Brexit is said to be driving bargain-hunting luxury shoppers to Britain, but for how long?
Since Britain’s shock vote to leave the European Union late last month, one of the most immediately stark consequences has been a plummeting pound. By the morning of June 24, when the leave vote was announced, sterling had tumbled over 10% to $1.32 against the dollar, and by July 6 it fell below $1.28, its lowest level since 1985, Reuters noted.
As of mid-July, the currency is still down by around 10% against the dollar and the euro compared to its pre-referendum levels, with Credit Suisse just one of the banks forecasting a recession in Britain in the wake of the Brexit vote.
But could there be a silver lining to this cloudy picture? The luxury goods market in the U.K. could see a spike, as Chinese shoppers in particular are said to be eager to capitalize on the falling pound and the resulting fall in the price of designer goods purchased in the country. Indeed, the Guardian reports that Chinese shoppers have been taking to social media to trumpet their plans for a British shopping spree following the vote.
George Wallace, chief executive at London retail consultancy MHE Retail acknowledges that the falling pound is “low enough to move the needle a bit on the attractiveness of the U.K. to tourists in the short term.” Wallace expects to see a rise in visitors from China and the rest of Asia, along with the US and the Eurozone. “I think that…certainly for London, which is where most of the visitors come, and for luxury goods, there’s going to be a bit of a spike in business,” he adds.
And data from Visit Britain, the country’s national tourism agency, bears that out. The agency cites data from Ctrip, a major Chinese travel agency, which has seen a 200% rise in searches for UK travel products on its app since the fall in sterling, and predicts a 50% rise in Chinese travel to the UK as a result of the fall. Chinese tourists are one of the highest-spending groups that visit the UK, Visit Britain says, spending an average of £2,174 per visit in 2015.
But it’s not just visitors from the Far East. Visit Britain notes that British Airways saw a third more US customers searching for flights to the UK on BA.com from Monday June 27 through Sunday July 3. The traffic peaked on Tuesday June 28, with an 80% rise in US visitors looking for flights to the UK, compared to the same period last year.
Tom Jenkins, chief executive of the European Tourism Association, agrees that “if [a tourist is] already thinking of coming to the UK, it will make you more likely to come to the UK when the pound is weak…and it will mean that you’re likely to spend more money in the UK.” He also notes that Japanese tourists, with their strengthened yen, are likely to be more attracted to the UK now, too, adding that visitors from the country are keen to buy “English goods,” rather than European luxury goods in general.
But there are hurdles for Chinese tourists visiting the UK, Jenkins points out, as the country requires them to submit a separate, more expensive, and more complex visa, separate to the simpler Schengen visa they obtain to visit Europe.
And looking at the wider context for travel and trade, Jenkins argues that “the European Union has been the biggest destroyer of red tape in the history of the continent.” “They’ve actually got rid of most of the regulations that existed before [the EU] started—you can travel freely, you can transport goods freely, you can move around freely, you can do what you like, really. And that sort of impetus towards a liberalization from bureaucracy has now gone from these shores, and this is a big problem.”
And in terms of the boost to luxury goods in the UK, Wallace forecasts there won’t be such a bargain for long.
The analyst expects that luxury goods companies (most of which are based in Europe) will be quick to react to the falling pound, and are likely to push up their prices in Britain. “[Luxury goods firms] are not going to be happy to take an exchange loss in their British business,” states Wallace. “And what you’ll almost certainly see, if the pound stays low—which I think it will—is they’re going to gradually build in higher prices to compensate. There will be a benefit for [luxury shopping district] Bond Street and so on, but it might be fairly short lived.”
“They’re not going to do it tomorrow, that would be a bit crude,” says Wallace. “But when the next new merchandise comes in, maybe spring and summer 2017, I’d be surprised if we didn’t see them building [a price rise] into the sterling price.”
Beyond the next 12 months, Wallace senses there could be a further rise in the price of luxury goods in Britain if the UK government is looking for ways to raise revenues in a potentially weakened economic climate. One of the ways they could do this, he suggests, is by raising the levels of VAT, or value added tax, on certain categories of goods. “If generally the economy is weaker, the government will take less in income tax, less in corporation tax. And they may have to cut corporation tax to try and keep business here,” says Wallace. “So it’s very possible we could see an increase in VAT.”
And luxury goods—aimed squarely at the wealthier in society—could be a prime candidate for a rise in VAT. “You can’t [raise VAT] on food and essentials and so on. But politically it’s quite popular to say, oh we’ve taxed luxury goods, and taxed certain classes of goods, like jewellery, handbags, clothing – that wouldn’t be politically unpopular,” Wallace says.