PARIS/SHANGHAI/LONDON (BLOOMBERG) - By voting to leave the European Union, Britons have delivered a potential windfall to tourists eager to snatch up Burberry trenchcoats, Harrods Stilton and Liberty scarves on the cheap.
The outcome of Thursday's referendum sent the British currency plunging, making the country's goods and services cheaper for foreign buyers. Consumers reacted immediately: Searches by Chinese for UK holidays "skyrocketed" on Ctrip.com International's travel booking app, the company said, while Chinese news site Phoenix implored visitors to London to "Buy, Buy, Buy."
A slumping pound is a much-needed shot in the arm for UK luxury companies as the Chinese are the biggest buyers of high- end goods and make most of their purchases overseas. They made 270,000 trips to the UK last year, up 46 per cent, according to tourism website VisitBritain. British Airways owner IAG said on Tuesday (June 28) that the weaker pound will boost tourist flows to the UK
"I wouldn't be surprised to see Chinese and Middle Eastern tourists flocking to the UK as their purchasing value has increased," said Edouard Meylan, chief executive officer of Swiss watchmaker H. Moser & Cie. "People are ready to travel to get a 5 to 10 to 20 per cent discount."
More visitors to the UK would be a boon for British companies such as Burberry Group and Mulberry Group that have struggled amid slowing luxury demand and terror attacks in Europe. The UK is the world's sixth-largest market for luxury spending, at 15.5 billion euros (S$23.2 billion). Britain's gain could come at the expense of retailers in Japan, casinos in Macau and jewelers in Hong Kong.
Those tourists include Zihao Xie, a 24-year-old from China's Shandong province, who was shopping for his family at London's Selfridges department store Monday. He took advantage of the pound's decline to splurge on luxury items, buying his mother a Burberry trenchcoat and his sister a Coach handbag.
Any short-term fall in the pound will affect the number of visitors to London, said Harrods managing director Michael Ward. But those benefits could take time to materialize as Chinese tourists sort out visas and book hotels, according to Ctrip.com. Some luxury companies may also raise UK prices if the pound's weakness persists. And investors are bearish on what the EU referendum means for the broader sector, as reflected in sliding stock prices for France's LVMH and Gucci owner Kering.
"You only purchase luxury products for one reason: if you're feeling good about yourself," HSBC analysts said in a note. The EU referendum "will likely put another layer of doubt on a consumer who already has accumulated many."
Still, a 10 per cent drop in sterling could add as much as £90 million to Burberry's pretax earnings, according to MainFirst Bank analyst John Guy. Burberry gets about 10 per cent of its revenue in the UK, and 60 per cent of that comes from tourists, estimates Citigroup analyst Thomas Chauvet.
A surge in tourism to London could hurt Tokyo's fashionable Ginza shopping district. Chinese visitors to Japan increased 31 per cent last month compared with a year earlier, though visits have slowed recently as the yen has strengthened.
Switching travel to the UK and Europe from Japan could save Chinese shoppers as much as 40 per cent with the currencies' shift against the yuan, according to Bloomberg Intelligence analyst Michelle Ma. She expects to see changes to the travel pattern of mainland Chinese "straightaway" as it is the middle of their summer holiday season.
"If there's no certainty that the yen's advance will end, it would stop people from coming to Japan and we'd lose them to somewhere else," said Yoko Yamazaki, general manager of duty- free shops operator Laox Co.'s corporate planning department. As the yen rises, the stronger exchange rate acts "like body punches in boxing," Mr Yamazaki said, prompting Chinese shoppers to buy fewer expensive items like red coral ornaments worth more than 10 million yen (S$132,000).
It's also bad news for Macau casinos, as the yuan depreciates against the Hong Kong dollar, which is pegged to the greenback. That could prompt fewer Chinese to visit the gambling oasis, according to JP Morgan analyst DS Kim. In Hong Kong, retailers such as Chow Tai Fook Jewellery Group and Sa Sa International Holdings are grappling with the yuan's weakness.
For now, many of those Chinese will join Zihao Xie in shopping for friends and family on London's Oxford Street. "I can now buy luxury brands for them so they have got some nice presents," he said.