London has always been a honeypot for Chinese shoppers. Friendlier than Paris and faster-paced than Milan, it has a more accessible culture and more direct flights from China than any other European city – and a healthy population of Chinese students.
Since the Brexit vote and the subsequent crash of the pound, it has also been one of the cheapest places in the world to shop for luxury goods – and as a result 800,000 Chinese nationals flew into the British capital in 2019.
On these trips, many would visit the boutiques of New Bond Street and then take a bus down to Harrods or Harvey Nichols, or a train to designer outlet shopping centre Bicester Village. And at Heathrow airport on their way home, they would claim back 20 per cent of the purchase price of all goods over GBP135 (US$185): if you’ve spent a week splurging on luxury fashion, that can mean a lot of money.
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However, worried that visitors from the EU, who are now third-party nationals, would start claiming back VAT, the British government scrapped the VAT rebate. Right now, it’s a moot point, as nobody is jetting in for a trip to Liberty, but once the pandemic eases off, will Chinese customers strike London off their shopping list?
“London is the luxury capital of the world,” says Helen Brocklebank, the CEO of Walpole, the official body for British luxury. “There is an incredible ecosystem of art and culture and theatre and restaurants that bring in people from around the world – but fashion is a huge part of that, and without it London becomes less attractive.”
It is also central to the British economy. In 2019, foreign visitors bought GBP3 billion worth of goods from fashion and other luxury stores in the UK – and spent another GBP3 billion staying in hotels and eating in restaurants. Of that spending, 75 per cent was in London, and these visitors helped sustain a thriving consumer market.
“These people – who mostly come from China – have contributed a huge amount to the British economy but will simply make the choice not to shop in the UK because it is less advantageous to them,” says Paul Barnes, the CEO of Association of International Retail.
“We are now the only country in Europe offering no VAT rebate, so why would tourists not go to Paris instead, if they can save thousands of euros on luxury goods there and nothing here?”
French officials are already rubbing their hands at the prospect of tempting Chinese customers across the channel. France has recently dropped its minimum spend required to recoup VAT from Euro175 (US$210) to Euro110 and is said to be investing in new luxury space in central Paris and at the city’s Charles de Gaulle airport. It is also looking into making visas for Chinese nationals easier to obtain.
“Essentially what we are doing is disincentivising customers from shopping in the UK and making us uncompetitive with Europe,” says Brocklebank. “The key to recovery for fashion brands after a year is tempting back international travellers, and instead we’re telling them not to shop here.”
Yes, Chinese visitors who have flown all the way to Europe might still visit London to see the sights and attend a play or two, but they will save their shopping budget for other European cities where they can claim back VAT. The popularity of the duty-free island of Hainan is testament to what a difference policies such as these make.
“The government is wrong if it thinks that these high-end shoppers will not take this into account before they fly,” says Barnes. “Assuming sales will stay the same is very naive: these visitors are clued up and where to go and why – anyone who has seen the VAT queue at Heathrow knows that.”
According to the Office for Budget Responsibility (OBR) – a UK body that provides independent economic advice to British authorities – the government has got its sums wrong as a result of this miscalculation. The Treasury believes it will make GBP500 million annually from the new policy, but according to the OBR it will deter enough visitors to lose 40 per cent of those sales – a loss of GBP1.14 billion.
Add the loss of sales to the loss of VAT from the hotels and restaurants that will not be visited and they have a deficit.
The biggest losers in all this will be Britain’s own luxury brands. It is no skin off the nose of a major global player such as French luxury conglmeate LVMH, as it will simply allocate more of its budget to Milan or Shanghai and less to London.
It is well known that visitors are more likely to shop at the heritage brands of the country they’re in, and companies such as Burberry, Mulberry, Paul Smith and Temperley London will be hurt by this. They will also lose potentially loyal customers who would have returned to China and continued buying their goods.
“As a company, we’ve faced many challenges in the past 50 years,” says British designer Paul Smith, “but I never imagined that I would find myself having to withstand pandemic-induced national lockdowns and now the abolition of VAT-free shopping.”
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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.
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