THRIVING AFTER BREXIT

The impact of leaving the EU on the UK’s luxury goods sector

and policy recommendations

March 2017

2

About Walpole

Walpole’s mission is to promote, protect and develop

the UK luxury industry, which is worth £32.2 billion to

the UK economy.

Walpole’s unique membership of more than 170 companies

spans an incredibly diverse range of industries from

haute-couture, jewellery and watches to leather goods,

fashion, accessories, fine fragrances, interiors, hotels,

luxury publishing, marine, automotive and aviation.

Walpole members represent some of the UK’s most

desirable brands, such as Alexander McQueen, Burberry,

Claridge’s, Mulberry, Harrods, Net-A-Porter and Rolls-

Royce Motor Cars, as well as smaller, niche brands such

as Boodles, Bremont and Soane Britain. Our member

companies design, manufacture, market and distribute

luxury goods throughout Europe and beyond, and are

united by a business model based on creativity, heritage

and craftsmanship, continuous innovation, a relentless

focus on quality, highly skilled workers and a strong

export orientation.

Walpole also partners with more than 20 world-famous

British cultural institutions, including the Royal Opera

House, BAFTA, the Victoria & Albert Museum and the

Creative Industries Federation. Through our mentorship

programmes, Brands of Tomorrow, CRAFTED and our

Programme in Luxury Management at London Business

School, we support the next generation of entrepreneurs,

emerging talent, craftsmen and business leaders, thereby

securing the continued growth of this important sector.

Walpole is supported by corporate partners including

McKinsey & Co and Charles Russell Speechleys and is fully

self-funded through membership fees and sponsorship.

Walpole actively supports the British government,

providing advice on the UK luxury sector and works hand

in hand with the GREAT Campaign to promote business

and the reputation of the UK internationally. Walpole also

collaborates with our European partners as the European

Cultural and Creative Industries Alliance (ECCIA), which

represents 400 luxury and high-end brands across Europe.

3

Contents

Preface

Executive summary

The UK luxury goods sector—high quality, high potential

Value to the UK economy

Key pillars of the luxury goods sector’s business model

Priorities and recommendations—five areas for action

International trade and investment

Trade with the EU

Talent and skills

Legislative framework to protect the sector

Tourism

Timeframe for implementation and conclusion

Acknowledgements

1

1.1

1.2

2

2.1

2.2

2.3

2.4

2.5

3

4

4

5

10

10

11

14

14

17

19

23

25

29

30

9

Figure 1

Policy

recommendations

15

Figure 2

Priority

international

export markets

20

Figure 3

Positions held

by EU citizens by

business function

27

Figure 4

Top 10

international

shoppers

4

Preface

Following the result of the EU referendum, Walpole

identified areas of concern for the UK luxury goods sector,

and organised an initial briefing workshop on the 27th

July 2016 with speakers from the Financial Times, BDO,

Charles Russell Speechleys (our corporate partner law

firm), Visit Britain and the UK China Visa Alliance to brief

members and to offer a view of the political, business

and economic outlook.

Following the summer break, Walpole organised a series of

member roundtables to talk in more detail once members

had been able to review their internal priorities. In addition,

we have held a number of individual member consultations

and take advice from partners including Charles Russell

Speechleys and McKinsey & Company.

We asked members to complete a detailed survey on

the implications and opportunities of leaving the EU.

The results from this survey, along with the conclusions

from the workshops and meetings, provide the empirical

evidence and business insights that are detailed in this

document and that have informed our recommendations

to policy makers.

The UK luxury sector contributes £32.2 billion to the UK economy and employs 113,000 across the UK

5

Executive Summary

The UK luxury goods sector has outpaced the UK economy

over the last decade, with a marked outperformance

through the recession. It continues to grow despite the

global economic uncertainty.

In September 2015, Walpole undertook the first economic

assessment of the sector, together with Frontier

Economic, an independent consultancy. The results clearly

demonstrated the value of the sector to the UK economy.

• The luxury goods sector contributes £32.2 billion to

the UK economy in sales, accounting for 2.2% of GDP.

• It employs 113,000 people across the UK and contributes

£5.2 billion to the Exchequer through Corporation Tax,

Income Tax, National Insurance contributions.

• Exports are valued at £25 billion, which is 78% of the

sector’s total production value.

• The British luxury sector will continue to grow rapidly

in the medium term: before the Brexit vote, the value of

sales for 2019 was estimated to reach more than £50

billion and the sector was set to employ 158,000 people.

As impressive as these figures are, they understate the full

economic contribution of the sector because they do not

capture three significant spillover effects. First, the impact

on the British travel and tourism industries; second, the

impact on the country’s skills, manufacturing & knowledge

capabilities; and third, the diplomatic value of the luxury

goods industries in promoting British values overseas and

in attracting international trade and investment.

In light of its significant and far-reaching contribution to

the UK economy, the impact of the Brexit negotiations on

the sector will clearly have wider ramifications.

There have already been a number of short-term

benefits as a result of the vote. The UK has seen an influx

of international visitors, many visiting the UK to take

advantage of the fall in sterling and to buy luxury brands.

Sales performance over the summer and autumn has

been strong with businesses reporting 30-40% increases

in year-on-year trading.

Despite these short-term benefits, half of Walpole

members are already experiencing some type of negative

impact as a result of the vote. Small and medium-size

enterprises, which form the backbone of the luxury goods

sector, are at particular risk from the uncertainty, currency

fluctuations, supply chain vulnerability, legislative changes

and trade barriers as a result of Brexit. Though of course

they also have enormous growth potential, especially in

overseas markets.

Exports are valued at £25 billion which is 78% of the sector’s total production value

6

We ask policy makers to ensure that this unique and

growing industry is recognised, promoted and protected

to safeguard its continued growth and support of the

British economy.

In collaboration with our members and the broader luxury

goods community, Walpole has identified five specific

business priorities for the UK luxury sector during the

Brexit negotiations, and accompanying recommendations

for policy makers. Four of these priorities – international

trade and investment, trade with the EU, talent and skills,

and the business model – face clear medium- and long-

term challenges from Brexit, although we feel sure that

these can be mitigated and in some cases turned into

opportunities through careful policymaking. The fifth

priority - tourism - is undoubtedly an area in which existing

policies can be strengthened to help support the sector

as it goes through the next few years of uncertainty.

1. International trade & investment

Policy makers must recognise the export value of the

luxury good sector and work to secure long-term trade

agreements with key international partners, including

Europe, the US, China and the Middle East. Furthermore,

given the importance of foreign direct investment to the

sector, it is essential that the UK remains an attractive

location for investment by pursing a new strategic

partnership with the EU and remaining a secure, stable,

open and supportive place for business.

The UK luxury market is very heavily export-oriented with

78% of production value destined for overseas markets –

around £25 billion. Furthermore, since the sector benefits

significantly from foreign direct investment, international

trade and investment opportunities underpin the growth

potential of the UK luxury industry.

The UK must remain open for business and continue to send

a clear message about its support for international trade.

2. Trade with the EU

Policy makers must ensure there is minimal disruption

to the free movement of goods, services and trade with

Europe, and seek to ensure that the UK is able to negotiate

a new strategic partnership which includes an ambitious

and comprehensive Free Trade Agreement and new

customs arrangement to provide the most frictionless

trade possible.

They should also actively consider the impact on SMEs

and micro businesses, and ensure they have access to

government grants to help them realise their export

potential, while also ensuring they face a minimal

administrative burden upon leaving the single market.

Luxury brand supply chains are fully integrated across the

EU. Europe is an important export market for British luxury

brands. Furthermore, many European luxury brands use

British manufacturing, and the mix of European luxury

brands in London and cities such as Manchester and

Edinburgh attracts international visitors to the UK. The

ability to source materials, to manufacture, to import

and export, and to do business throughout the EU with

minimal disruption is of vital importance to the sector’s

continued growth and development.

