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Evening Standard
Evening Standard
Business
Joanna Hodgson

Challenges: Why a host of luxury retailers are feeling the chill during this Winter

The post-Christmas retail reporting season is well underway, and the City has observed two clear trends. There are grocers cheering solid festive growth with sales warmed by huge appetite for pigs in blankets, turkeys and party food, and then there are some luxury brands that have given updates- during the same month that Britain has experienced freezing temperatures- about signs of cooling demand.

Since the start of the year various London-listed high end retailers have highlighted challenges that have impacted the industry.

From Mulberry warning that the lack of VAT-free shopping is hitting businesses, to Burberry pointing to a backdrop of slowing luxury demand and Watches of Switzerland saying it experienced a volatile trading performance in the run-up to and beyond Christmas.

So what are the main headwinds companies are grappling with and are conditions likely to remain challenging in 2024?

Looking at why some results may look weaker than in prior years, retail commentators are keen to point out that last year's comparatives are unusually high because of a bounce in spending during and after the pandemic.

Jacqui Baker, partner and head of retail at accountancy firm RSM UK explains: "The luxury market thrived during Covid as people stored up cash which allowed them to splash out on luxury items which they might not have been able to in the past." But it’s unlikely a number of these customers will make this a repeat purchase, says Baker.

She adds: "As we’ve emerged from the pandemic, consumers now have the choice between spending on goods or experiences, and in many cases, people are prioritising experiences."

Meanwhile a number of factors have prompted many shoppers, including wealthy ones, to tighten their belts. Richard Lim, who leads consultancy Retail Economics says: "The sharp rise in interest rates is capturing a large number of middle and higher income households who are feeling the pinch from rising mortgage costs. They are having to cut back spending and parts of the luxury market are feeling the effects."

Having more pressure on disposable income could prompt high end fashion fans to look for the best deals, and that may mean travelling to cities such as Paris and Milan rather than London.

Scores of UK luxury companies, from Savile Row suit makers, to hotel operators and clothing firms, have long voiced concerns that the move to axe VAT-free shopping in 2021 will be detrimental to business here.

The perk had made UK purchases 20% cheaper for international visitors, but the government pointed out the scheme could cost British taxpayers around £2 billion a year and mainly benefits the capital.

Helen Brocklebank leads trade body Walpole (Walpole)

Helen Brocklebank, chief executive of luxury goods trade body Walpole says: "The loss of tax-free shopping is an on-going drag on the UK luxury sector, placing us at a disadvantage compared to other European capitals and the government should be doing everything possible to stimulate growth."

Bernstein analyst Luca Solca agrees the 'tourist tax' puts some brands at a disadvantage. He says: "The UK is not doing itself a favour by limiting tax free spend: This is moving luxury spend to other destinations on the continent."

Victoria Scholar, head of investment at Interactive Investor thinks weakness, in terms of earnings and revenue for the sector as a whole this year, could persist.

She comments: "There’s a lot of uncertainty in terms of the outlook for the Chinese consumer which is pivotal for the sector. Meanwhile the weak global economic backdrop with instability in terms of the Middle East conflict, higher interest rates and elevated inflation are dampening demand among US and European luxury spenders too."

But there are some positive signs, adds Scholar, who highlights that Cartier owner Richemont last week reported in a third quarter update that in Asia Pacific, sales growth of 13% was fuelled by a 25% sales increase in mainland China, Hong Kong and Macau combined.

The sharp rise in interest rates is capturing a large number of middle and higher income households who are feeling the pinch from rising mortgage costs

Richard Lim, CEO of Retail Economics

Meanwhile in the capital brands have plenty coming up in the calendar that could boost sales and attract new fans, including a number of tourists being in town to celebrate Chinese New Year and London Fashion Week.

It is also worth noting that even if trading is tougher right now, luxury businesses have long term confidence in London, with several firms signing for new West End shops in 2023, and property agents seeing good levels of tenants having requirements for future space.

Operators in the industry consider there will certainly be warmer times ahead.

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