, but recent swings are bigger than they anticipated.
“Moves in currencies this year are completely insane by historical standards. It’s a big deal when currencies move by like 1%,” Anish Melwani, chairman & CEO for LVMH North America told Quartz.
That puts these companies in a tough spot. If they don’t raise prices in places like Europe, where goods have become unusually cheap, it could train tourist shoppers to always expect a discount. But with high inflation in Europe, passing on price increases to customers there would be untenable as well.
Cutting prices in the US is not an option for luxury houses either because it would damage the companies’ reputation with American customers. “Frankly, it’s not a good signal to your customers when you lower prices, because it means you think that somehow this is not worth what it was yesterday,” said Melwani.
For now, LVMH and its rival Kering have said they would not raise prices in markets where the currency has depreciated significantly. “Short term, I don’t think so,” LVMH’s CFO Jean Jacques Guiony said during the company’s latest earnings call on Oct. 11. “The currencies are going up and down. They can unravel what they have created.”
Similarly Kering’s chief financial officer Jean Marc Duplaix said the company would manage foreign exchange fluctuations by adjusting what’s known as “the mix”. Brands can adjust how many small goods, like a wallet or keychain, versus big ticket items, such as a coat or dress, are released each quarter so that the average selling price of each brand collection remains high. “You’re right to say that we have a situation in terms of pricing and price gaps between the region, which is not necessarily sustainable in the very long term,” he said during the company’s Oct. 20 earnings call.
Bank of America predicts that if these gaps persist, brands will be forced to increase pricing in abnormally cheap markets at the start of 2023, when global tourism picks back up.
In 2015, Chanel was the first major luxury house to announce it would shift to a global pricing strategy, resetting prices once a quarter to even out disparities due to currency moves and taxes. But not many other brands can replicate that strategy.
Harmonizing prices across countries is easier for brands that operate their own retail stores and ecommerce storefronts, like Chanel. Labels that sell even a moderate amount via boutiques or department stores, like Balenciaga and Proenza Schouler, relinquish control over their products’ selling price.
The weak euro may boost luxury firms profit margins, though. According to Morgan Stanley’s Aubin, most luxury brands produce their goods in Europe so more than 80% of their costs are in euros. But nearly half of their revenue is in dollars or dollar-pegged currencies.
This may result in a slight edge to luxury firm’s financials in the short-term but does not bode well in the long-haul for fashion houses. Wild swings in exchange rates mess up the business planning and logistics of running a fashion house—and attract the wrong kind of customer.
Brands try to discourage transactional bargain hunters, preferring clients that are loyal and who buy into the whole vision of the brand. It’s these type of shoppers who spend the most, which in turn can have a real impact on the bottom line.