Additional tariffs and operational or administrative costs

will be a heavy burden for businesses that already operate

on tight margins, reinvest heavily in their workforce and

have tightly managed production schedules

Policy makers must recognise the export value of the luxury sector and work to secure long -term trade agreements with key international partners

7

3. Talent and skills

Policy makers must protect the right to residence and

employment of EU citizens already in the UK and ensure

luxury businesses are still able to employ EU citizens.

In light of proposed changes to the future free movement

of people, we also ask policy makers to work with business

and educational institutions to develop the skills that would

furnish the sector with a stream of high-calibre British

employees. This extends to manufacturing capabilities; we

urge policy makers to invest in business grants to support

UK manufacturing and redevelop skills and capabilities that

have been lost in the UK. This also extends to the hospitality

sector and ensuring a stream of well-trained employees to

work in the high-end travel and leisure businesses.

Nine out of 10 Walpole members employ EU nationals

in their businesses, and for some brands, EU citizens

account for 30-40% of their workforce. In the case of

hospitality businesses, such as the UK’s many five-star

hotels, this can be between 50%-60% of the workforce.

The ability to access and employ EU citizens across the full

spectrum of roles, from senior management and highly-

skilled craftsman, to front-of-house representatives and

the workforce in distribution centre, is key to the daily

operation of the sector.

4. Legislative framework to protect the business model

Policy makers must ensure that the selective distribution

model is maintained and protected in UK legislation. It is

also vital to maintain the strength of the core intellectual

property regime, and provide assurances to rights holders

that the protection of IP and a coherent relationship with

the EU will be a key priority. In the medium term we ask

policy makers to ensure that IP rights are protected in

both EU and UK legislation and that we continue to work

collaboratively across Europe to fight counterfeiting.

The luxury goods sector has two core characteristics: its

selective distribution model (limiting sales to authorised

dealers that can provide the quality of distribution to meet

customer expectations), and the high value of intellectual

property to its revenues. Protection of selective distribution

is recognised in the EU legislative framework and is

enshrined until 2020. We are pleased to hear that EU

law will be adopted by the UK, and trust that in this area

at least any subsequent amendments strengthen rather

than weaken the protection.

5. Tourism

Policy makers should make the 10-year visa for Chinese

visitors cheaper thereby encouraging multiple visits; and

they should make it easier for the parents of children

studying in the UK to obtain visas. We also urge policy

makers to look at the visa regimes for wealthy visitors

from key markets such as India, Vietnam and the Middle

East, as well as China.

With the Heathrow expansion now agreed, policy makers

must minimise further costly delays to the development,

which would have a long-term negative impact.

Finally, we recommend that policymakers consider

extending Sunday trading hours, perhaps through

‘international shopping zones’ in key areas in London.

International visitors are important luxury goods

customers. Walpole members make 34% of their sales

to tourists in aggregate, but for some companies, as

Policy makers must protect the right to residence and employment of EU citizens already in the UK and ensure luxury businesses are still able to employ EU citizens

8

much as 80% of revenues are attributable to international

visitors. Shopping tourism is important to the UK luxury

market and has substantial benefits to the broader travel

and tourism industries. Promoting the UK to international

visitors is key to continued sector growth, especially during

the uncertainty around the outcome of Brexit negotiations.

This requires simplifying the visa application process,

delivering airport expansion as quickly as possible, and

creating international shopping zones.

Conclusions and Recommendations

These policy recommendations do not all need to be

implemented immediately. Figure 1 shows which require

immediate attention as negotiations get started, and which

can happen over the medium or longer term.

Finally, the speculation and uncertainty that have been

the hallmark of recent months have compounded the

impact of Brexit on businesses and their ability to

prepare for change. Employee confidence in particular

has suffered, particularly among those EU citizens who

make up such an important share of the UK luxury goods

sector; investment opportunities have been delayed; and

unnecessary workstreams have been setup to prepare

for all possible scenarios.

We welcome the government’s commitment to clarity

during the negotiation process and hope it maintains

this clarity over the coming months, specifically with

regard to the rights of EU citizens working in the UK.

Most importantly we urge government to engage in a

regular dialogue with business in order to achieve a fuller

understanding of all parties’ needs and aspirations, and to

ensure that any transitional arrangements are as smooth

as possible.

9

Short termImmediate

action

Talent and skillsPolicy makers must protect the right to residence and employment of EU citizens

already in the UK and ensure luxury businesses are still able to employ EU citizens.

Medium term Before the UK exits the EU

International trade & investment Policy makers must recognise the export value of the luxury good sector and work

to secure long-term trade agreements with key international partners, including Europe, the US, China and the Middle East. Furthermore, given the importance of foreign direct investment to the sector, it is essential that the UK remains an attractive location for investment by negotiating a new strategic

partnership with the EU and remaining a secure, stable, open and supportive place for business.

Trade with the EU Policy makes must ensure that there is minimal disruption to the movement of goods and services

between the UK and the EU, and seek to ensure the best possible terms of participation with the single market. They should also actively consider the impact on SMEs and micro businesses, and ensure they have access to government grants to help them realise their export potential, while also making sure

they face a minimal administrative burden upon leaving the single market.

Legislative framework to protect the business modelPolicy makers must ensure the selective distribution model is maintained and protected in UK

legislation. It is also vital to maintain the strength of the core intellectual property regime and provide assurances to rights holders that the protection of IP and a coherent relationship with the EU will be a key priority. In the medium term we ask policy makers to ensure that IP rights are protected in both EU and UK legislation and that we continue to work collaboratively across Europe to fight counterfeiting.

Tourism Policy makers should also make the 10-year visa for Chinese visitors cheaper thereby encouraging

multiple visits; they should make it easier for the parents of children studying in the UK to obtain visas. We also urge policy makers to look at the visa regimes for wealthy visitors from key markets such as

India, Vietnam and the Middle East, as well as China.

Long term After exit

Legislative framework to protect the business model In the longer term, policymakers should consider refinements to the system, with a view to adding flexibility to allow brand-owners to protect their investments. One example would be to liberalise

competition law restrictions which limit the ability of brand-owners to control where and how their luxury goods are sold. Safeguarding the aura of luxury brands is an important element in protecting

their value and allowing the UK to maintain its reputation for quality.

Talent and skillsIn light of proposed changes to the future free movement of people, we also ask policy makers to work

with business and educational institutions to develop the skills that would furnish the sector with a stream of high-calibre British employees. This extends to manufacturing capabilities; we urge policy

makers to invest in business grants to support UK manufacturing and redevelop skills and capabilities that have been lost in the UK. This also extends to the hospitality sector, ensuring a stream of well-

trained employees to work in the high-end travel and leisure businesses.

Tourism With the Heathrow expansion now agreed, policy makers must minimise further costly delays

to the development, which would have a long-term negative impact. Finally, we recommend that policymakers consider extending Sunday trading hours, perhaps through ‘international shopping

zones’ in key areas in London.

Trade with the rest of the WorldIn the event that the UK will accede to the WTO and leave the EU customs union, it will set its own tariffs on the import of goods from outside the EU (through a schedule of tariffs). It is important to

set tariffs at a level that is liberal and opens the UK to business with the rest of the world, as well as allowing UK businesses to take advantage of global opportunities and remain competitive. We also

consider that adopting a progressive approach to levels of import tariffs will encourage other nations to reduce barriers to trade with the UK (possibly by means of bilateral Free Trade Agreements).

FIGURE 1: POLICY RECOMMENDATIONS

10

Section 1. The UK luxury goods sector – high quality, high potential

Defined by brands such as Burberry, Alexander McQueen,

Claridge’s and Rolls-Royce Motor Cars, the UK luxury

market represents the top-tier of British brands across

multiple sectors, from fashion and jewellery to automotive

and marine, and hospitality to interiors.

1.1. Value to the UK economy

The UK luxury goods sector has grown faster than the UK

economy over the past decade, markedly outperformed

the UK economy through the recession, and continues to

grow despite global economic uncertainty.

