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Unstable Euro Triggers 2011 Price Increases

Published September 3, 2010

BY NICOLE FORMOSA

NEUSTADT, Germany—European companies grappling with a slew of cost challenges—primarily the decreased value of the euro—expect to ratchet up 2011 retail prices anywhere from 5 to 20 percent to help cushion the financial setback.

Since the beginning of the year, the decline of the euro has increased raw material costs for Sigma Sport by at least 15 percent, according to Frank Sirringhaus, president of the Neustadt, Germany based computer, light and heart-rate monitor company.

To help offset rising costs, Sigma will announce a 6 percent price increase at Eurobike, Sirringhaus said during an interview with BRAIN at the company’s headquarters in July.

Sirringhaus recognizes that Sigma has to be careful as to not miss key price points, but with “freight rates up, the euro down and production costs up, it’s not so easy these days,” he said, adding that Sigma buys nearly all its raw materials from Asia using the dollar.

Schwalbe, which also buys its raw materials in the dollar, announced a 5 percent price increase for its tires on Aug. 1. Carsten Zahn, product manager at the company’s headquarters in Reichshof, ers that prices would stay fixed for at least one year per company policy.

FSA also planned a 5 percent price increase to OEMs for 2012 product and for 2011 aftermarket product in light of higher shipping costs and losses from the euro, said Gloria Radaelli, marketing director of FSA Europe.

Although other factors are influencing the price increases, to be sure, the fluctuation of the euro has undoubtedly caused the most headaches among company executives. The 16-nation currency’s value has fallen steadily since the beginning of the year when it was trading at $1.43 against the dollar. In May, the currency hit a four-year low at $1.22. As of press time, the value had begun rebounding and was hovering around $1.30. Still, for most, the damage had already been significant by that time.

Dorel Industries’ bike division, including the Cannondale, GT, Mongoose, Schwinn, Iron Horse, Pacific Cycle and Sugoi brands, tallied losses of $2 million during the second quarter of 2010 due to the euro’s reduction in value against the dollar, said Jeffrey Schwartz, Dorel’s chief financial officer, although Dorel executives declined to specify how that would affect next year’s pricing strategy.

During an interview in early July, Scott Bikes’ vice president Pascal Ducrot didn’t mince words when addressing the impact: “It’s very easy. The margin goes down and the retail price goes up,” he said.

Scott Bikes dialed up its prices by 10 to 20 percent and still expects to sacrifice margin because maintaining the same margin would require “sky high pricing.”

But, Ducrot’s outlook on the situation is fairly positive.

“It’s not a bad thing. It’s a challenge to have to overcome and adapt our structure. It’s quite a challenge, but it’s maybe not so unhealthy to do that. I see it also as an opportunity to keep a lean structure, not to overspend for stuff. That you will keep on doing your stuff that you’re turning directly to investment,” Ducrot said.

Georg Honkomp, president of Europe’s largest retail group ZEG, also said industry wide price increases of 8 to 10 percent wouldn’t necessarily be a negative to its nearly 1,000 retailers as it would help protect pricing on previous year’s bikes.

“It’s stable in the value. There’s no need to discount if new bikes are selling for 8 percent higher than old bikes. This is very healthy for the dealer,” Honkomp said.

Honkomp and Ducrot both believe that the price increases won’t drive down consumer demand despite an economy that’s still struggling in parts of Europe like Eastern Germany and Spain, where unemployment reached nearly 20 percent in May.

But, average selling prices will likely decline as consumers buy down.

“People will still buy, but instead of buying an XTR/XT bike they will probably buy an XT/LX bike,” Ducrot said.

Although many are keeping a close eye on the foreign exchange market for signs that the euro is continuing to regain strength, some European companies, primarily those that still manufacture domestically, would prefer the euro maintain its low value.

SKS, for instance, manufactures nearly all its goods in Germany so it’s gaining profit in exports to the U.S. This allows the company to spend more on marketing and advertising to grow its presence in the U.S., said Marcel Spork, global sales manager for SKS Germany.

“I was at a meeting of the German bike industry in May and half or two-thirds of these guys had tears in their eyes when talking about this. Others are laughing, like SKS, because it’s good,” Spork said.

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