Harrods, the renowned luxury department store in London, is starting to witness a gradual recovery in sales following the devastating impact of the coronavirus pandemic. However, the road to full recovery is not without its obstacles, as changes to VAT-free shopping rules for tourists and a shift in Chinese shoppers’ spending habits could potentially hinder the store’s future growth.

The closure of Harrods’ flagship store during the multiple lockdowns this year has undeniably taken a toll on its business. Moreover, the significant reduction in tourist numbers has greatly affected the store’s sales, as a considerable chunk of its revenue typically comes from affluent tourists.

While the boss of Harrods, Michael Ward, expressed his relief that shops have reopened in England, he acknowledged that visitor traffic and sales remain significantly lower than those of last year. However, the customers who are visiting the store now seem to be more willing to spend. On the store’s opening day last week, customers spent three times the usual amount, resulting in a remarkable 24% increase in sales for the day.

Nonetheless, challenges persist for Harrods due to the UK government’s decision to end VAT-free shopping for non-EU visitors next month. The Treasury aims to generate an additional £500 million in revenue annually with this policy change; however, researchers argue that it could lead to a loss of over £3.5 billion per year. The removal of tax-free shopping may deter tourist shoppers from visiting the UK, potentially resulting in job cuts and other negative consequences for British retailers.

Ward has openly criticized the government’s decision, deeming it fundamentally wrong. He anticipates that people will choose to shop in France rather than the UK, which will undoubtedly have detrimental effects on British retailers. Harrods, which typically achieves significant annual pre-tax profits of around £233 million, was compelled to make 700 job cuts in the summer due to the impact of the lockdowns in 2020.

Despite the ongoing challenges, Ward has been proactively engaged in discreet personal marketing efforts throughout the year. During one of his trips to Asia, he had the opportunity to connect with potential high-spending customers. However, he recognizes that the shift in Chinese tourist spending is likely to persist even without the influence of Covid-19. The changes in sales witnessed this year are expected to have a long-lasting impact.

In an attempt to adapt to the changing consumer landscape, Harrods is gearing up to launch The Residence, an exclusive personal shopping space in Shanghai. This strategic move aligns with the company’s recognition that Chinese shoppers are now increasingly focused on their domestic market and are less likely to spend abroad.

While Harrods is gradually experiencing a bounce back from the immense challenges posed by the pandemic, the future still remains uncertain. The changes to VAT-free shopping rules and the shifting spending behavior of Chinese shoppers pose significant risks to the company’s growth. Surmounting these challenges will require meticulous strategic planning and a constant adaptation to the evolving retail landscape.

Useful links:
1. https://www.vatfrauded.org/home/ (VAT Fraud Education Initiative)
2. https://www.retailgazette.com/blog/2020/09/ending-taxfree-shopping-could-cost-uk-over-3-5bn-a-year/ (Retail Gazette – Article on the potential loss due to ending tax-free shopping)