In September 2015, Walpole launched the first economic

assessment study of the sector, in partnership with Frontier

Economic, an independent consultancy. The results clearly

demonstrate the value of the sector to the overall UK economy.

• The UK industry contributes £32.2 billion to the UK

economy in sales, accounting for 2.2% of GDP.

• It employs 113,000 people across the UK.

• It contributes £5.2 billion to the Exchequer through

Corporation Tax, Income Tax and National Insurance

contributions.

• Its exports are valued at £25 billion, which is equivalent

to 78% of total production value in the sector.

• The British luxury sector should continue to grow

rapidly in the medium term, according to the pre-

referendum report. It forecast the value of sales for

2019 to reach just over £50 billion with the industry

set to employ 158,000 people.

Ed Vaizey, who was then Minister for Culture, Media and

Sport, endorsed the report, citing the luxury industries

as “a business card for Great Britain”.

As impressive as these figures are, they understate the

full economic contribution of the sector because they do

not capture the significant spill over effects to three areas:

first, the British travel and tourism industries; second, the

skills, manufacturing and knowledge capabilities of the

UK as a whole; and third, the diplomatic value of the luxury

goods industries in promoting British values overseas and

in attracting international trade and investment.

Travel and Tourism: aside from direct benefit that accrues

from international visitors buying luxury goods, the UK’s

Defined by brands such as Burberry, Alexander McQueen, Claridge’s and Rolls-Royce Motor Cars, the UK luxury market represents the top-tier of British brands

11

luxury brands are a major factor in people’s choice of

destination; international visitors choose to come to

London and the UK because of our luxury brands and

experiences, and, of course, once here they spend money

in many other sectors as well.

Recent research carried out by TNS Sofres suggests this

view is backed up by public opinion. Three-quarters of

British people see the high-end industries as a contributor

to the UK’s economic development by making the UK a

more attractive destination for tourists.

Skills and Knowledge: the high-end industries employ

more than 113,000 people (a conservative estimate) and

create both employment opportunities, as well as training

and sustainable careers for people across the UK.

These opportunities are not confined to London. From

medium- and large-scale manufacturing to individual

artisans and craftspeople working in regional clusters, the

luxury supply chain has a significant footprint across the

country. Businesses such as Church’s, Mulberry, Ettinger,

Halcyon Days, Bentley, Burberry, Rolls-Royce Motor

Cars and Savior Beds all have regional manufacturing

centres that stretch from Glasgow to Northamptonshire

to South Wales.

Due to the necessity for highly skilled craftsmen, the

industries provide opportunities for young people through

training and apprenticeship programmes but also

provide sustainable long-term careers, often employing

craftsmen and women who work into their 70s. In addition

to creating employment, the industries also contribute

to the transfer of knowledge and skills in other sectors

through regional clusters and these skills are also passed

on to the next generation.

Diplomacy and exports: the UK luxury goods sector

actively draws on its heritage, provenance, long-

standing traditions of craftsmanship, creativity, style,

high standards and exceptional quality to export to global

markets. Importantly, luxury brands play a key “soft

power” or diplomatic role, spreading desirable British

values and qualities, and supporting our reputation as an

international trade partner as well as attracting investors

and investment into the UK.

1.2. Key pillars of the luxury goods sector’s

business model

To make such a significant contribution to the UK economy,

the luxury goods sector relies on an unusual but successful

business model that has evolved over hundreds of years. It

is one based on creativity, craftsmanship and heritage, and

is recognised for continuous innovation, a relentless focus

on quality, highly skilled employment and strong exports.

The business model is supported by five pillars: aura;

creativity and craftsmanship; intellectual property and

innovation; selective distribution and global orientation.

Aura: the aura of luxury relates to the quality of the

product, combined with the heritage and provenance

and the craftsmanship involved in creating it. It also

reflects the associated personal customer experience

and desire created in the eyes of the consumer. Aura is a

key competitive advantage compared to other industries

and has been recognised by the European Court of Justice.

Creativity and Craftsmanship: to be “luxury” means to

maintain the highest levels of creativity, craftsmanship

and quality. This is dependent on both the development

and nurturing of creative talent and on craftsmanship

in the highly-skilled workforce across the supply chain.

Luxury brands invest heavily in their creative talent; this

is evident in both the end products and in their marketing,

communications, digital and physical retail environments,

as well as their collaborations with architects, artists,

educational and cultural institutions. The creativity of

designers such as Sarah Burton (Alexander McQueen)

12

and Ian Callum (JLR) is held in the highest regard globally

and reinforces the UK’s position as a centre for creativity.

Creativity is interwoven with craft skills, and luxury

brands also make significant investments in highly-

skilled individuals. Far from being stagnant, these skills

and their proponents constantly innovate to create new

production methods, work with new raw materials,

and harness new design technologies. Critically, they

also train the next generation of craftspeople. By

supporting craftsmanship, British luxury brands have

both safeguarded and reignited the UK’s manufacturing

and skills base, providing employment and training as

well as sustainable careers.

This unique combination of creativity and craftsmanship

make luxury brands one of the most successful examples

of commercial creativity: brands and businesses that

consistently deliver strong financial growth.

Luxury brands also rely on an ecosystem of smaller

businesses, from whom they source materials and skills;

indeed they will often invest in their supply chain to secure

specific products. For example, luxury interiors brand

Soane Britain bought the last rattan-making company

in the UK, and Halcyon Days bought Caverswall China.

These smaller businesses have enormous potential for

growth, however they are also more vulnerable to risks,

currency fluctuations, policy changes and additional

business administration. Safeguarding their future is a

prerequisite for a vibrant luxury goods sector.

Intellectual property and innovation: to support this

level of quality, creativity and craftsmanship, luxury

brands make long-term investments in research, product

development, innovation, skills and brand identity.

Protecting both the innovations and the brand identity

is central to the sustained success of the sector. As

such, the protection of intellectual property rights is

essential. A strong framework of intellectual property

rights (both on and offline) also increases legal certainty

for companies.

Selective distribution: luxury products and services

encapsulate more than the physical characteristics of

the product or the environment in which they are sold; they

create desire and a sense of fascination. Maintaining the

aura of luxury is a key driver of consumer behaviour and

differentiates luxury products from mass-market sales.

Brands invents heavily in flagship stores in key markets

and cities; in concessions within department stores; in their

own online stores; and in their digital presence with pure

players. This way they can continue to provide exceptional

customer experiences. Selective distribution is key to the

success of the luxury business model and maintaining the

quality of the distribution and retail of products is essential

to live up to and exceed customer expectations.

Global orientation: luxury brands draw on their heritage,

provenance, creativity, craftsmanship and exceptional

standards of quality to export to global markets. While

direct export is an obvious mechanism, a substantial

proportion of sales in these markets occurs through travel

and tourism, and luxury brands and hotels invest significant

marketing budgets in reaching international customers.

“British luxury brands are a business card for Britain”

13

The UK industry contributes £32.2 billion to the UK economy in sales, accounting for 2.2% of GDP

It employs 113,000 people across the UK

It contributes £5.2 billion to the Exchequer through Corporation Tax, Income Tax and National Insurance contributions

14

Section 2: Priorities & recommendations – five areas for action

The Brexit negotiations are of vital importance to the UK

luxury industry. The sector has enormous growth potential,

but to realise that outside the EU will be challenging.

Naturally there are opportunities as well as risks, and the

industry will seek to adapt accordingly. However, there are

certain business priorities that we believe are especially

important and that policy makers should consider during

the negotiations over Brexit.

In collaboration with our members and the broader luxury

community, Walpole has identified five priorities for the UK

luxury goods sector. Four of these priorities – international

trade and investment, trade with the EU, talent and skills,

and the business model – face clear medium- and long-

term challenges from Brexit, although we feel sure that

these can be mitigated and, in some cases, turned into

opportunities through careful policymaking. The fifth

priority – tourism – is an area in which existing policies

can be strengthened to help support the sector as it goes

through the next few years of uncertainty.

