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Fashion: On the Frontlines When Currencies Shift

By Bill Camarda

From design to manufacturing to retail, few industries are as thoroughly globalized as fashion. Consequently, besides shifting fashion trends and fickle consumers, fashion companies may need to worry about shifting currency exchange rates and fickle FX markets. Since each company has its own unique mix of customers and sources of value, they may pursue very different currency strategies.

In 2016, the fashion industry's worldwide estimated market size was $2.4 trillion, according to McKinsey & Company: that exceeds the GDPs of India or Italy, and it generated more value than media, transportation, or professional services.1 But "shocks to the cost base, such as the impact of plummeting exchange rates on sourcing costs, are a constant threat. As a result, the value created by apparel and luxury companies varies much more than it does for the market overall."2


Exchange Rate Shifts Can Buffet Luxury Brands


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.3


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."4


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.5 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.6


Deloitte notes that luxury fashion and related brands quickly adjust pricing to respond to exchange rate movements. Deloitte's Global Powers of Luxury Goods 2017 report explains that when the British pound fell by 18 percent against the U.S. dollar following the U.K.'s EU membership referendum in June 2016, luxury and fashion brands responded such that "headline prices in the U.K. were 5 percent higher for like-for-like items, and a further effective 5 percent rise was achieved by replacing existing inventory with higher-priced products," by March 2017. "Conversely, when the ruble appreciated during 2016, companies cut the prices of their luxury goods in Russia by over 11 percent." Even in the wake of these adjustments, sizable regional pricing disparities remained, creating arbitrage opportunities for wealthy travelers.7


Wide Impacts on Global Supply Chains


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.8,9 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-2017.10 The dollar's value against the dong rose roughly 10 percent between 2013 and early 2017, but has remained roughly stable since.11


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.12


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.13 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.14


Outsized Impact on Consumer Buying Behavior


As the LVMH and Tiffany examples suggest, exchange rate fluctuations can have outsized effects on consumer purchasing behavior in fashion markets. In early 2017, McKinsey noted that foreign exchange fluctuations, combined with related economic slowdowns, were impacting consumer spending on imported fashion and apparel in emerging markets ranging from Brazil to Russia.15 After the ruble was devalued late in 2014, Zara, adidas, and other retailers closed their stores in Russia.16


Exchange rate shifts can significantly impact consumers' choices even when they keep buying. For instance, mid-decade currency pressures helped increase sales for "affordable luxury" companies in China and elsewhere, when consumers traded down from higher-end luxury brands.17


Managing Exchange Rate Shifts via Hedging


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."18


Currency risks can impact fashion firms throughout the business cycle, beginning when they project costs for a new line as much as a year in advance.19 Luca Solca, head of luxury goods at Exane BNP Paribas, notes that many companies hedge margin exposure 12 months forward.20


Of course, companies that use currency hedging forego earnings associated with favorable currency shifts. However, when exchange rate volatility increases, Business of Fashion suggests, more companies are likely to use these instruments.21



Fashion companies can face outsized impacts from exchange rate fluctuations, related to both supply chains and consumer demand. They respond in a variety of ways – from adjusting pricing, sourcing, and retail locations to hedging currencies in the FX markets.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.


1. The State of Fashion 2017, McKinsey & Company;
2. Ibid.
3. “Navigating a Storm of Currency Volatility,” Business of Fashion,
4. Ibid.
5. Ibid.
6. “Tiffany Profit Misses Estimates After Currency Weighs on Sales,” Business of Fashion,
7. Global Powers of Luxury Goods 2017, Deloitte;
8. “Outlook 2017 - What Next for Apparel Sourcing?,” Just-Style;
9. “Vietnam Remains Second Only to China in Sourcing,” Sourcing Journal;
10. “USD/CNY,” Yahoo! Finance;
11. “USD/VND,”;
12. “Outlook 2017 - What Next for Apparel Sourcing?” Just-Style;
13. Ibid.
14. “Vietnamese Textile and Garment Industry in the Global Supply Chain: State Strategies and Workers' Responses,” Angie Tran;'_Responses
15. The State of Fashion 2017, McKinsey & Company;
16. “Fashion brands affected by volatile currencies,” FashionUnited;
17. The State of Fashion 2017, McKinsey & Company;
18. “Navigating a Storm of Currency Volatility,” Business of Fashion;
19. “Tailor-made currency exchange solutions for your fashion business,” Smart Currency Business;
20. “Navigating a Storm of Currency Volatility,” Business of Fashion;
21. Ibid.

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