By Samantha Conti
with contributions from Robert Williams
 on December 21, 2016
Many have been taking advantage of a weaker pound — especially with regard to luxury goods, while the euro is also expected to soften.

Growing pains, or a death rattle?

The euro zone is shape-shifting and the balance of power tilting as the tide of populism crashes onto its shores, shaking currency markets, toppling governments and blowing the status quo to bits. The question remains whether the future iteration of the European Union will be more solid — or simply a shadow of its former self.

Brexit was just the first domino in a stack of falling pieces. With Britain preparing to negotiate its way out of the EU, Italy waiting for a new caretaker government under new Prime Minister Paolo Gentiloni and Germany, France and The Netherlands gearing up for elections next year — not to mention the victory of Donald Trump in the U.S. — it remains unclear how much more the populist wave will swell and what sort of impact it will have on day-to-day business. The incantation of antiglobalization and national sovereignty can’t be good for retail, fashion or luxury goods —  or can it?

All eyes for now are locked on the U.K. Businesses are still coming to terms with what Brexit will eventually mean for them with regard to currency, sourcing, pricing and demand. Although no one is under any illusion that the next years are going to be easy, few Britons are crying into their Stilton soup.

Whether or not they’re happy with the idea of leaving the EU, British fashion, luxury and retail businesses have not let Brexit — or the fear of what’s to come — stand in the way of their ambitions or momentum.

“In times of uncertainty, you carry on. People do what they have to do — and great things can happen,” said Adrian Joffe, Comme des Garçons president and chief executive officer of Dover Street Market.

Joffe, whose businesses are spread around the world, said he finds the prospect of Brexit, exchange rate volatility and the U.S. election result “concerning,” but added: “You’ve got to stand your ground and be strong.”

While U.K. economic growth is set to slow to 1.2 percent in 2017 due to a drag on business investment from increased political and economic uncertainty around Brexit, there is no sign of recession next year, according to PWC.

Businesses including IBM, Facebook and Google are investing in Britain with plans to add thousands of jobs — despite the outcome of the referendum — while smaller companies such as Yoox Net-a-porter Group and Skechers are expanding their presence in the British capital.

“Business hates uncertainty and to some degree, we’re all holding our breath. Brexit is unknowable. Britain doesn’t know what the other side is going to bring to the table,” said Lady Barbara Judge, chairman of the Institute of Directors, a U.K. business ambassador and a founding member of the U.K.-China Business Leaders Club.

“England was a trading nation before there was an EU and it has experience dealing with adversity. It’s resilient and it will overcome,” she said.

In the meantime, brands continue to open stores: Michael Kors, Polo Ralph Lauren, Coach and Stuart Weitzman are among the major American labels unveiling flagships on Regent Street this year, while smaller firms such as Giuseppe Zanotti, MCM, Philipp Plein, Moncler, Globe-Trotter and Casadei have been snapping up prime real estate in Mayfair.

Italian shoe designer Zanotti said his new store had been in the works for two years and he was going to open regardless of the Brexit vote. “London is an important crossroads, with clients from China, India, the Middle East, and we sell very well in England generally. We needed the visibility, a framework for telling our story,” he said.

A few months before the referendum, Joffe and his wife, Rei Kawakubo, took a gamble on a new location for Dover Street Market in London, moving it from its namesake street in Mayfair to a space triple the size in a neighborhood by Piccadilly Circus that’s well-placed, but not as chic. Sales are already outstripping expectations: As of early December, they were 178 percent ahead of last year, compared with the projected 140 percent. In the first six months, DSM London was already more than halfway to hitting its first-year revenue projection of 28 million pounds, or $35 million at current exchange.

Britain’s former first lady Samantha Cameron, whose husband David Cameron campaigned tirelessly for Britain to remain part of the EU, is launching a contemporary clothing line aimed at filling a niche in the market for day-to-evening dressing. Meanwhile, emerging designers such as Molly Goddard are adding e-commerce to their burgeoning brands and niche online businesses are popping up everywhere.

