It is not the same to buy a raincoat from Burberry in its flagship of Regent Street, one of the pioneers in digitization, than anywhere else in the world. The brand itself knows that very well, which last week warned that the United Kingdom’s exit from the European Union (EU) implies London’s loss of attractiveness as a shopping destination for tourists with high purchasing power. The British textile firm, which recorded a 4.3% drop in sales between October and December 2020, regretted that the pandemic, trade closures and the lack of travelers will be added to the Brexit effect, together with the decision of the British government to interrupt, from this January, the VAT refund mechanism to tourists from outside of The EU.
This change of scheme in a country in which every year there are shopping tax free worth 3.5 billion pounds (3,960 million euros) could significantly damage its luxury industry, which will already be seriously affected after the pandemic. “In recent years, London was becoming the capital of the shopping for international tourists ”, says Luis Lara, professor of internationalization at ISEM Fashion Business School. Although Paris was always the star of the dance, London was gaining momentum. In 2018, 9.6% of new store openings in the luxury segment were made there, above any other city in the world, according to the report Global Luxury Retail 2019, prepared by the real estate consultancy Savills Aguirre Newman, while the French capital had to settle for 4.7%.
“It was always a luxury destination, but in the last 25 years it has been raising the bar a lot,” says Lara. But nothing is forever, especially in a time of uncertainty like the current one and with an extremely demanding audience. “I believe that the path traveled during the last 25 years can be easily retraced with Brexit. London can lose many positions in the world ”, sentence. It is precisely luxury products that are most sensitive to VAT, which in the United Kingdom is 20%. “If it is bought in stores like GAP or Topshop, it is most likely that this refund will not be requested, but if someone buys a 10,000 euro watch, of course they will demand it”Continues Lara, who insists that this mechanism be interrupted will be a very significant loss of attractiveness for high-end consumers.
This impact on shopping tourism that the British capital receives will especially affect national firms. “For luxury brands, London is usually 5% or 6% of their turnover, which is a significant percentage, but it is still restrained,” Lara illustrates. The bulk is in Asia. The consulting firm Bain & Company estimates that, by 2025, 50% of luxury purchases worldwide will be made in China, so most firms will try to increase sales in other European places and, above all, in the Asian giant to make up for UK losses, but local names will have more work ahead of them. “People prefer to buy genuinely British brands, such as Burberry, in London than in Paris, so for these types of companies, the British market is more than 10%”, justifies Lara, who goes beyond the signature of the trench coats and recalls Harrods, Harvey Nichols or even the Heathrow Airport shops themselves.
In spite of everything, the big brands will not be the most affected. “Luxury is not just a Burberry or a Bentley, it is also found in décor, in much smaller brands, in craftsmanship... ”, explains Susana Campuzano, professor and director of the superior program of direction and strategic management of the universe of luxury at IE University.
The high-end range will be affected in many ways beyond the lack of tourists, for example, with a lower influx of talent in the creative industry, which was fed largely by immigration, since, as the IE expert continues University, London was a very attractive point of interest in which to establish professionally.
Also crafts, which need to import raw materials from the rest of Europe, will be impacted and forced to raise prices. Without forgetting the weight of exports: 80% of the luxury goods produced in the United Kingdom are exported, mostly to Europe, according to data from Walpole. “Despite the fact that an agreement has been signed so that the exchange of luxury goods does not have tariffs, it is necessary to take into account the bureaucracy, which is an added cost in itself, it is a non-tariff barrier but that can influence”, Lara points out.
The British Fashion Council organization, which seeks to bring together the different national fashion agents, estimates that the non-refund of taxes will result in the loss of 40,000 jobs in the industry. Some unflattering data that coincide with the perspective of the British luxury association Walpole British Luxury, which has already estimated that Brexit would have an impact of 6.8 billion pounds (7.68 million euros) on exports, as well as a loss of competitiveness 20% compared to its neighboring countries.
London has raised the bar a lot in the last 25 years, but the path traveled can easily be retraced with the exit of the EU
Luis Lara, professor and isem Fashion Business School
The economic blow will go beyond spending in stores. “Shopping tourism does not only impact on the purchases themselves, but it is also restoration, it is leisure, everything that happens within the trip”, explains Jorge Esteban, director of the Planet company in Spain. The firm of tax free estimates that the UK will lose around 10 billion pounds (11,000 million euros) in tourism spending in favor of its former community partners. And, here, it is the luxury that you will notice the most. “One of the incentives that long-haul tourists had is to spend part of their trip shopping. Now they will have to make the decision of how much of what they had planned to invest in purchases they will spend in the United Kingdom “, continues. According to a Planet report, 53% of Chinese tourists say they will divert their expenses to other European destinations after Brexit and more than 90% of elite Chinese buyers say they will either not visit the UK or spend only half time than originally planned.
The only possible advantage, Campuzano says, is that the pound’s fall could attract buyers, as prices would also fall, but he insists that brands must act quickly to compensate. “They must match prices so that London does not become the outlet of Europe and there are resales ”, develops.
Esteban, for his part, believes that it could be an opportunity for other countries, such as Spain, Italy and France, as they can absorb part of the spending that is no longer made in the United Kingdom. British tourists also become a new target, since they will now have the right to demand a VAT refund like other non-EU travelers. “And Spain is number one in reception of British tourists,” Esteban recalls.
In any case, to know the real impact of Brexit on British high-end brands, we will have to wait for the pandemic to pass, since the United Kingdom, like the rest of European countries, has the economy in quarantine. “They are not traveling now, but when they travel again, they will make their decisions with these actions in mind. that have been carried out ”, Lara sums up.
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