Already hurting from the absence of big-spending Chinese tourists, British luxury boutiques and retailers are poised to see another hit to the bottom line in 2021, when the United Kingdom formally ends its VAT Retail Export Scheme. The program, which refunds a significant portion of the 20% value-added tax on purchases made in the country by foreign travelers, was widely used by Chinese tourist-shoppers making big-ticket purchases over the past decade.
According to the New York Times, the cancellation of VAT refunds came as a major shock to U.K. luxury brands and retailers that have come to depend on spending by foreign travelers as a critical part of their annual sales. “I don’t think anybody expected the announcement that [the British government was] abolishing tax-free shopping,” said Helen Brocklebank, chief executive of Walpole, the British luxury industry association.
Although they make up only 5% of non-E.U. travelers in the United Kingdom, Chinese tourists tip the scales in terms of high-end spending, accounting for nearly a third of VAT refunds. For luxury retailers, the concern for 2021 and beyond is that, even if Chinese tourists are able to resume international travel, they may eschew luxury shopping in London for Paris, Madrid, or somewhere else (including, as we’ve seen this year, at home in China).
While some British brands and department stores are likely to say that the loss of the refund program won’t hurt their business — believing that tourists will still seek out the “experience” of in-in person shopping from quintessentially British brands — this move will be a massive post-holiday “gift” for brands and retailers elsewhere in the European Union.
While some Chinese tourists will buy from British luxury brands that have a small or nonexistent retail presence outside of their home country, department stores such as Harrods and Selfridges, outlet malls like Bicester Village, and multi-brand retailers like Watches of Switzerland will almost certainly see a painful drop in sales to Chinese tourists once tourism to Britain gets back on its feet. And why wouldn’t this be the case?
For many Chinese travelers, it is typical to take a multi-country trip that includes the United Kingdom, France, and perhaps Spain or Italy, since they are already taking a long-haul westward journey. And given the option of purchasing a Rolex with a VAT refund in an E.U. country versus or paying a roughly 20% premium to buy the same watch in London, the outcome is a no-brainer.
Although the ongoing Covid-19 pandemic must be brought under control before travel recovery can become a focus, European tourism officials have a golden opportunity to use content-commerce strategies to entice Chinese tourists to visit (and spend) more in the years ahead. This is particularly true for hard luxury retailers and brand that can create more content specifically for platforms such as Bilibili that center on the shopping experience with the added benefit of continued VAT refunds.
With a growing number of luxury watch brands joining Tmall’s Luxury Pavilion, it is feasible that these brands could team up with tourism authorities to collaboratively promote pilgrimages to famed watchmaking regions such as Glashütte or Switzerland’s Jura Arc across various platforms including Taobao Live, or even consider content-commerce avenues such as custom reality shows or discreetly sponsored films and television programs. The sky is the limit — and, ultimately, it is Europe that holds the cards rather than post-Brexit Britain.