The Brexit Problem the Fashion Industry Was Not Expecting
Hello and welcome to the 33rd issue of moderated, a newsletter created to dive into insights and phenomenons of the Fashion Industry. It also has a curation and summary of the most talked about last week’s events of the industry, offering further readings for more details.
If you are new here, welcome! I hope I can somehow help you to keep up with the fast-paced Fashion Industry.
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On this week’s moderated, I analysed the potential impact that the abolishment of the VAT refund for tourists in the UK can have on Britain’s fashion industry.
But before jumping into the main article, check the last week’s recap of the Fashion Industry. Brace yourselves because the fashion industry had an intense week.
Last Week’s Recap
British Retailer Arcadia Group, Owner of Topshop, Filed for Bankruptcy
We all kind of knew it was eventually coming, but it still got us shook. Arcadia Group, the owner of Topshop, Topman, Miss Selfridge, Dorothy Perkins, Wallis, Evans, Outfit, and Burton, entered administration, UK’s compatible of bankruptcy. So far, no redundancies or store closures were announced, but the future is uncertain for Arcadia’s 13,000 employees and 444 UK stores. Deloitte was appointed to deal with the bankruptcy and is now assisting the high-street group on its options, which include buyers for some or all its brands. Most specialists believe that Topshop and Topman will probably find a buyer to buy them from administration, but the other brands don’t share the same optimism. I hope Arcadia manages to save as much as possible, once this sad scenario puts many jobs at risk. This was the largest company to collapse in the UK since the pandemic started.
Click here to read more about the fall of Arcadia Group.
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A 16% Drop In Global Retail Sales Is Expected for 2021
According to a new report by Euromonitor, global retail sales are expected to suffer a 16% decrease in 2021. However, this drop is not forecasted to be equal around the world. The report predicted that Western Europe and North America will experience sales decrease by 19% and 20% respectively. Latin America could be preparing for a deeper annual decline in sales of 22%. In contrast to the rest of the world, the Asia Pacific region is anticipating a growth of 40% between 2019 and 2024, despite the probable sales decline of 14% in 2020. From a perspective of the fashion industry, this report does not come as a surprise, once the Asia Pacific region has shown a sales performance superior to the western markets, especially since the pandemic started.
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The Fashion Industry Had Many Changes In High-Profile Positions
Let’s start with the luxury conglomerate LVMH. The group’s chief digital officer Ian Rogers is stepping down from his position. To fill the gap, LVMH decided to create a “chief omnichannel officer” role at the group level, which will be taken by Michael David, current Louis Vuitton vice president, according to BoF. The changes come amid a surge in e-commerce sales due to the pandemic, with the stores open having to rely on online support such as click-and-collect orderings and booking appointments to try products, in order to drive sales.
Continuing at LVMH, Chris de Lapuente, who is already the head of Sephora, Le Bon Marché group, and the Perfume and Cosmetics division, became the new chairman and chief executive of the luxury giant Selective Retailing Division from January 2021 on. On top of his current scope, Lapuente will now oversee brands such as DFS and 24S.
The luxury group Richemont appointed the new CEO for its multi-brand e-commerce division Yoox Net-a-Porter (YNAP), who will replace Yoox founder Federico Marchetti. The successor named by the group to start from January 4 is Geoffroy Lefebvre, Richemont’s group current digital distribution director. YNAP had a high-profile departure the same day the company announced its new CEO, which is just another mark of the difficult year the e-commerce platform had to keep up with the strong competition from players such as MatchesFashion, Farfetch, and MyTheresa.
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Investments in the Consumer Space Expected to Hit a Record High
Despite a drastic drop in retail sales, consumer products – which include the fashion industry - are still a hot category for investors. According to a report from CB Insights, deals, and financing in business focused on the consumer space are expected to hit a record high of US$18 billion by the end of the years. Due to the pandemic, investors were still being cautious with this category. However, this caution was quickly substituted by a desire to capitalize on the acute surge of online shopping that started in April and has been projected to remain.
Wearable fitness tracker WHOOP and affordable activewear label Gymshark became unicorns this year, with their valuations over US$1 billion. Indian e-commerce giant Flipkart attracted US$1 billion investment from Walmart, Qatar Investment Authority, and Tencent. The Faire platform, which connects wholesale vendors with retailers online, was valued at US$2.5 billion after receiving US$170 million in a funding round. Investors that are betting on the consumer space are mostly aiming at start-ups focused on technology that moves the fast-growing e-commerce category. As Mike Duda, founder of the venture capital firm and creative agency explained:
“I think we’ll see, in the next six to 12 months, a [surge] of new ideas and new entrepreneurs, inspired by the pandemic and the political chaos of 2020. And fashion doesn’t have to be a loser in this,”
To read more about the investment opportunities in the consumer space, I highly recommend checking this article from Business of Fashion.
