UK sacrifices luxury tourist spending bonanza due to outdated systems
The UK continues to be a magnet for high-spending global tourists but the potential for higher spend at its luxury fashion stores is being badly let down by the country’s ‘Stone Age’ method of refunding VAT, even though most of Europe has digitised the process.
That’s the conclusion of a round table discussion hosted this week in London by tax-free payments specialist Planet and the New West End Company.
Planet said that tax-free shopping sales were worth around £6.8 billion to the UK in 2018 and also that across Europe, international shoppers from outside the EU spent on average 3.7 times more than their domestic counterparts. Meanwhile some retailers saw 60% of sales coming from non-EU shoppers.
And the importance of these international shoppers is rising as the average transaction value of purchases made by tourists in Europe grew by 6% last year with fashion being a key purchase priority.
Yet the UK is disadvantaged not just by the uncertainty surrounding Brexit, but by its archaic method through which tourists reclaim the VAT on their purchases when they leave the country.
Many departing tourists aren’t getting their refunds, which means they’re less likely to come back to spend more.
Planet CEO Patrick Waldron said that France sees up to 93% of tourists claiming back the VAT refunds they’re entitled to via a digital system that can complete the process in a couple of minutes. For the UK, meanwhile, only around 70% get their money back, and only after a long-winded process that can take up to an hour.
While stores have their end of the VAT refunds process down to a digital art, and while other countries have fast, seamless, electronic systems, the UK is still paper-based and many consumers aren’t prepared to join long queues at the airport, especially wealthy consumers.
Planet said that this factor could be suppressing UK high-spending visitor growth compared to countries that have much better systems.
In 2017, for instance, 337,000 Chinese tourists visited the UK (source: VisitBritain), compared to 432,000 visiting Finland (source: Visit Finland), a country with a population only 68% that of the UK’s capital but, crucially, with a slick VAT refund system.
Planet also said that VAT refunds have been proved to boost spend, whether it’s due to the Chinese consumer’s love of a discount of the simple fact that a guaranteed 20% refund frees up more money to spend on more luxury fashion.
And the numbers eligible to claim back their VAT are huge. Of the 37 million total tourists to the UK in 2018, 13 million were from non-EU nations so could get refunds. There were also 24 million arrivals from EU nations, and once Brexit happens (if it happens) they could mean a 187% rise in the current number of eligible tax-free shopping tourists to the UK.
Henry Gregg, Director of External Affairs at The New West End Company said this could be worth an estimated £1.4 billion for UK retailers. But with the current VAT refund system at breaking point, that extra spending isn’t likely to be achieved.
“There will be a clamour for equality,” he said. “If Britons will be able to shop tax-free in Europe, Europeans will call out for it too. We need to digitalise as the current system is at breaking point.”
BREXIT AND UTOPIA
So what’s the reason for Britain’s outdated approach? It seems that Brexit is a big part of it with government attention being focused on other priorities. But Brexit has only been an issue for a few years and the problems go back much further with a long-term lack of engagement with the companies operating in the field on the part of the UK authorities, compared to the approach taken in other markets where the two-way dialogue is stronger.
Planet also said that the British government’s long-held “utopian” view of what any system needs to be is shackling development too, despite the company (and its biggest rival) having been working hard on solutions for years.
For instance, “they want everyone going for a VAT refund to be pre-registered,” Patrick Waldron said, “which is not practical as 85% of tourists every year are new.”
Aside from the slow development of digital solutions linked to Brexit, the UK’s EU exit is also suppressing spend by tourists for another worrying reason. Waldron added that “there have been some concerns with some of the source destinations around Brexit. Some people think there is an unwelcoming attitude to tourists in general. It gets mixed up in the immigration debate.”
India is a perfect example. “Nearly twice as many Indian tourists come to the UK as Chinese, yet they don't feature in our 20,” he said. “We’ve been speaking to some of the wealthiest Indian tourists and we found they don't feel welcome. Plus they simply cannot get their VAT refund when they’re leaving Heathrow.”
This is a big problem as they’re heavy spenders. Waldron said that “historically they would have bought a lot at chain stores, but now they’re buying Gucci and Chanel.” And he added that when Planet started tax-free operations in the UAE last year, India quickly became its top source destination.
It’s a depressing scenario, especially given how appealing the UK remains as a tourist shopping destination. Waldron said that visits to the country “are in good shape” and could be benefiting from the fact that France is down due to the yellow vest protests. Chinese tourist forward arrivals are booming (up 32% in January, aided by Golden Week timing) and 14% in January to April, compared to a low-single-digit rise for France.
“It's the most positive January to April forward arrivals data that we've seen,” he added, as it’s being helped by a strengthening of China’s currency.
But it seems that until the UK faces up to the fact that it’s making things harder for tourist shoppers, the potential benefit its retailers could enjoy will stay muted.
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