Burberry store

Burberry was one of many brands to see a major boost from the weaker pound among both tourists and local shoppers after the 2016 referendum.

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PARISBrexit has turned Britain into a haven for luxury bargain-hunters, compounding the pricing conundrum facing luxury brands in an age of heightened currency volatility.

The United Kingdom has become the cheapest market worldwide for luxury goods since voters decided in a referendum on June 23 to leave the European Union, sending the British pound plunging by 10 percent to its lowest level in 31 years, a report by Exane BNP Paribas noted on Wednesday.

This is welcome news for Burberry plc, whose revenues have been sapped by a poor performance in Asia, but will come as a cold shower to continental rivals like LVMH Moët Hennessy Louis Vuitton, which made 10 percent of its revenues in France in the first half of the year and risks losing tourists to London.

Exane announced in June it was joining forces with Deloitte to use its BenchMarque global luxury pricing tool to publish quarterly updates on cross-border price gaps and price trends. At the time, China was around 20 percent more expensive than the global average, while Italy was 17 percent cheaper.

In May, the U.K. was around 14 percent cheaper than the global average. “Our data shows that the U.K. is today at least 20 percent cheaper,” said Luca Solca, managing director of the global luxury group at Exane BNP Paribas. The United States sits in the middle between Europe and Asia.

“We don’t expect luxury goods players to hike prices in the U.K. for a few months, until the Brexit dust starts to settle. Tourist inflows and spend are highly correlated to FX. Continental markets like France suffer the double whammy of higher relative prices and new terrorist attacks. The likely consequence is a tourist spend boom in the U.K.,” the Exane report said.

Soft luxury goods brands have on average 4.5 percent of their stores in the U.K., with Burberry and Hugo Boss the most exposed among large cap firms, the broker said. With major flagships in London, Burberry – which reports in pounds – should experience a strong tailwind in the second half, it predicted.

Hugo Boss has 6 percent of its store base in the U.K., according to Exane, but any organic growth benefit could be offset by translating the revenues into euros. Other companies over-indexed in Britain include Mulberry, Jimmy Choo, Church’s and Stella McCartney, it said.

The implications vary depending on how companies manage price differentials. Before the sterling collapse, Mulberry, for instance, had a global average selling price of $812, only slightly higher than the $797 average in the U.K. For Burberry, the differential was 46 percent, the Deloitte data found.

Carol Fairweather, chief financial officer of Burberry, said last month that the recent depreciation of sterling is expected to boost its retail wholesale profit by 90 million pounds, or $119 million, in its 2017 financial year, versus an earlier forecast of 50 million pounds, or $66 million, in May.

“We have a global pricing strategy. We didn’t tend to make immediate reactions when an FX rate moves. Clearly, there has been a significant shift. And we will wait until that settles in and then make any price adjustments that may be appropriate, always looking to see also what our peers are doing,” Fairweather said in a conference call after the brand reported results for its fiscal first quarter.

LVMH is also taking a wait-and-see approach. Jean-Jacques Guiony, its cfo, said last week that the group’s cash-cow brand Louis Vuitton had not implemented any price increases in major countries during the first half and was still mulling an adjustment in the U.K. after the Brexit vote.

“The global environment is quite challenging. It’s particularly true in terms of currencies, where the traditional answer of adjusting prices to fluctuations in currencies is not valid anymore. It doesn’t mean that we have no pricing power, it means that we should take a long-term view on reflecting currency fluctuations in prices,” Guiony said after LVMH reported a 2.2 percent rise in second-quarter sales.

It remains to be seen how many Chinese tourists will be moved by the currency benefits of traveling to Britain. Rogerio Fujimori, luxury analyst at RBC Capital Markets, predicts China’s recent efforts to encourage domestic consumption – including higher taxes on overseas purchases – will depress Chinese buying overseas.

“In the long term, a more level playing field from a taxation standpoint should support domestic consumption in Mainland China. And the likely gray market squeeze should somewhat alleviate the pressure on luxury brands to harmonize regional price gaps,” he said in a report on luxury goods also published on Wednesday.

“Against this backdrop, the best-performing luxury brands in Q2 like Hermès or Gucci are clearly winning the local consumer,” Fujimori concluded.