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Keeping Track of Covid-19 Financial Crisis Impact
(Besides Arcadia’s bankruptcy)
$5 billion ‘American Dream’ Mall faces make or break holiday season.
Gap is closing more underperforming stores to focus on e-commerce after weak Q3.
British retailer Debenhams to enter liquidation after Christmas with a loss of 12,000 jobs and closure of 124 stores.
Rating La Mode - Sell Signifiers, Not Stuff
This week I stumbled into an article ta the Business of Fashion that really got me thinking. We always talk about sustainable solutions for the production and retailing of fashion items, be that an upcycled fabric, a lower carbon print shipping solution, or a new technology to recycle old pieces. Not that any of that is bad, it is all great, but it is still talking about producing more stuff, selling more stuff, and then figuring out how to deal with this stuff once no one wants it anymore. Well, not this article. The article titled ‘A Sustainability Solution for Fashion: Sell Signifiers, Not Stuff’ was written by Aaron Chamberland and suggests a different way that fashion brands can keep selling and making a profit without only throwing more stuff into the world. Not going to say more about it, because I really recommend this short read.
Click here if I convinced you to read it!
The Brexit Problem the Fashion Industry Was Not Expecting
Before moving to Paris, I was living in London, getting my Master’s degree at the London College of Fashion. During my one year of study there, there was one subject that would always eventually come up in class, on the news, and in every conversation with friends, colleagues, and Uber drivers. Yes, I am talking about the infamous and controversial Brexit.
The referendum to leave the EU was held in the UK in 2016 and in 2020, after a long transition and many postponements, it finally happened. But the transition phase will be officially over only on December 31 and that means the UK is currently living a countdown to its new economic and political reality. A little more than a month before the transition phase is over, the Treasury released a statement abolishing an important scheme for Britain’s retailers and everyone is – with reason – freaking out about it. This news came as a shock for the fashion industry, especially for players of the luxury market. And that is what we are discussing this week.
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What Is Brexit?
If you don’t know what Brexit is at all… first, are you living under a rock? Second, let me explain.
Since Britain joined the EU in 1975, which was then called the European Economic Community, there was always a debate if the nation wanted to be part of it. After only three years as part of it, the UK held a referendum and keeping the membership won with 67% of votes. However, the debate was not over and in 2013, the then Prime Minister David Cameron promised a new national referendum to settle the debate once and for all. The options of the referendum were vague – Remain or Leave – and Cameron was certain that Remain would easily win. As we all know, it didn’t. The referendum was held in 2016, amid a refugee crisis in Europe that generated political rage across the continent. On top of that, the Leave campaign was accused of fake news and breaking election laws. The result: 52% of the UK voted to withdraw from the economic bloc. Brexit was happening, Britain was Exiting the EU (just in case you didn’t know where the name came from).
The results were a worldwide shock. David Cameron was not only wrong about the outcome of the referendum but also about the fact that this referendum would settle the debate. It has been four intense years of postponing the UK’s withdrawal from the EU. The vagueness of the referendum, economic negotiations, and political issues made the decision be postponed and even questioned at times. This is exactly the period in which I was living there and I can guarantee you: no one, even the largest companies or the government, knew what was next and how to prepare for it. During this period, the UK went through 3 different Prime Ministers and a lot of controversies. But here we are, over four years later, Brexit finally happened.
The phase of transition is in theory set to be over on December 31, but not in practice. The terms and deals of Brexit were never fully closed and a lot is uncertain about how simple things such as exports and taxes are going to work exactly. Companies, including those from the fashion industry, are still figuring out how to deal with this still unclear new dynamic. For fashion businesses, Brexit was an unnecessary hit that, topped by a pandemic that drastically dropped sales, may change the course of the British fashion industry – and not in a good way.
But how exactly is Brexit affecting fashion businesses? I would not be able to tell you every single thing retailers and brands had to adapt due to UK’s withdrawal from the EU, because there are way too many and some that I don’t even have enough knowledge to talk about. I could talk about the most obvious ones such as import and export taxes, where distribution centres would be from now on and the rise of retail prices. However, I believe there is a lot out there about it. If you want to read about these, check this article. What I decided to analyse here is the last challenge the UK’s government laid on its companies. An issue that can result in a drop in sales that no vaccine against Covid-19 can solve. I will talk about the end of the VAT refund to tourists.
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Abolishment of the VAT Return
The latest discussion around Brexit in the fashion industry has been the tax return, and believe me they are right to be angry. Follow me. Every EU member offers a tax return to non-EU tourists that shop products in their territory. Since the UK was part of the EU, it also offered this perk to tourists. There, the VAT Retail Export Scheme refunds a large portion of the 20% value-added tax (VAT or sales tax) on purchases made by non-EU tourists and taken out of Britain. This is a great incentive for tourists to shop more when travelling around the European Union.
