The mid-January decision by the Swiss National Bank (SNB) to stop an enforced cap of CHF1.20 against the euro has created much uncertainty for the duty free and travel retail channel – not only for players active in the Swiss market, but companies and operations domiciled there, of which there are many including retailer Dufry, plus major multinational brands in tobacco and confectionery.

 

 

When the SNB made its announcement on 15 January there was an immediate +21% spike in the franc’s value against the euro to reach parity (see chart below), and also a rise against the US dollar. Over the past days, the franc has stayed high and this morning it was worth €0.97.

 

INSTANT PRICE CUTS

The consequences have been immediate for retailers. At Zurich Airport (ZRH), prestige fashion player, Grieder, has applied a -20% discount at its airside boutiques “owing to the sudden appreciation of the Swiss franc against the euro” it says.

Asked about its strategy to deal with the strong franc, Lukas Brosi, Head of Financial Services at ZRH operator, Flughafen Zürich, tells TRBusiness: “It is our responsibility as the airport operator to approach our commercial partners and define individual measures together. A number of our commercial partners have already lowered their prices on several products.”

As for the impact so far, a ZRH spokesperson, adds: “We can’t give you an indication of the January figures yet. These will be published on 12 February. However, the SNB decision will certainly have an impact on turnovers, especially airside.” Nuance is the main DF&TR operator at the airport.

The positive spin from the airport is that “going abroad will be more attractive and therefore we expect people to travel more”.

However, that will not make up for the impact of a fall in spending from foreign travellers given that the population of Switzerland is 8m and ZUR alone processed 25.48m passengers in 2014.

PREVIOUS SPIKE HIT HARD

The last time the Swiss franc spiked was mid-2011 in the aftermath of the global financial crisis when the currency was considered a ‘safe haven’. In that year commercial turnover per departing pax at ZRH fell dramatically by -6.4% to CHF 39.40. Stability and growth only returned when the SNB intervened in September with its peg.

Peter Mohn (left), CEO of travel retail research group, M1nd-set, comments: “It is extremely likely the rise of the Swiss Franc will have a negative impact on travel retail sales here in Switzerland, since a significant number of travellers – especially from Europe – are fully aware of the new [franc vs euro] exchange rate. It will mainly affect products which are also available outside Switzerland, since a direct comparison is easy. Products with a local touch or items only available in Switzerland will most likely not be affected by the new situation.”

TRANSLATION EFFECTS ON P&L

As well as much lower expected travel to, and spending in, the Swiss market, the translation effect for companies domiciled in Switzerland, represents another headache for the travel retail business.

Smaller export players that receive most of their revenue in euros or dollars, will lose out on the translation effect to Swiss francs on their P&L accounts, more so if their costs, such as salaries, are mostly in Swiss francs.

M1nd-set is a good example. “As a Swiss-based company ourselves it will not have an impact on how we do our business, but it will definitely change our balance sheet at the end of the year, since many of our clients pay us in euros but most of our expenses are in Swiss francs,” says Mohn.

Bigger players which have operations or production facilities – as well as revenue – abroad, are more sheltered from the currency swing, but they will still see a negative effect this year.

Dufry has played down the issue. Renzo Radice, Global Head Investor Relations, tells TRBusiness: “Dufry has a natural hedge since revenues are matched by costs in the same currency; revenues occur mostly in USD and EUR; this applies also to debt. Therefore the FX impact is purely translational and does not impact margins. The main impact will be related to the translational/reporting effect.”

In a note to the market last week about Dufry, Deutsche Bank said: “Dufry earnings and share price are quoted in CHF. Hence marking-to-market lowers both our earnings forecasts and target price by about -15%, though we make no changes to underlying operating assumptions.”

The analyst adds that Dufry had a “well-hedged P&L” and that sales in Swiss francs account for about 3% of revenues [mostly as a result of its Nuance acquisition]. Nevertheless Dufry trades 49% in US dollars and 24% in euros and Deutsche Bank estimates a -11% impact on 2015 sales [based on December currency rates].

REASONING FOR LIFTING THE CAP

When the SNB first introduced a peg in September 2011 it said: “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.”

This time around, the bank was almost forced into dropping its intervention in the light of the [then expected] massive Eurozone quantitative easing programme announced by the European Central Bank a week ago which is likely to further weaken an already frail euro.

The SNB says: “Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced. The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”

However, the SNB has not shut the door to another intervention if the Swiss franc rises too fast again. “We will continue to take account of the exchange rate situation in formulating monetary policy in future. If necessary, the SNB will remain active in the foreign exchange market to influence monetary conditions,” it says.