What the last-minute Brexit deal means for luxury

Expect a longer, slower return to growth for luxury in Britain. Even with a last-minute Brexit deal, the scrapping of the value-added tax rebate scheme for international buyers and the new strain of the Covid-19 virus are putting the market under additional pressure. The Brexit deal, secured in the final moments of 2020, included zero-tariff and zero-quota trade for luxury goods between the EU and Britain and was largely welcomed by the industry. The UK Fashion and Textile Association says it secured the £7.4 billion of fashion and textiles the UK sells to the EU every year, its biggest market. But red tape and customs declarations will weigh on logistics, and others including the Fashion Roundtable say the £35 billion British fashion industry will suffer from lack of EU garment workers and creatives. More concerning is the scrapping of VAT for international buyers, which prevents visitors from claiming back the 20 per cent tax unless they ship purchases home. The move is still facing a judicial review following a challenge by a group including Heathrow Airport, duty-free retailer Dufry and Global Blue, set to be heard in February. The Centre for Economics and Business Research says the non-EU visitors could fall by as much as 7.3 per cent, with a £1.8 billion loss in sales. McKinsey has forecast a global return to pre-pandemic growth in 2023, but Helen Brocklebank, CEO of British luxury trade group Walpole, says the UK’s recovery “will be a bit slower”. “We have vaccines, but the additional frictions of Brexit and the amount of uncertainty for what that will bring is high,” she says. The UK is a relatively small luxury capital compared to the US and growth markets like China. Exposure for international luxury brands to the UK is around 4 to 5 per cent, analysts estimate. Its position as a luxury market is more crucial for domestic brands like Burberry, who generate around 10 per cent of sales domestically, and smaller local brands who rely on tourist spend, particularly from China, and may struggle to recoup it in other markets as foreigners favour buying British brands in Britain, French brands in Paris and Italian brands in Milan. “If tourists from Asia can buy in either Paris or Milan instead, where you’ve got exactly the same luxury brands present, and they can actually get the tax refund, then why would they choose to shop in London?” says Kathryn Parker, luxury goods analyst at Jefferies. “Obviously the risk here is that there’s a certain kudos to buying Burberry in London. If you’re in Paris, you’re possibly more likely to buy Louis Vuitton than a British brand in a European city. So it’s certainly an unhelpful impact for British luxury brands.” Long-haul travellers, particularly from Asia, are often driven by hefty price differentials, says Thomas Chauvet, managing director at Citi covering the luxury goods sector, which “drives a big chunk of the Chinese luxury spend in Europe”. Depending on the company, approximately half to two-thirds of European luxury sales come from tourists, Chauvet says. There is some good news for British luxury given its export reliance; 80 per cent of British luxury is destined for overseas markets, according to British luxury body Walpole. “It’s one of the most successful exports this country has. The allure is undiminished, whether it’s Burberry or a Lock and Co. hat, the best cashmere for Johnstons of Elgin, a Roksanda dress – they are still desirable,” says Brocklebank. Britain is in talks with the US over a Free Trade Agreement, which could see the 25 per cent tax on British wool, cashmere and Saville Row suits reduced. A summer of events, if realised, could offer opportunities. The current vaccine rollout in the UK also offers glimmers of hope. “Everyone is planning for Q1 and part of Q2 to be pretty much the same, but the minute it opens up, the customer comes back. The customer, fortunately, has a lot of pent-up demand, and they need the opportunity to realise that,” Brocklebank says. To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com. More on this topic: The reality of a no-deal Brexit British retailers brace for the end of tax-free shopping Boris Johnson could be good for luxury, if he sorts out Brexit

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