However, now that the UK is leaving the economic bloc, its Finance Minister Rishi Sunak announced the government will abolish the scheme once the transition period is officially over in January. Under the World Organisation Rules, Britain can’t tax EU members and non-members differently. Taking that into consideration, the UK’s Treasury came to the conclusion that it would be too expensive to refund all EU visitors. This decision was probably also influenced by the financial crisis the country is going through, the worse since World War II, due to the damaging combo of Brexit and pandemic. UK’s government sees ending the VAT return as a way to collect more taxes for the fragile British economy. But specialists disagree that will be the end result.
In a scenario where the UK does not allow this tax to be reclaimed by consumers visiting the nation, these buyers would instead purchase in other countries in Europe that offer it, once products would be literally cheaper. London would lose sales to other shopping cities like Paris, Milan, and Madrid that still offer the tax return. Specialists are calling the plan “suicidal”, and retailers such as Paul Smith and Ted Baker stated that abolishing the tax return would only encourage tourists to shop somewhere else in Europe, hurting the UK’s tourism and retailing industry.
The decision is already causing a lot of backlash from retailers to a point that Heathrow Airport is even planning legal action against the government. According to a report by the York Aviation consultancy, the end of airside discounts could cost the UK economy £2.1 billion in tourists’ income and job losses. Seeing this potential negative impact, UK’s Largest Airport Heathrow united with duty-free shopping giant Dufry and the tax refund specialist Global Blue to pursue legal action against the measure. In a statement, all parts made the following claim:
“We believe there are solutions available that can address concerns, whilst protecting the UK’s competitiveness as a shopping destination, and airport retail, in a year that will be so critical as [we recover] from the worst year in history . . . We are exploring all options available to us on this decision.”
This claim was backed by the Airports Council International and many other retailers and brands.
“Sudden decision is ill-advised given the perilous financial state of the airport industry today. UK airports will lose hundreds of millions of sales and thousands of jobs [will be] at risk,” explained the Tax Free World Association and the Duty Free World Council.
If think it was bad, it gets worse...for the UK. What is bad news for some is good news for others. Just a few days after the UK announced the abolishment of its tax return, the French government stated that from January 1 the minimum amount non-European tourists must spend to reclaim French VAT would drop from €175 to €100. This change was clearly a way to attract tourists to substitute their British shopping for some French purchases. Like every country in the world, France's tourist retail shopping drop drastically due to travelling limitations imposed by the pandemic. This disadvantage of Britain's tax refunds became the perfect opportunity for France to start its path to recovery from 2020.
According to The New York Times, high-end retailers will be the most affected with the end of the VAT return, once a large portion of their revenues come from travellers from China, the US, the Middle East, and others. This will include fashion luxury brands, especially jewellery and watches. “Because it’s a higher ticket price on those items, people are far more likely to reconsider where they spend their money,” explained Derrick Hardman, Global Blue’s managing director for the U.K. and Ireland.
One of the main concerns is related to Chinese shoppers, who are lavish but price-conscious when purchasing in travels. They will probably keep visiting the UK but will leave the shopping to be done in Paris or Milan, where they will get a better deal for their money.
UK’s Treasury highlighted that if visitors purchase the products in Britain and ship it to their home countries, they will still receive the tax return. However, there are a lot of challenges in this model. For starters, on top of the product’s price, the consumer would have to pay shipping costs, including any import taxes demanded by the tourist’s home country. For example, in Brazil, these taxes can go as high as 60% of the product’s price, making it more expensive than buying without the VAT return in the UK. Then, when shipping the product, the instant gratification of shopping is lost, as well as the opportunity to use the product during the trip.
This shipping model works even worse for luxury labels, as Julie Brown, chief financial and operating officer of Burberry Group: “There’s something about buying a luxury product and keeping it with you. People feel it’s a lot safer that way.” This model is already used by many retailers but according to them is an option rarely chosen by consumers.
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Brexit Problems Are Just Starting to Appear
Having such a large issue just dropping from the sky without much warning comes to show that the problems of Brexit are just starting to appear. Leaving an economic bloc means renegotiating every deal that was once based on the membership, not only with the countries that were part of it too but also others. If the UK took EU deals for imports from China, for instance, those will have to be renegotiated. This counts for every single aspect. Then there the internal laws and schemes, such as the VAT return, that will have to be revised. Unfortunately, this is already affecting fashion brands and retailers from the UK and with time the impact will be even stronger – at least until things settle down. I guess if I was still living in London, everyone would still be mentioning Brexit all the time, even though the process is almost “over”.
Thanks for reading this week’s moderated and next Tuesday I will be back with more.
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