Brexit: new opportunities for the luxury industry

On June 23, 2016, 51.9% of Britons voted in favor of the United Kingdom's exit from the European Union. This very quickly spurred a cavalcade of proclamations from the luxury goods industry, labeling this vote variously an “earthquake”, a “untold disaster”, even a “cataclysm”. A Walpole study predicted that Brexit would mean a loss of 6.8 billion pounds for British luxury goods. More than four years after the "Leave" victory, the tone has changed radically. The climate of anxiety has given way to more upbeat views and optimistic outlooks. For one thing, the expected fall in the value of the pound sterling could actually benefit the sector, as a recent study by RBC Europe Limited confirmed. Indeed, a low pound could be a reason for foreign tourists to flock to Britain, at least once the coronavirus pandemic is under control, because it would mean that for travelers, products on British store shelves would cost less than at home. This is a scenario that has already played out once before, as Jean-Daniel Pasche, president of the Federation of the Swiss Watch Industry, recalls. “In 2016, when the pound fell by 15%, Swiss watches became instantly less expensive for Asian and American tourists in particular, who account for a large share of the British watch market,” he says. “When that happened, instead of raising prices massively, the brands absorbed part of the difference in their margins. That made the United Kingdom more attractive than ever, and since then Britain has become the leading European outlet for Swiss watches and a growth driver.”

Another interesting consequence is that luxury goods companies with turnover generated mainly outside the UK will benefit from a fall in the pound, because their revenues are mainly in euros and dollars. This certainly explains the revaluation by Walpole, whose latest study estimates that the turnover of the British luxury sector will grow from around 54 billion euros in 2019 to more than 73 billion by 2024 – a 35% increase. However, this still depends on two things: one, that the European Union and the United Kingdom reach an agreement on their future trade relations and two, that the consequences of the coronavirus pandemic are not too far-reaching. As Giana Eckhardt, Professor of Marketing at the Royal Holloway University in London, points out, “The impact of Brexit on the British economy depends on the trade agreements the UK is able to negotiate. If it can negotiate a better trade agreement with the US, for example, than it did when it was a member of the EU, the economic consequences may not be negative. But that's an unknown at the moment.” And she also notes that the biggest impact on the sector is going to come not from Brexit, but from COVID-19, “because the pandemic is changing the meaning of luxury, pushing it to evolve from status symbol to symbol of authenticity and durability.”

What we don’t know is whether traditional luxury brands will be able to respond to this shift.” Stéphane Monnier, CIO of the Lombard Odier banking group, sounded a cautionary note in a recent analysis: “The UK's readiness to sign an agreement with the EU suggests that it wants to be able to focus as soon as possible on negotiating agreements with other trading partners. In reality, the end of the year deadline is closer than it appears. There is a risk that, rather than concluding a ‘deep’ trade agreement, the UK will only reach a minimal, low-level agreement in this short time.” This would have a direct impact on the economy and therefore on the export industry, especially considering that more than 80% of British luxury goods are exported – mainly to Europe, since the Continent is its largest market. 

As regards the European side, further action will follow depending on the outcome of the negotiations, which were delayed by six weeks due to the coronavirus but resumed at the end of April. Boris Johnson’s government intends to meet the deadline of December 31, 2020, but for the time being all is quiet. “We have no comment on the subject for the moment,” says Aurore Borderie, spokesperson for the LVMH group. On the Swiss side, however, it's a different story: the country has taken advantage of its position outside the European Union to take steps to avoid any legal hiatus, as Jean-Daniel Pasche reminds us. “A bilateral trade agreement was signed on February 11, 2019, and other agreements followed concerning regulations on origin, customs facilitation and security, and transport, among others. Whatever scenario the forthcoming negotiations between the United Kingdom and the EU bring about, Switzerland will rely on these basic instruments to maintain easy access to the British market. With this as the context, no particular consequences should arise with regard to market access as such, apart from logistical issues such as the transit of goods through the European Union.” But he then adds, “On the British market itself, it goes without saying that there are still possible consequences for watch sales, mainly in connection with the performance of the pound sterling, which means tourism too. From the point of view of domestic consumption, Swiss watchmaking customers should not be particularly affected, with the possible exception of those in the City.”

But as Giana Eckhardt points out, there is another reason for rejoicing: Brexit has reasserted British identity. “This can help strengthen luxury brands that position themselves around Britishness,” she says. “The best example would be Burberry. They have always positioned themselves as the British brand par excellence, and therefore an independent Britain is part of their brand identity. Other luxury brands that have similar identities are Mulberry, Aston Martin and Bentley.”