Imports pound UK companies

WHEN Italy's Benetton Group chose London for its flagship megastore in September 1996, it was persuaded by the same reasons that prompted Newsweek to call London "The World's Coolest City" in November that year.

The Italian clothing company knew that Britain's economic revival had made its capital a hot spot for fashion, music, clubs and cuisine. What it didn't know was that Britain's currency was on the brink of a run that would make Benetton's earnings from its Oxford Circus store even hotter.

The pound's 25 per cent surge against a trade-weighted basket of currencies since August 1996 means UK companies are taking a beating at home, with foreign companies able to undercut them on price.

"My advantage in the UK is coming from the value of the pound," said Giancarlo Bottini, chief financial officer at Benetton. British sales accounted for 7 per cent of group revenue last year, surpassing the US's 5 per cent share. "We've become more competitive. I can get more revenue without raising prices."

Benetton's ability to keep prices the same even as inflation rises is the boon of the strong pound. Some importers, perhaps less entrenched than Benetton in the hearts of shoppers, have gone so far as to cut prices. Italian importers sold 45 per cent more women's clothing in the UK in the first half of 1997 than in the first half of 1996, according to the Italian Trade Centre. Prices came down as theaverage cost of an item of women's clothing exported to the UK fell to pounds 50 from pounds 70.

Fashion retailers aren't the only companies earning more in the UK. There's evidence across Europe that importers of everything from office furniture to cars are enjoying the same boost.

Since summer, 1996 sterling has risen 25 per cent against the lira, 28.5 per cent against the German mark and French franc and 30 per cent against the peseta. The reason: concern about a weak European single currency and a thriving UK economy.

The stronger pound could easily have been a deterrent to foreign companies, given the increased costs of setting up shop. London's new cultural chic, however, has made it worth their while. "London is hot, as it was in the days of Twiggy and Carnaby Street," said Glynn Alwyn-Jones, chairman of the International Fashion Federation. "The opportunity foreign companies obtain by opening a store here is not only a domestic opportunity, it's a world opportunity."

Official figures on overall UK trade with other European Union countries tell the tale. Imports rose 7.7 per cent in August to October 1997 over the same period in 1996. Prices, meanwhile, fell 7.3 per cent.

Dutch office furniture maker Royal Ahrend cited the guilder's 31 per cent rise against the pound since mid-1996 as the driving force for an expected 24 per cent rise in 1997 net profits. The company expects to use the foothold it has gained from sterling strength to build a business that will weather any decline in the pound.

It is also happening in the car market. The number of European-made cars sold into the UK last year rose by more than 3,000 on 1996, while sales of British-made cars fell by a similar amount, says the Society of Motor Manufacturers and Traders. Car importers increased their share of the UK market to 66.2 per cent from 62 per cent in 1996. Each of the three large UK car companies, Ford, Vauxhall and Rover Group, lost market share.

While importers gained from the pound's rise almost immediately, the harm to UK manufacturers took more than a year to show up. UK companies masked the problem by cutting margins and taking advantage of lower prices on imported raw materials.

"It catches up with them eventually," said Nish Dattani, an economist at the CBI. "It's happened only recently, but now we're seeing the signs of import penetration coming through."

Mr Dattani said the first sign came last August in the CBI's quarterly retail survey. Among retailers the CBI questioned, 18 per cent more said they were stocking more imports than the quarter before; a trend that continued in the November survey.

The only way to cope, UK retailers say, is to act like importers and manufacture products outside Britain.

"We believe the effect from importers will be dramatic," said Roger Saul, chief executive at clothing retailer Mulberry Group. "If the pound stays strong for another year, UK companies will have to move their production abroad or you're going to see them going under."

Mulberry is poised to shift production from Britain to factories in Italy and elsewhere in southern Europe, where it has already done test runs in preparation, Mr Saul said. That's a threat to the company's 400 employees in Somerset.

Mulberry could find itself becoming a neighbour of Benetton - and a new exporter to the world's hottest city.

Copyright: IOS & Bloomberg