2.1. International trade and investment

The luxury industry is a key contributor to British exports,

represents a significant international expansion opportunity

and benefits from foreign direct investment. The impact of

Brexit could be substantial, with some short-term benefits,

and longer-term challenges. We have developed a set of

recommendations for supporting this priority.

Contribution to exports: The UK luxury goods sector

has achieved strong growth in established and emerging

markets, notably the Americas, East and South East

Asia, Europe, the Middle East and parts of Western and

Southern Africa. Exports are worth around £25 billion,

which accounts for 78% of production in value terms.

Automotive is the most successful export sector; year-

on-year growth has been around 12% including cars, and

4.5% if cars are excluded. Very few other sectors are able

to maintain this level of export and annual export growth.

International expansion opportunity: The luxury sector

already makes a significant contribution to British exports

but there is potential for growth. As outlined in the joint

Walpole/McKinsey report, The Great British Luxury

Paradox (March 2016), the British luxury industry has

far fewer large-scale luxury brands with sales in excess

of £100 million than France or Italy. The good news is

that most British luxury brands are SMEs and as such

have significant space for growth. Achieving scale though

will undoubtedly require international development

and expansion. Today, many British luxury brands are

underexposed internationally, which suggests that there

is an opportunity to grow exports and business in key

international markets.

According to the Walpole & McKinsey study, the following

markets are important for growth both today and in the

future – see Figure 2.

There is a clear message from the luxury sector that

developing a positive global trading environment would

15

be important even if Britain was to remain in the EU. With

the prospect of Brexit, it becomes critical.

Foreign direct investment: The UK luxury industry is a

significant investment opportunity and already benefits

directly from international investment from both the

EU and globally. There are numerous examples among

Walpole’s own members of companies that are recognised

as British heritage brands but are owned by companies

and individual investors from overseas. The three main

luxury conglomerates – Richemont, Kering and LVMH

– are all European. Walpole member brands that are

owned by or have investments from these groups include

Alexander McQueen (Kering), dunhill (Richemont), Purdey

(Richemont), Thomas Pink (LVMH) and Glenmorangie

(LVMH).

Many other successful Walpole members have benefited

from FDI, including Harrods (Qatar); Burberry (US); Jo

Malone London (US), Church’s (Italy), DAKS (Japan) and

Gieves & Hawkes (China).

• The benefits of international investment expand beyond

The UK luxury industry is a key contributor to British exports, represents a significant international expansion opportunity and benefits from foreign direct investments

FIGURE 2: PRIORITY INTERNATIONAL EXPORT MARKETS

Top future international markets

% respondents who selected option as 1 of top 3

international markets by revenue. March 2016.

US

A

75

%

EU

RO

PE

54%

CH

INA

50

%

MID

DL

E E

AS

T 4

6%

OT

HE

R A

SIA

2 25

%

IND

IA 4

%

RU

SS

IA 4

%

AU

ST

RA

LIA

4%

JAP

AN

7%

16

the ability to put more money into skills, domestic and

omnichannel distribution and a healthier balance sheet.

They include access to new foreign markets, helped

both by the necessary investment and the contacts; new

infrastructure in foreign cities both for production and

distribution; and they make companies more attractive

to experienced leaders and managers.

Multinationals have historically been keen to invest

in British businesses and projects. Studies show that

investors value factors such as the quality of life in

Britain, the stable and predictable political climate, good

transport and technology infrastructures and competitive

labour markets. Other desirable qualities include labour

legislation, the overall trade policy environment, corporate

taxation rates, labour and real estate costs and availability.

However, investors cite access to the European single

market as of key importance to the UK’s attractiveness.

Depending on the outcome of the negotiations and the new

trade arrangements with the EU, investors’ perception

of the UK may change which could have an impact on

future FDI.

2.1.1. Implications of Brexit

We have identified two factors of FDI in the UK luxury goods

sector that we believe will be affected by the Brexit vote.

• Timing of investment – the uncertainly caused by

Brexit has already caused some investors to delay

their investment plans or put them on hold. However,

other investors are continuing with business as usual.

There has been an immediate increase in private equity

investment due the devaluation of sterling. Although this

does ease some of the immediate impact, it cannot be

considered a long-term growth strategy as it is linked

to currency fluctuations. It is unclear to what extent

FDI might increase if the UK is no longer tied to the EU.

• Attractiveness based on single market access – the

single market has made the UK an attractive export

platform for investors, as they can avoid potentially

high costs when exporting to the rest of the EU both

from direct tariffs and from the simplicity it offers

companies managing a complex supply chain across

multiple borders. Proposed changes in access to that

market could affect investment decisions and foreign

investment in UK luxury brands in the longer term.

• Impact on the financial services sector – employees

in the financial services are key customers for luxury

brands. The uncertainly caused by Brexit and the

potential implications on the City could also therefore

have a wider impact on the luxury brands.

2.1.2. Recommendations

• Ensure the UK remains open for business and continues to

make clear messages about its support for international

trade and trade partners. Policy makers must start

work to secure long-term trade agreements with key

overseas markets, such as China, the US and the Middle

East, while negotiating the new framework with the EU.

• The UK must remain an attractive location for investment,

and the new arrangements with the EU will be an

important factor in securing that.

• Policy makers should ensure the UK continues to support

international investment and nurtures our reputation as

a secure, stable, open and supportive place for business.

Policy makers need to ensure that the UK remains open for business and continues to make clear messages about support for international trade and trade partners

17

Foreign investors have a choice in where to make their

next European flagship investment; helping them choose

the UK is as important across the luxury retail sector

as it is in other key industries, such as mass-market

automotive.

• The government must continue to recognise the export

value of our creative and luxury industries and continue

to support international promotional activities.

• Walpole and its members look forward to working with

the FCO, British Missions overseas and other departments

to maximise the opportunity to project our competitive

strengths in the luxury sector. For example, the completion

of the Bond Street public realm renewal project, and the

opening of the Elizabeth Line, form a major opportunity

at the end of 2018 to celebrate London globally as the

world’s leading luxury shopping destination.

2.2. Trade with the EU

UK luxury brands design, manufacture and trade extensively

across Europe, with key markets including France,

Germany, Italy and Spain. The trade relationships can be

spilt into three key areas: manufacturing and importing,

export, and the UK as a luxury goods destination. It goes

without saying that the outcome of Brexit negotiations

will be of huge importance to the sector’s ability to do

business with the EU, and we have developed a set of

recommendations accordingly.

Manufacturing and importing: the luxury brand supply

chain stretches across Europe as brands seek out the

highest-quality materials and levels of craftsmanship.

Materials are either imported into the UK or into

manufacturing centres across Europe. For example,

while we have a strong tradition of shoe and leather

accessory making here in the UK, the leather itself is

often shipped from Europe to factories in Northampton

and the Midlands.

In some cases, Europe’s strength is such that particular

skills have disappeared in the UK. For example, Italy

boasts the best women’s footwear manufacturers and silk

scarf producers; and Grasse in France is acknowledged

as the home of perfume, despite the raw ingredients

coming from all over the world. Similarly, some European

luxury brands choose to manufacture here in the UK to

take advantage of our skills. For example, cashmere

clothing and accessories in Scotland, or high-end paper

for packaging in Cumbria. It is easy to see how the luxury

brand supply chain is completely integrated across Europe.

Export: European countries are key export markets for UK

luxury brands. Walpole member brands are represented

in France, Germany, Spain, Italy and beyond. Not only are

these stores important for raising brand awareness and

spend, but they are also vitally important for reaching

visitors from emerging markets. For example, some brands’

Paris stores cater to both French customers and Chinese

customers who travel to Europe under Schengen visas.

