London’s calling, but no one’s answering.
While a stronger pound compared to the wild lows witnessed in the months following the shock Brexit decision will come as a sigh of relief to Britain’s embattled government, it won’t be seen as such a boon to U.K.-based retailers.
Back in 2016, 17.4 million Britons voting to leave the European Union sent markets nosediving, the pound tumbling and fueled fears about the future of the U.K. economy.
However, there was a surprise winner in those turbulent days — luxury British retailers, many of which saw a bounce in sales as droves of tourists descended on the U.K. to pick up a bargain thanks to the weak pound.
Pricy handbags, clothes and watches became more affordable as the pound slid against the dollar to as low as $1.21 in January 2017, a whole 20 percent lower than before the crucial Brexit vote.
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It wasn’t just Americans benefiting, though, as some airports were exchanging one pound for less than a euro last summer, while weak sterling also attracted a lot of Chinese tourists, who sometimes shun the U.K. as it’s not part of the Schengen Agreement (they can travel to several countries on one visa, but the U.K. requires an additional one).
As tourists — predominantly from Europe, China and North America — flooded in, it translated into higher sales, with Burberry alone enjoying a 40 percent rise in U.K. sales in the final quarter of 2016.
However, since then the pound has risen, trading at $1.42 against the dollar at the beginning of April. While it has come down a bit since then, it has remained pretty stable recently given this week’s political turmoil, which started with Brexit Minister David Davies resigning from Theresa May’s government.
He was followed by Foreign Secretary Boris Johnson, who was dismayed with her soft Brexit plan. Nevertheless, May powered ahead and released her Brexit blueprint plan Thursday, which boosted the pound to $1.3244.
“Given all that’s going on, I’d say it’s remarkably stable,” said David Lamb, head of dealing at Fexco Corporate Payments, adding that his company doesn’t put out predictions. “In the long term we’ll at least try to hold onto the gain we’ve seen from early 2017.”
Inevitably, the stronger pound has impacted some U.K. luxury retailers, which also have to battle with Britons tightening their purse strings thanks to limited wage rises and stretched household finances.
Luxury British handbag maker Mulberry initially benefited after the shock Brexit announcement as tourists took advantage of the weak pound, but its chief executive officer Thierry Andretta last month admitted that the U.K. “remained challenging.” The brand’s U.K. sales fell 9 percent in the first quarter on the back of lower footfall and fewer tourists.
Burberry is now facing the same problem. The company, famed for its trench coats, said Wednesday that U.K. and Europe sales fell by “a low single-digit percentage rate” in the 13 weeks to June 30, partly due to a stronger pound leading to weaker demand from tourists.
Caroline Brown, an audit manager at Mazars USA LLP, said: “It’s obvious that the exchange rate normalizing after Brexit has had a massive impact on tourists going to the U.K. and going where it’s cheaper.”
She added that the Brexit blueprint points toward a soft Brexit for products and free trade, but for services it’s going to be more of a hard Brexit. This, she believes, could mean a stable currency for now, which would likely continue to weigh on luxury retailers.
The industry will no doubt be watching the pound like hawks, but as the path to Brexit remains rocky and the U.S.-led global trade war continues to escalate, it’s almost impossible to make predictions.
For now, U.K.-based brands that have a strong global presence will be hoping that this can be offset by currency movements elsewhere, as well as other factors.
Case in point is Burberry, which reported a midsingle-digit percentage rise in Asia-Pacific sales as Chinese tourists chased favorable exchange rates in the likes of South Korea and Japan.