British prime minister Theresa May’s visit to India and trade talks with her Indian counterpart takes me back to the midsummer’s day in 2016. We woke up in Britain to find that the Leave campaign, colloquially called Brexit, had won the referendum. The pound plummeted and for a while the stock markets were in chaos. Markets stabilised but the pound continued a downward trend, beating historic lows.
Britain’s luxury brands are known for their heritage, design, craftsmanship, and quirky individuality which together shape a luxury narrative matched by none other. London has been a choice destination for the experience of buying both British and non-British luxury brands.
The weakened pound was good news for tourists visiting the UK. The month of Ramazan, which brings wealthy visitors from the Middle East to London, followed. Flight bookings from Europe and Asia reportedly rose after Brexit. Premium and luxury hotels benefited, too. All this made London the hottest, cheapest luxury shopping destination this summer. Much shopping took place as is evident from UBS’s analysis of tax refund receipts. Tax refunds, sought on big ticket goods, rose by 36% in August.
So far, the Brexit vote looks good for luxury shoppers from outside the UK including those from India. The picture for luxury brands, however, is more complicated.
Iconic British brand Burberry has seen a 30% rise in sales in its British stores in the last six months. Facing headwinds otherwise, Burberry has also cut prices in its Hong Kong stores, taking advantage of the weaker pound as the brand notably incurs 40% of its costs in Britain.
It is a mixed picture for luxury watches, often presented as investment pieces, hence seen as considered purchases not impulse buys affected by currency fluctuations. Many coveted watch brands are imported into the UK and the weaker pound has made the imported goods more expensive. Prices for brands such as Cartier and Mont Blanc, owned by the Richemont Group, have been increased while Hublot, Omega and Tag Heuer, owned by LVMH and Swatch Group are holding on. The latter category of brands is taking the impact on its margins. For now.
But British luxury watchmaker Bremont is quids in despite 30% of its costs being imports of Swiss watch parts, now more expensive. A weaker pound has helped it deal with low sales in Asia and come out stronger.
London being a hub for creative entrepreneurs, I spoke with proprietors of many upcoming luxury brands. My conversations reveal a mixed picture. Many small luxury brands source parts, finished products or packaging abroad while serving mainly local British customers. After the referendum, the bill of materials is decidedly more expensive by 10-30% depending on where they import from. As small businesses and nascent brands, however, they cannot always pass on the costs as price increases to the customer. Some, however, are slowly edging up prices of some products while keeping others steady. This does not bode well for smaller, upcoming brands. Tighter margins will hamper their growth, even the ability to survive.
It is also important to remember that despite the outcome of the referendum, Britain is still operating in the single European market with free movement of people. This makes it easier for people from the European Union to shop in the UK. Any change in the ease of travel will affect Europeans travelling to and shopping in the UK just based on a weaker pound.
Luxury marques already under pressure, such as British car maker Aston Martin, expect a short-term lift from the weakened pound but that may only last till Britain quits the single market. The automotive supply chain is global. It will continue to affect the brand’s margins and profitability, especially if Britain loses single market privileges and is not able to strike similarly attractive deals with the many countries where Aston Martin sells.
Some luxury brands are already thinking long term. For instance, Bremont is collaborating with the Advanced Manufacturing Research Centre in Sheffield to reduce its reliance on imported parts. Aston Martin too has made recent investments in product development and a new plant in the UK although its reliance on imported parts will continue for a while. But with any clarity absent about the nature of the deals Britain may be able to make, the return on these investments remains uncertain.
The pound recorded a brief recovery on 3 November after the high court ruled that the government will need parliament’s approval to trigger Article 50 which is essential for the official start of negotiations with the European Union. It has temporarily buoyed the Remain voters. The uncertainty is compounded by the government’s appeal of the decision in the Supreme Court.
Luxury brands, like many others, will just have to sit tight and watch. After all, what is a couple of years in the grand schema of luxury brands that have lasted or intend to last for centuries?
Shefaly Yogendra co-founded a fine jewellery business and is now a luxury consultant in London.
Fine Print runs viewpoints on luxury and design by different writers.