According to our survey, a third of Walpole members

manufacture in Europe, and a third of those have all

their manufacturing activities take place in EU states

outside the UK. More than half of Walpole members

have retail operations in other member states; 36%

operate ecommerce and 27% operate warehousing and

management offices in other European countries. All these

members are exposed to changes to the free movement

of goods and services that Brexit could entail.

The UK as a global luxury destination: European luxury

brands are traded extensively throughout the UK. London

The UK must remain an attractive location for investment

18

remains the natural capital for luxury, but cities such

as Leeds, Manchester, Birmingham and Edinburgh all

offer a range of British and European luxury brands and

luxury retail experiences. The mix and concentration

of British and European luxury brands makes the UK,

and in particular London, an important destination for

international visitors and residents.

2.2.1. Implications of Brexit

Luxury brands and businesses in the UK are supported

by a multi-level ecosystem that extends across Europe;

the impacts of Brexit are already visible in manufacturing

and manufacturing costs, tariff, the administrative burden,

and supply-chain vulnerability.

• Manufacturing. The integrated supply chain and the

devaluation of sterling means that British luxury brands

that manufacture elsewhere in Europe are already

experiencing an increase in the real costs of materials

sourced in Europe. In the longer term, these potentially

prohibitive costs could lead to a reshoring of manufacturing.

We have seen a number of luxury brands invest in their

own manufacturing and UK supply chain; however, due

to the loss of certain skills over time and the reduction in

manufacturing capabilities in the UK, for many this would

present a significant investment challenge.

• Tariffs. If the UK is unable to reach a free trade

agreement with Europe then luxury goods companies

would be hit by tariffs. In the worst-case scenario,

under which there would be reversion to WTO tariffs,

these could be in the region of 11% for fashion and

4% for leather goods, to take two relevant examples.

These additional costs would either be absorbed by the

businesses or passed on to customers. For SMEs with

very tight margins, this could be very difficult. Walpole

members with extensive manufacturing operations in

Europe are now considering moving their warehousing

away from the UK to either other EU states or Dubai to

minimise the impact of additional tariffs if the UK is to

leave the single market. There is a potential upside to

increased tariffs, which is that it would make European

luxury goods more expensive for UK consumers, perhaps

boosting consumption of domestic goods, but this will

really benefit only those companies who source and

manufacture entirely within the UK.

• Administrative burden. Additional customs regulations

and checks such as rules-of-origin marking would be an

extra administrative burden for businesses on leaving

the single market. Proving the precise share of materials

from each market and location of manufacture would

require additional resources and increase the cost and

time of production. Time lost in customs check could also

have a negative impact on business. Again, this is less an

issue for larger business but would be very challenging

for small companies that already run on tight margins

and manufacturing schedules.

• To take an example in the beauty and cosmetics sector:

there is a requirement to have a named responsible

person located within the EU or EEA appear on all

packaging. For UK brands distributing to the rest of the

EU this tends to be an office in the UK. Upon leaving the

single market, this office would no longer be acceptable

and the company would have to set up an arrangement

with an EU/EEA based company to act as the responsible

Luxury brands and businesses in the UK are supported by a multi-level ecosystem that extends across Europe and would be affected by increased costs, tariffs and administrative burdens

19

person for its products or acquire an office in an EU/EEA

country. UK companies will need time to anticipate such

changes by reorganising their business and ensuring

that their intellectual property and confidentiality are

protected. In addition, cosmetics already placed on

the EU market and compliant with the rules could be

affected by Brexit. Companies will need time not only to

set up a “responsible person”, but also to relabel their

products and resubmit the relevant notifications. All

this is time-consuming and costly.

• Supply-chain vulnerability. Numerous industries

manufacture across Europe but unique to the luxury

business model is a supply chain based on small artisan

craft makers and businesses. These businesses already

run on tight margins and resources with little capacity

for increases in costs or additional administration

requirements as highlighted above. (During the

recession, a number of members secured their supply

chain by buying the businesses that they depended on

for particular materials and expertise).

2.2.2. Recommendations

• Policy makers must minimise disruption to the UK’s

free trade with the rest of Europe in order to avoid

subjecting the luxury goods sector to onerous and

potentially crippling tariffs, high administrative costs

and potentially far-reaching operational changes to their

businesses. In addition, leaving the single market could

see the end of European luxury brands using British

manufacturing capacity and any withdrawal of European

luxury brands from major British retail centres could

affect the UK’s attractiveness to international visitors.

• Policy makers should also actively consider the impact

on SMEs and micro businesses, and ensure they have

access to government grants to help them realise their

export potential, while also making sure they face a

minimal administrative burden as they seek to do

business outside the single market.

• Policy makers should also invest in business grants to

support UK manufacturing in order to help restore the

skills and manufacturing capabilities that have been

lost over time.

2.3 Talent and Skills

Luxury brands and businesses in the UK rely heavily

on nationals from other European Union countries

throughout the workforce and at every level within the

business. When polled, 86% of Walpole members said

they employed non-UK European nationals in their

businesses, with some brands saying that 30-40% of their

workforce comprised such EU citizens; in the hospitality

sector this can be up to 50-60% of the workforce. The

major issues facing UK luxury brands is a lack of suitable

British applicants for roles, the breadth of roles that

EU citizens already hold within British companies, and

access to arts and creative education.

Lack of applicants: it is clear from our discussions with

members that while businesses try to employ British

people there are often no or few applications for the

positions, or the skills required are lacking.

For example, retailers such as Harrods have to increase their

distribution centre workforce in the run up to Christmas,

yet in 2015, despite advertising extensively to the local

Luxury brands and businesses in the UK rely heavily on nationals from other European Union countries throughout the workforce - for some businesses 30-40% of their employees are EU citizens

20

community, not one British citizen applied for the roles

available. British bed-maker, Savoir Beds manufactures

exclusively in the UK but is frustrated as it is unable to

find willing apprentices from the UK for its training and

apprenticeship programmes, even though these provide

long-term development, training and careers.

Two-thirds of members believe their firms would find it

hard to recruit staff, were the UK to no longer accept the

free movement of labour. This is due to both a lack of skilled

staff, and a lack of British applicants. The vast majority

(83%) of Walpole members want the UK government to

allow the free movement of skilled labour.

Breadth of EU citizen involvement: European citizens are

employed across the full spectrum of roles at UK luxury

brands as Figure 3 makes clear.

Their knowledge, experience and expertise is critical to

the long-term growth and performance of the sector.

Member companies have cited a reliance on staff from

Italy, France and eastern European EU countries in their

businesses – particularly in the creative, marketing,

product, manufacturing, distribution teams for retail

brands, and in the front of house and housekeeping teams

for hotels and restaurants.

Indeed, on the point of creativity, the unique cultural

diversity of the UK and in particular creative hubs like

London or Glasgow (and the arts schools) are dependent

on a mix of influences and experiences of the international

citizens who learn from and inspire creativity in a virtuous

circle, enhancing the UK’s creative leadership globally.

Of course, European luxury brands also employ British

nationals across their businesses, especially in creative

leadership and design. This supports the UK’s position

as the natural home of creative visionaries and leaders.

There are many examples, but to give just one: Stella

McCartney was the creative director at French women’s

wear brand Celine (owned by LVMH) and she was

succeeded by Phoebe Philo, who is held responsible for

making Celine one of the most desirable luxury women’s

fashion brands globally.

Two thirds of members believe their firms will find it hard to recruit staff if the UK no longer accepts the free movement of EU nationals due to both a lack of appropriately skilled staff and a lack of British applicants

FIGURE 3: POSITIONS HELD BY EU CITIZENS BY BUSINESS FUNCTION, %

SE

NIO

R M

AN

AG

EM

EN

T

23

%

MID

DL

E M

AN

AG

EM

EN

T

22

%

MA

NU

FA

CT

UR

ING

/CR

AF

TS

MA

NS

HIP

2

0%

WA

RE

HO

US

ING

/DIS

TR

IBU

TIO

N

24%

DE

SIG

N/P

RO

DU

CT

12

%

CL

IEN

T S

AL

ES

OR

RE

TAIL

21%

21

Access and funding for education and training: to ensure

the sustained success of the British luxury industry,

it is essential to invest in the training and education

of the next generation of craftsmen, leaders and the

broader skilled workforce. Looking only at the creative

and design functions within the sector there is a strong

link with the creative and arts education institutions in

the UK. The majority of our leading British designers

and design teams have all been educated at Central St

Martins, London College of Fashion and schools such

as Goldsmiths or Cordwainers.