Selfridges is charging ahead with its 300 million pound, or $372 million, overhaul of the eastern end of the store, with the goal of creating the world’s largest accessories hall. As part of that larger investment, it has also unveiled The Body Studio and the Designer Studio.

Tourists, meanwhile, have been taking advantage of a weaker pound — especially with regard to luxury goods, where the bargains are better. According to Global Blue, tax-free spending by tourists to the U.K. in August, September and October saw an increase of 37, 18 and 41 percent year-over-year, respectively.

Global Blue said it expects 2017 to bring even more tourists into the country to take advantage of the weaker pound.

“Consumer confidence overall is reasonably stable due to low interest rates and inflation. House prices are robust and people are still feeling good,” said Diane Wehrle, marketing and insights director at Springboard, an international agency that monitors footfall and measures retailers’ performance.

“The wobble will come,” she said, when Brexit negotiations begin — and bring with them even less certainty. “And those negotiations will take a long time.”

Brexit has brought with it pricing and margin pressure, especially for designers, brands and retailers that source and manufacture abroad and sell in pounds. They’re facing higher input costs and have to decide whether to hike prices.

Some brands, such as Burberry, have already raised the price of certain items while increases of up to 10 percent are expected up and down the fashion high street come the New Year. Other companies, like Roksanda, are holding their fire and taking advantage of selling to markets such as the U.S.

Mass market firms BHS and Austin Reed, which both went bust within days of each other, underlined how important it is for retailers to remain relevant to their customers — and keep a beady eye on costs. “The fact is that with globalization, you can shop anywhere in the world, so retailers need to give customers a reason to shop in their stores,” Wehrle said.

One thing is certain: that Brexit, populism, the future of the Italian banking system and the upcoming elections in France, Germany and The Netherlands — as well as the fate of the EU and its currency — are bound together.

“The one big unknown is how Brexit is going to play out — but that is more of a European problem and the whole European project is looking a little shaky right now,” said Mark Henderson, chairman of Gieves & Hawkes and of the London Luxury Quarter, and a director of the U.K. luxury industry association Walpole.

He believes the U.K. will continue to attract investment from individuals and businesses and that luxury goods will continue to shine. “Luxury remains resilient and if anything the euro will soften over the 12 to 18 months, which will benefit the industry overall,” said Henderson.

Luca Solca, managing director at Exane BNP Paribas, argues that there’s an even bigger problem looming in the EU: austerity.

“I think European populism is not going to cause any damage as long as it doesn’t impact fundamental economic choices. A government change — and even elections — is not a big deal for Italy. Italians are accustomed to that.

“This is assuming you don’t have another [Mario] Monti clone [as prime minister] wanting to implement more austerity. Austerity means higher taxes and lower consumer spend, which kill demand. This is a potential risk in France if a [François] Fillon pro-austerity agenda is implemented,” he said, pointing to the Republican nominee in the French presidential elections due in the spring.

Raj Badani, senior economist at IHS Global Insight, said he’s not sitting on a knife edge regarding France, but there is the possibility of an explosive outcome.

“When there is potential for an explosive outcome, economic agents start sitting on their spending plans. In the next 12 months, consumers may be more price-conscious, buying clothes and footwear at the bottom end,” he said.

For brands, there remains a silver lining, and the key to finding it is accepting the world’s new normal: uncertainty.

Solca believes that while most major markets are mature in terms of luxury, there is great potential beyond troublesome Europe and the U.S.

“Southeast Asian nationalities stand first in line to bring the next wave in luxury consumption,” Solca said in a recent report, adding their combined worth could represent 50 percent of Chinese demand.

He added that a “very large and largely untapped” nationality are the Indians, who account for only about 0.5 percent of global demand. “Should import barriers fall, this potential could be unleashed,” he predicted.