Things Are Tough All Over (the World)

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THE EURO'S STRENGTH VERSUS THE DOLLAR is raising the prices of many of the products sourced from the European Union. Dealernews talked with a number of European businesses that are being forced to reduce margins or raise prices to keep up with the currency trend.

"Certainly it's becoming more and more difficult to sell European products in the United States due to the exchange rate between the euro and the dollar," says Claudio De Viti, director of the Powered Two-Wheeler Division of Confindustria ANCMA, the trade organization for the Italian motorcycle industry. "And, at the same time, we have an unfavorable exchange rate with yen as well."

To remain competitive, he says, the export firms must apply heavy discounts. "However this opportunity is only feasible when products have a fair margin of profit, mainly for aftermarket suppliers rather than vehicles," he notes. "An alternative could be to establish stocks of semi-finished products close to the potential clients in the U.S., and then to complete the manufacturing process directly in the U.S. with a relative low cost. This could be a temporary solution waiting for a strengthening of the dollar.

"If the currency trend doesn't modify, it will jeopardize exports to the U.S."

Alpinestars is a privately owned Italian company with offices in more than two dozen countries. Alpinestars North American sales manager R. Scott Link says the company's design work is done in Southern California and Italy, but production takes place worldwide depending on which Alpinestars-controlled supplier can offer the best processes at the best prices.

"We have a pretty well-balanced worldwide business portfolio. Our products are made at factories all over the world. We build some stuff at our original factory in Italy, some in Eastern Europe, and some goods in Asia. It just depends on what the product is," Link says.

The currency exchange situation is "painful," he says. "The dollar has dropped, what, 50 percent in the last seven years? If you think about it, our margins aren't 50 percent. And so, in some cases, we've had to raise prices. But what dealers will recognize is that, in most cases, we haven't."

Link says Alpinestars made midyear price hikes on two products this year: its Tech 3 and Tech 7 boots. "But with a collection of 500 pieces, to only have to raise prices on two or three pieces midyear is outstanding. Ultimately, we price and we live with it for a year. If we introduce a price at Indy, trust me, it's in effect until Indy of the following year — period. If we have to take a hit, we'll take a hit. But we're not going to mess with the pricing and the market."

What helps, he says, is the fact that Alpinestars is diversified and can look at an aggregate market. "Our jacket and glove business can help our footwear business. We may be willing to work on no margin at all on goods coming from Italy, and we've had cases where we've actually operated on a negative margin to keep our dealers stable. So because we're diversified, we can kind of take it on the chin, hold our prices and commit to dealers. We're really looking at the big picture — how we can get through this and maintain stability for the long term.

Renthal's factory is in the U.K. "The currency situation has impacted our profitably since the dollar has declined against the British pound," says David Kaiser, national sales manager. "I remember when I started at Renthal six years ago, the exchange rate was $1.59 to the pound. Now it's over $2 versus the pound — and we still have the same dealer and retail prices from six years ago.

"We are a premium-price-point brand, and it's difficult to raise retail and dealer price points in our market," Kaiser notes. "This situation can't go on forever if the dollar continues to be weak against the pound. We did raise our prices to our distributor recently, but nowhere near the amount they should have risen." Instead, Renthal reduced its profit margins for its U.S. business.

Nicola Serragiotto, CFO and vice president of sales at AXO America Inc., says he believes the euro's current strength versus the dollar may persist for one more year, "and then, depending on many factors, we could have a dollar that's 30 percent stronger."

"The currency exchange should not be an issue for big companies," Serragiotto says. "If they did their homework they should be covered with currency risk hedging. Our group does hedging on a two-year period of time, so our costs and revenues are not really elastic to the currency exchanges. One benefit to us overseas is that, in many countries, we have price lists in dollars, and that is generating an increase of demand outside of the U.S."

U.S. brands and distributors have it hardest, he says. "First, most of the American brands are not well-distributed in the European Union as is true vice versa. That means that they may put some effort now in doing so, but in a year or two, if the dollar gets stronger, their effort will be null and void. If the U.S. is a tough market, the E.U. is tougher because of the uniqueness of each individual country."

Second is the fact that global sales are just a tiny portion of many U.S. businesses. "Often there is no face-to-face relationship with the local importers, so they cannot balance their current U.S. 'down' peak with an export 'up' peak," Serragiotto says. "You can see so many brands flushing out their inventory because they don't know where to sell their products outside the U.S. and because of their financial stress.

"If I had to give a suggestion to distributors, I would say, 'Buy out your European vendors, but pay in two years. Or pay now if they have good distribution in place," he continues. "And for the future, probably it is better for those distributors to buy in euros and do hedging on their side. They are bigger than their European vendors and they can afford the transaction costs of doing hedging."

"Anyone that is bringing in product from Europe knows the score here: It has been tough," says Gaerne Boot's U.S. representative, Bob Rathkamp. "We have seen the exchange rate give up more than 15 percent in the last 12 or so months. Add cost increases in raw materials due to expensive crude, and prices rising in freight and duty, and it really becomes a bit overwhelming.

"The manufacturer can only do so much to try and help," Rathkamp notes. "Considering that the industry is trending downward in 2007 and 2008, it is not the best time to be raising prices, as it will add to the general slowdown. Some say that by the end of the election in 2008 we will see the euro versus dollar back to a one-to-one basis. We can only hope."

The weak dollar makes business considerably more difficult for manufacturers and distributors, according to Bill Berroth, president of Motonation, importer and distributor for Sidi, Spidi and Vemar. "In many cases a company's survival is at stake unless action can be taken," he says. "I have been saying this for the past three years now, as the dollar started its fall against the euro."

Berroth says there are only a few things that a European manufacturer can do to help the situation while maintaining product quality:

  • It can implement currency hedging techniques (but this only limits the downside; it does not help solve the problem).
  • It can raise prices. Motonation raised select Sidi street boot prices in June 2007, select dirt boot prices in September and again increased select street and dirt prices on Jan. 1. Price increases are matching the loss of value in the dollar as well as being indicative of rising costs such as shipping fees.
  • A company can try to sell more (but every company should be trying to do that each day anyway).
  • It can cut its overhead as much as possible while not impacting sales. Perceived extra ads, racers, shows and other types of promotions are usually the first to go.
  • A company must suck it up and accept some lower (or no) profits until the dollar starts gaining strength, which Berroth believes may not happen until 2009.

"One of these actions alone will not do it," Berroth warns. "A company that successfully weathers this hard time will have to do some of each of the five points. The bottom line is that European products are just going to cost more in 2008 and beyond; there is no way around it. If someone says they aren't raising prices, they're either lying, or have outsourced their production to an emerging country without informing customers."