In addition to the education and development of the lead

creative directors, the importance of local colleges cannot

be overestimated. These are the institutions that train and

develop the talented craftsmen and women who work

across the UK for brands such as Burberry, Mulberry

and Church’s, and the staff, both front of house and

housekeeping, at hotels such as Chewton Glen, Claridge’s

and Gleneagles.

Investing in creating a skilled workforce is of utmost

importance for the sector, especially if more manufacturing

is to return to the UK. EU Initiatives such as the Youth

Employment Initiative enable young people to access

training and develop the skills to become part of this

workforce. These initiatives do not just benefit the

UK luxury goods sector, they also bring real value to

local communities, providing regional employment and

sustainable careers.

There is no doubt that Britain produces produce some

fantastically skilled and creative people. However, many

of the institutions that train these creative leaders receive

substantial EU funding:

• The Skills Funding Agency distributes European Social

Fund funding, with 107 providers receiving more than

£305 million in 2014/15

• Apprenticeships, which are the lifeblood of many luxury

brands and a way for valuable, time-honoured skills

to be passed on, are also supported by the EU. The

European Alliance for Apprenticeships launched in

July 2013 and brings together governments with key

stakeholders to strengthen the quality, supply and image

of apprenticeships across Europe. Organisations from

all over Europe, including the UK, have made pledges

to support the work of the alliance

• UK fashion institutions including the British Fashion

Council, the Centre for Fashion Enterprise and the

University of Arts London receive millions of Euros

in European Union funding. Beneficiaries of EU funds

include the Centre for Fashion Enterprise and the

British Fashion Council, which received £743,000 in

EU funding from July 2011 to June 2013 for its London

Show Rooms project. UK fashion businesses are also

eligible to apply for EU funds such as Horizon 2020,

which has made €3 billion available for small and

medium-sized enterprises from 2014 through 2020,

or the EU’s programme for the Competitiveness of

Enterprises and Small and Medium-sized Enterprises

(COSME), which has made €116 million available in

loans to UK SMEs over the next two years

2.3.1. Implications of Brexit

Luxury brands throughout the UK rely on European nationals

and the free movement of people and associated skills. The

impact of Brexit is already visible, and as the member survey

makes clear, the sector is very exposed to any changes in

The vast majority (83%) of Walpole members want the UK government to allow the free movement of skilled labour

22

the free movement of labour. Uncertainty, the struggle to

hire skilled labour, the impact on Britain’s creative culture

and the loss of EU funding are all serious implications.

• Uncertainty in the workforce. This is not unique to the

luxury industry, but EU nationals employed in the UK

by luxury brands are expressing concerns about their

rights to residence and to work, as well as more broadly

about the extent to which they feel “welcome”. Employers

are working hard to reassure their teams and welcome

recent government signals that the rights of existing EU

workers will be a negotiation priority

• Recruitment. European candidates already in the

recruitment process have been expressing concerns

and a hesitancy to commit to UK-based roles due to the

uncertainty. This is a barrier to day-to-day business but

also hampers longer-term growth where businesses

are relying on these key appointments to move into the

next cycle of growth

• Furthermore, there is a real threat to the pipeline of

suitably skilled workers if the UK no longer accepts the

free movement of skilled labour. For all the big name

designers we can boast, there is still a palpable lack of

skills and talent in the UK. More than a quarter of Walpole

members said that they would not be able to fill all of

their sales and retails roles with British talent, and 24%

said they would be unable to fill all of their craftsmanship

and manufacturing roles with British talent

• Impact on creative culture. Luxury brands draw

inspiration from a wide range of sources and cultures

and it is of vital importance to retain a diverse cultural

mix of people who understand British and European

luxury brands. The revival of Gucci has been largely

attributed to its new creative director Alessandro

Michele. Interestingly Alessandro has drawn on the

UK, our culture, heritage, architecture, and creative

power in his collections – he showed Gucci’s most

recent collection in Westminster Abbey and his new

collection is inspired by Chatswoth House; which will

now host a three-year fashion exhibition, supported by

Gucci. If Brexit makes the UK less open or welcoming to

different cultures and nationalities in terms of workers

and students, it could jeopardise this rich cultural mix

• Loss of funding. The biggest threat is the potential loss of

EU funding and partnerships for all aspects of education

and training that support the British luxury industry. There

is no guarantee that the UK would still have access to

any of these EU-funded projects after we leave the EU.

The UK government would need to plug these funding

gaps and create new alliances and initiatives in order to

provide sustainability to the sector, ensuring the British

luxury goods industry can continue to realise its potential

• Switzerland, a non-EU member, previously had equal

access to education projects in the EU but after it voted

against free movement of workers in 2014, this access

was revoked. This meant Swiss universities were blocked

from European research projects and Swiss students

were denied access to the Erasmus exchange programme.

•

Leaving the EU could also have a negative effect on

academic enrolment, particularly if EU citizens are

reclassified as international students. EU nationals living

and working in the UK can enrol on further education

courses and apprenticeships on the same basis as UK

citizens. If that arrangement changed these students

would potentially have to pay higher fees. British creative

More than a quarter of Walpole members said that they would not be able to fill all of their sales and retail roles with British talent

23

educational institutions have typically attracted large

numbers of talented EU students who often stay on and

work in the luxury goods sector. It is estimated that EU

citizens studying at UK universities generate £37 billion

for the UK economy as a whole.

2.3.2. Recommendations

• Policy makers must seek to secure the ability of luxury

goods companies to retain and employ EU citizens in the

UK, across the full spectrum of roles including skilled

craftsmen, designers, customer representatives and

senior board members. Furthermore, since European

luxury brands rely on British citizens in leading creative

roles, it would be mutually beneficial for UK citizens to

remain free to work across Europe, learning new skills

that they could bring back to the UK

• Policy makers must protect the rights to residence

and employment of EU citizens already in the UK and

vice-versa. This extends to a visible recognition of the

important role EU citizens play in the UK economy. We

recognise the need to not reveal the UK’s negotiating

hand in Brexit talks with the EU and note the Commons’

recent rejection of a proposed amendment to the Brexit

Bill to offer residence to EU citizens already living here.

However, we would encourage the UK at the earliest

opportunity to prevent a “brain-drain” of talented EU

workers by providing the reassurance that many of them

seek that they will be allowed to remain here after Brexit.

• We urge policy makers to work with business and

educational institutions to develop the appropriate skills,

to encourage school and college leavers to train in craft

and hospitality professions, to support business with

apprenticeship programmes, and to address the issue of

skills shortages and the lack of a suitably trained talent

pool to support the UK luxury goods sector

• We recommend that policy makers understand the

economic, as well as the subtle but important creative

and cultural benefits of international students from

across the EU and the world studying in London and

the subsequent long-term benefits to the UK

2.4. Legislative framework to protect the

business model

The luxury goods sector has two core characteristics: its

selective distribution model (limiting sales to authorised

dealers only), and the high value of intellectual property

to its revenues. Without these, the business becomes

unsustainable, with the associated knock-on effects on

employment, GDP, and erosion of the reputation for quality

that Britain is so proud of.

Selective distribution: luxury products and services

encapsulate more than the physical characteristics of

the product or of the environment in which they are sold.

They create desire and a sense of fascination – the “aura

of luxury”. Maintaining this requires significant investment

in flagship stores, in concessions in department stores,

online and in marketing and communications. Customers

want exceptional and consistent experiences that meet

their expectations of the brand.

