LONDON — The only way is up — at least when it comes to prices in post-referendum Britain.
Sterling has fallen 2.2 percent against the dollar over the past week, 9.2 percent in the past month and more than 16 percent over the past year. It has also slumped against the euro.
Once Europe’s almighty currency, sterling’s resizing will mean price hikes at retailers ranging from discount supermarket chains to Bond Street boutiques. Tourists will still benefit from favorable exchange rates — at least in the short-term — as will foreign companies importing products from the U.K., according to analysts from UBS in London.
Helen Brand, luxury-goods analyst, said during an informal press briefing Tuesday that U.K. prices are currently trading on a 3 percent discount to those in France, although her team expects to see increases coming through.
Brand said Louis Vuitton took the initiative in May — pre-referendum — increasing its handbag prices in the U.K. by about 4 percent, according to her research. “LV is the price leader in the market. Brands will look to them” before they increase their own prices, she said.
U.K.-centric brands such as Mulberry will have a harder time taking prices up, she added, because of their reliance on the U.K. consumer, who earns and spends in pounds.
Brand added that luxury brands have generally been quiet on the pricing front after a flurry of changes last year amid much currency volatility. “There have not been big price increases so far this year, and that is a headwind the sector is facing.”
Adam Cochrane, non-food retail analyst, said U.K. retailers will have to push through pricing increases over the next 12 months, due to the weaker pound. According to his survey of 2,000 U.K. consumers, price hikes will not come as a surprise: 20 percent plan to spend more on discount retail in the coming months.
He said discount retailers — supermarkets in particular — will be forced to increase their prices, because many of their products are sourced in euros. Adding in fuel price rises, the U.K. should expect a return to grocery inflation. U.K. apparel retailers, who source about 75 percent of their goods in dollars, are in a similar situation and will also need to raise prices.
“The exposure is greater for those low-margin retailers — there is no room to maneuver,” said Cochrane.
Analysts said that consumer price inflation, coupled with historically low interest rates — on Tuesday, Bank of England governor Mark Carney indicated that a rate cut could come later this summer — should make for an interesting scenario in the next few months. The benchmark interest rate is currently at 0.5 percent.
Amazon — and its online fashion competitors — was another big theme. Cochrane said that while the retailer dominates online shopping, it’s going to have problems with luxury.
“Luxury companies are very protective of their pricing. Amazon doesn’t want prices set by the brands, because it does not want consumers to find its products cheaper elsewhere,” he said. “It’s going to be a while before Amazon signs up with Louis Vuitton. For the luxury brands, Amazon may be a step too far.”
He added that the future will most likely see the big luxury brands setting up their own micro-sites on Amazon, resembling the model of Burberry’s on Tmall.
Although Amazon may struggle with luxury, it still has an edge in clothing and fashion: According to the UBS survey of 2,000 U.K. customers, 35 percent had bought clothes on Amazon in the past three months. Among the under-35 age group, the figure was 45 percent. “Amazon’s clothing market share is higher than any of us thought,” he said.
He added that of the 3 to 4 retail apps on any consumer’s smartphone right now, the number one is Amazon, with everyone else fighting for the remaining spots, although he said there is room for improvement at Amazon, with regard to fashion in particular.
“Amazon and Zalando are similar in that they are only good if you know what you want to buy. Asos, by comparison, is more of a partner to customers, and is much more nimble. They are better at targeting their core customer and have a much higher degree of customer loyalty.”
With regard to future trends in luxury, Brand said the Chinese will continue to buy — but at home rather than abroad — as they remain cautious about travel due to the threat of terrorist attacks.
Her research showed that two-thirds of Chinese consumers surveyed felt better about their financial outlook compared with last year. (They were coming from a low base, with the 2015 stock-market crises and the yuan devaluations denting consumer confidence.)
She believes that Mainland China will continue to outperform, although not at the rate of 26 percent that Compagnie Financiere Richemont notched in April. “We also expect to see good trends in Korea, the U.K. and Mainland China, due to tourist spending.”
Brand added that although Gucci is showing great promise — the Bond Street store’s sales are up in the triple digits year-on-year — there needs to be a greater focus on evergreen leather goods (rather than shoes and rtw), as they will be the steady sales drivers going forward.