How the Exchange Rate Affects Swiss Retail Trade
Retail sales were not the only thing significantly affected by the strong Swiss franc in 2015. The spotlight also fell on global price differences. These differences are mostly due to production costs.
The removal of the EUR/CHF exchange rate cap at the start of 2015 had a significant impact on the Swiss retail trade. Swiss retailers considerably lowered their prices due to the appreciation of the Swiss franc in the first few months of 2015. Nonetheless, foreign purchases by the Swiss, already at a high level, shot up even further, causing a huge chunk of Swiss purchasing power to leave the country. Additionally, the strength of the Swiss franc negatively affected consumer sentiment, especially during the second half of 2015. Frequent news of layoffs throughout the year, often related to the strong Swiss franc, was also responsible for the consumer sentiment index dropping much lower than its long-term average during the second half of 2015. All this led to the Swiss retail trade reporting a year-on-year drop in sales of around 1.7 percent in 2015.
Foreign Purchases in 2015 Equaled Roughly 10 Percent of Turnover in the Swiss Retail Trade
Even before the exchange rate cap was removed, Swiss shoppers were already making annual foreign purchases in the billions. With the Swiss franc's initial appreciation against the euro in 2010 and 2011, shopping tourism increased significantly but stabilized at a high level during the next three years. In 2015, foreign purchases by the Swiss increased again by an estimated 8 percent, reaching a value of almost CHF 11 billion. This is equivalent to around one tenth of total sales in the Swiss retail trade.
Retail Trade Should See Light Relief in 2016
The situation in the Swiss retail trade is expected to improve slightly in 2016. Thanks to negative interest rates and sporadic foreign exchange purchases by the Swiss National Bank, the EUR/CHF exchange rate should remain at around 1.10. Shopping tourism is therefore likely to stabilize at the peak level of 2015, but consumer sentiment is not expected to improve significantly. Thanks to slightly higher disposable income and robust population growth, demand in 2016 is expected to be better than in 2015. Prices in the retail trade should fall less sharply in 2016, with nominal sales leveling off.
Obvious Price Differences Compared to Foreign Countries
With the sharp increase in foreign purchases by the Swiss and the quickly growing online retail trade, foreign providers have become serious competitors for domestic retailers. This means that Swiss retailers have also had to face greater scrutiny of their prices in recent years. The comparisons reveal obvious differences. The 2016 Retail Outlook analysis shows that, on average, prices for food are 30 percent, those for furniture 26 percent, and those for clothing 38 percent higher in Switzerland than in key countries of origin for the corresponding Swiss imports (mainly EU 15 countries, China, Eastern Europe, and the US).
Price Differences Mostly Due to Production Costs
The 2016 Retail Outlook shows that the majority of Swiss household spending on food, furniture, and clothing goes to Swiss retailers, producers, and suppliers. Therefore, consumer price differences between Switzerland and other countries are primarily due to higher production costs in Switzerland. One of the key reasons for the price differences is labor costs, which are a major cost factor, especially in the production of the three analyzed groups of goods. Those costs are significantly higher in Swiss industry than in the most important countries of origin for imports. Input goods for production in Switzerland are also more expensive than their equivalents abroad. Labor costs in the retail/wholesale trade in Switzerland are substantially higher than in the most important countries of origin. However, labor costs are not among the most important cost factors in trade. Here, transport and logistics costs, as well as rent for storage and retail space, play a more important role. Switzerland is relatively expensive in these areas as well. Only the cost of capital and value added tax are lower in Switzerland than in other countries. Since the proportion of the cost of capital to production value in the three industries and retail is, however, relatively low, this Swiss advantage is of little consequence. The low value added tax rate in Switzerland ensures that price differences with other countries are not even greater.
Stronger Swiss Franc May Significantly Reduce Swiss Household Spending
A considerable portion of Swiss household spending goes to foreign providers. A full 21 percent of Swiss household spending on food goes to foreign retailers and producers via imported products and inputs. For furniture and textiles and clothing, the foreign share is 22 percent and 43 percent, respectively. This international connection in the retail trade causes exchange rate fluctuations to have a direct effect on consumer spending by Swiss households. The 2016 Retail Outlook calculates the extent of this effect in a scenario in which the Swiss franc appreciates against the euro by 15 percent, and the currency benefits are passed on at every stage in the value chain. With supply and demand behavior remaining stable (e.g. no adjustment of product range or purchases), household spending drops by 2.2 percent on food, by 1.9 percent on furniture, and by 3.3 percent on clothing in this scenario. Using household spending in 2011 as a calculation basis, this corresponds to a total of approximately CHF 1.3 billion.