Depending on the particular territories in which they trade,

brands may hold multiple distribution agreements. They

often fully own their own retail channels, have distribution

partners and possibly franchise agreements for both

physical and digital retail. All these arrangements are

tightly managed and closely monitored to ensure that the

To address the skills gap we urge policy makers to work with business and educational institutions to develop the appropriate skills needed by UK businesses

24

level of customer experience, care and after-sales care

is appropriate and consistent.

Bluntly, selective distribution is key to the success of

the luxury good sector’s entire business model and

maintaining control of product distribution is essential.

It is so important that it is currently enshrined in EU

legislation until 2020. Nevertheless, the luxury industry

faces challenges from other businesses that want the

commercial benefits of distributing luxury products, but

are unable to provide the quality of experience that a

customer would expect when purchasing those goods.

Intellectual property: to support the level of quality,

creativity and craftsmanship, luxury brands make long-term

investments in research, product development, innovation,

unique skills and methods, and brand identity. Protecting

the innovation, reputation and the identity of the brands is

central to the development and success of the businesses.

The protection of IP rights is key to the success of this

unusual business model. A strong framework that protects

IP rights both safeguards brands and increases legal

certainty for companies, both on and offline, all of which

helps secure sustainable growth.

2.4.1. Implications of Brexit

The implications of Brexit for competition law and

selective distribution remain unclear and will depend on

the model adopted for the UK’s future relationship with

the EU. Whatever the final agreement, it seems unlikely

that anything will change immediately with regard to IP

protection, as the overarching provisions of the Paris

Convention and TRIPS agreement will continue to apply.

However, in terms of selective distribution:

• We could see a growing divergence between the UK and

EU competition regimes and parallel investigations by

the UK and EU competition authorities

In terms of IP protection, luxury brands are reviewing

a number of issues that could affect their business,

depending on the outcome of the negotiations.

• Enforcement in the EU of UK judgments. There is

uncertainty as to whether UK judgments will continue

to be automatically enforceable in the EU

• Trademarks. EU trade marks (which provide a single

trade mark registration covering all 28 member states)

will not automatically cover the UK after Brexit, exposing

luxury brand owners to threats to their IP

• Models for protecting EU marks and luxury brands in

the UK are being discussed with the Minister for IP,

including automatic re-registration of EU trade marks

in the UK, or separating the UK from existing EU marks

through a conversion process. Furthermore, since EU

trade marks must be used “in the EU” within five years

of registration, they could be liable for cancellation if

used only in the UK and not the EU. Although the UK will

not leave the EU for at least two years, brand owners

are considering pre-emptively registering both EU and

UK marks now, but this is an additional cost and soaks

up administrative resources

• When EU trade marks were introduced in 1996, existing

UK registrations could be incorporated into an identical

EU mark to save the cost of double protection. Upon

Brexit, lapsed UK marks subsumed into EU marks will

have to be reinstated as such brands will need to show

historic trade mark documents in case they are required

to prove pre-1996 UK rights

• Of significance to trade mark owners is that, on leaving

the EU, the UK courts may have the last word on

interpretation of our IP laws. If the UK also leaves the

EEA, they will not have to refer matters to the European

Court of Justice and then have to interpret answers

which are not always clear

25

• Design rights. There are a number of issues relating

to Registered Community Designs (RCD) that will not

apply in the UK unless the UK provides for transitional

use / protection post Brexit. New RCD filings will not

extend to the UK, meaning designers would need to seek

national protection for designs in the UK in addition to

RCD protection within the EU. Novelty issues may cause

problems when dividing existing RCDs into UK and EU

registrations, as it is not possible to obtain a registered

design which is not new

• EU-wide unregistered design rights (which provide

inexpensive three-year protection for designs against

copying) will not cover the UK post Brexit. This is

particularly damaging to the fashion sector. This EU

right arises from the place of first marketing. Post Brexit,

designers may need to launch new ranges in the EU to take

advantage of this EU design right, which would be costly

– prohibitively so for small designers and businesses

• Brand owners are looking at ways to safeguard their

rights by obtaining UK-registered designs at the same

time as EU-registered designs, not least because

unpicking the UK from the EU registered design system

will be much more complicated than for trademarks.

Fortunately, copyright will suffer minimal impact from

Brexit, although this will depend somewhat on whether

the UK remains in the EEA

• Anti-counterfeiting. The new anti-counterfeiting

provisions of the EU trademark regulation (and the

trademark directive) will not automatically apply to

the UK after Brexit, although the UK could enact the

same provisions into its national law even if it did not

implement the directive. If the UK leaves the EEA, then

EU trademarks and community registered designs could

be used to prevent UK imports into the EU as exhaustion

rules would no longer apply. Similarly, UK rights would

not be exhausted by sales elsewhere in the EEA and could

be used to stop parallel imports to the UK from the EU

• “Made in...”. The law on origin marking is a mix of

EU law, national legislation, codes of practice and

common law. Currently, businesses trading in the EU

voluntarily apply country-of-origin labels. In 2014, the

EU parliament adopted a proposal for regulation to

introduce mandatory labelling – this is yet to come into

force (the UK opposed it for procedural reasons). If the

regulation is brought in after Brexit, it will not apply

to the UK. However, the UK used to have compulsory

origin labelling for some products (clothing, domestic

appliances, footwear and cutlery) which was held by

the EU courts to be contrary to EU law, so it could be

that we return to this position, or origin labelling may

be mandatory if we enter the EEA

2.4.2. Recommendations

• Policy makers must ensure that luxury brands are able

to rely on protection of selective distribution in Europe

and they must address policy measures to ensure that

the principles of selective distribution for luxury brands

are also protected in UK legislation

• Policy makers must ensure that IP rights are protected

in both EU and UK legislation and continue to work

collaboratively across Europe to fight counterfeiting

2.5. Tourism

The final business priority is tourism. Many of the

Policy makers must ensure that luxury brands are able to rely on the principles of selective distribution in Europe and address policy measures to ensure the same protection in the UK

26

specific issues here are not necessarily directly related

to Brexit, but they are important issues during the period

of negotiations and beyond as stimulating tourism will

help maintain and even boost revenues for the UK luxury

goods sector. This will help offset some of the additional

costs and challenges that we have outlined in the pages

above. There are two driving factors behind the importance

of tourists: the absolute numbers, and the amount they

spend, and this is reflected in the overseas marketing

budgets of luxury brands.

Number of visitors: the UK is already one of the most

popular tourist destinations in the world, attracting 32

million overseas visitors every year. Inbound tourism

accounts for into the UK is of real value to the economy: it

accounts for 9% of GDP and more than three million jobs.

According to Deloitte, 63% of holidaymakers to Britain are

from the EU. The UK is the base for three of the top five

international airlines, one of the world’s busiest airports,

and three of the world’s largest tourism wholesalers.

The luxury goods sector plays an important role in UK

tourism. International visitors are voracious consumers of

luxury goods and the very presence of luxury brands is a

competitive advantage that the UK (and especially London)

enjoys over many of its rivals. Our brands really are a

business card for Great Britain. The international appeal

of Bond Street or Knightsbridge, the cachet of having a

suit tailor made on Savile Row, the art deco glamour of

staying at Claridge’s, the earthy charms of visiting whisky

distilleries in Scotland, or the seasonal lure of specific

events such as Frieze cannot be underestimated.

The World Tourism Organisation identifies this as

“shopping tourism”. Tourists also like the assurance

that goods are not counterfeit; the clustering of stores

that increases choice; the quality of service; the status

conferred by particular brands; purchasing those brands

in particular locations; and the overall attractiveness

of the setting.

Despite already being a successful shopping tourism

destination, the UK continues to be at a significant

disadvantage to its continental European counterparts

having opted out of the Schengen zone that allows free

movement within Europe. In the case of visitors from China,

the UK loses £1.2 billion annually compared to France as

a direct result of the current visa system.

The UK also suffers from constrained airport capacity,

which also puts the country at a disadvantage in terms

of attracting overseas visitors. The UK has no direct daily

flights to 10 emerging markets – but 26 cities in those

economies are served by European competitors. This

is significant as 20% more trade is done with countries

where the UK has a direct air link. Research from Let

Britain Fly shows that an increase of 1,000 passengers

a year between two countries sees trade increase by as

much as £920,000. Extrapolating these figures shows

that a new daily route to all eight high-growth economies

(China, India, Brazil, Russia, Indonesia, Mexico, Turkey and

South Korea) could net an additional £1 billion annually to

GDP. The expansion of Heathrow will certainly go a long

way to alleviating this problem, though the timeframe

for construction means it will be some years before the

benefits are reaped.

How much they spend: data from Global Blue tax-

free sales gives some indication of the importance of

international visitors. In October 2016, tax-free sales in

the UK were made up of consumers from China (29%), the

Middle East (27%), Thailand (7% – more than a fourfold

increase from the previous year), the USA and Hong Kong

(4% each). See Figure 4.

Tourists have long been a source of important revenue for

British luxury brands. The Chinese, the world’s biggest

spenders on luxury goods, often prefer to purchase high-

end items overseas, with VisitBritain statistics showing

an average spend of £2,688 per head in the UK. Chinese

visitors account for almost a quarter of tourist spending in

27

the UK; VisitBritain and the UKCVA (of which Walpole is a

founder) hope to double this to a total of £1 billion by 2020.

London is also an important luxury-shopping destination

for high-spending visitors from the Middle East and Gulf

states and African countries such as Nigeria, who are

attracted to London’s high-end shopping destinations,

hotels and restaurants.

One seemingly minor issue that could have a surprisingly

large impact on spend is Sunday trading. According to

research from Volterra, just two additional hours (6pm-8pm)

on Sundays in the West End and Knightsbridge alone would

generate additional annual sales of between £260 million

and £305 million and between 1,450 to 2,245 FTE jobs.

Marketing budgets: Walpole members claim that a third

of their UK sales are attributable to tourist spend but

for some brands that figure is more than 80%. Visitors

from Middle East, America, Europe and of course China

are the most important. On average, 28% of advertising

budgets are focused on driving tourist spend with some

larger brands indicating that their spend on international

marketing sits at £100 million.

2.5.1. Implications of Brexit

The evidence suggests that Brexit would be largely

beneficial to Britain’s tourism industry, at least in the

short term. However, if Britain is going to continue to

attract more high-spending tourists to help grow the UK

FIGURE 4: TOP 10 INTERNATIONAL SHOPPERS IN OCT 2016. GLOBAL BLUE.

COUNTRY(global shopper

nationality)

SHARE(% of total tax free sales excl

nations smaller than 2%)

GROWTH(% growth for October 2016 compared to October 2015)

AVERAGE SPEND(value of an average single

tax free transaction)

Total 100% 41% £822

China 29% 54% £845

Saudi Arabia 10% 40% £1,389

Thailand 7% 325% £2,126

Kuwait 6% 17% £758

Qatar 6% 28% £2,176

UAE 5% 17% £1,574

United States 4% 53% £757

Hong Kong 4% 56% £747

Malaysia 3% 66% £624

India 2% 33% £444

28

luxury goods sector, and offset some of the costs outlined

in previous sections, there is some work to do.

• Short-term boost from devaluation of sterling. The

sharp drop in the pound that immediately followed the

referendum attracted tourists on shopping sprees for

luxury goods, driving a jump in tax-free spending by

overseas visitors, according to Global Blue. Statistics

showed that visitors from Asia and the US in particular

have been taking advantage of the exchange rates with

the London Luxury Quarter reporting a 21% year-on-year

increase in UK international tax-free shopping

• Longer-term ramifications could mean fewer EU

tourists. EU citizens already living in Britain are

responsible for generating around a quarter of tourists

- the so called “VFRs”: “visiting friends and relations”.

Although these visitors spend less on average than

holidaymakers, they still part with around £5 billion a

year. If the number of foreigners in the luxury goods

industry or other industries in Britain were to fall as a

result of Brexit, then we could expect a decline in this

form of tourism spend

• Tourism between the UK and the rest of the EU is facilitated

by the free movement of goods, services, investment

and people. Changes to this free movement are likely

to affect the ease of travel for visitors. Simply, fewer

Europeans might choose Britain as their destination

of choice

• Image of Britain. Brexit could also affect Britain’s image

as an open market for tourists and businesses long

term, which could lead to a reassessment by foreign

investors of their long-term strategies

• Non-EU tourists hindered by the visa regime and

airport capacity. Britain is outside the Schengen

Agreement, and therefore Brexit will have no direct

impact on the visa application regime for visitors from

China, Russia, India and the Middle East. Nevertheless,

this represents an excellent opportunity to let the rest

of the world know that we are open for business by

easing the onerous process many overseas visitors

have to go through to visit, and making sure they can

actually get here

2.5.2. Recommendations

• We urge government to enable the luxury goods sector

to attract high-spending visitors to the UK from key

markets including China, the Middle-East and India.

We welcome the government’s support in extending

the visa-sharing pilot with Belgium to make a one-

stop-shop for Chinese visitors applying for both a UK

and Schengen visa

• We ask policy makers to adopt the recommendations

of the UK China Visa Alliance (of which Walpole is a

founding member). These include reducing the price

of the 10-year visa to make it more attractive and thus

encourage multiple visits, and to ease the visa process

for the parents of children studying here in the UK. We

also urge policy makers to look at the visa regimes for

wealthy visitors from key markets such as India, Vietnam

and the Middle East

• We welcome the government’s decision to support

the expansion at Heathrow but urge policy makers to

minimise further costly delays to the commencement

of work which would have a long-term impact

• We suggest policymakers consider further deregulation

of Sunday trading laws, perhaps explicitly creating

international shopping zones with extended hours in

the West End and Knightsbridge

29

Section 3: Timeframe for implementation and conclusion

We have set out five business priorities for policy makers

to consider and developed a series of recommendations

that we would urge government to consider in light of the

substantial contribution the UK luxury goods sector makes

to the economy both directly and indirectly.

3.1 Timeframe for implementation

These policy recommendations do not all need to be

implemented immediately. Figure 1 on page 9 outlines

the main recommendations and time frames.

3.2 Conclusion

Finally, the speculation and uncertainty that have been

the hallmark of recent months have compounded the

impact of Brexit on businesses and their ability to

prepare for change. Employee confidence in particular

has suffered, particularly among those EU citizens who

make up such an important share of the UK luxury goods

sector; investment opportunities have been delayed; and

unnecessary workstreams have been setup to prepare

for all possible scenarios.

We welcome the government’s commitment to clarity during

the negotiation process and hope it maintains this clarity

over the coming months, specifically with regard to the

rights of EU citizens working in the UK. Most importantly

we urge government to engage in a regular dialogue with

business in order to achieve a fuller understanding of all

parties’ needs and aspirations, and to ensure that any

transitional arrangements are as smooth as possible.

The UK luxury goods sector sees the potential opportunities

about the years ahead – challenging though they may

be. As Britain becomes open for business outside the

European Union, we hope that the conditions are in place

for our brands and companies to realise their enormous

potential and continue to uphold the quality standards

the UK’s luxury industry have become rightly famous for.

WALPOLE

2nd Floor Riverside, Building County Hall, Westminster Bridge, London SE1 7JA

T +44(0)20 7873 3802 www.thewalpole.co.uk

Acknowledgements Our thanks to Walpole members for their time, contributions and insights.

To the writers and contributors to the report, Charlotte Keesing,

Jenni Rayner, Jonathan Turton, Paul Barnes and Kara Santner.

With sincere thanks for their support to Walpole’s corporate partners,

Charles Russell Speechley, McKinsey & Co and Global Blue

and Walpole founding member, The Financial Times.