here are two questions that my blog readers ask me all the time. Are designer bags cheaper in Europe? Are luxury brands cheaper in Europe? With this blog post, I’m finally bringing the answers you’ve all been waiting for.
Even if you don’t travel a lot, you’ve probably heard stories from people who managed to save significant amounts of money by shopping designer brands in Europe. Hey, actually, one of my Chinese friends keeps joking that Europe is like a big designer discount mall. How is that even possible?
The two main reasons for why people choose to shop for luxury in Europe are VAT-refunds and cheaper prices.
First, let’s talk about VAT. European countries let foreign (non-EU) travelers claim a so-called VAT-refund on eligible purchases. VAT translates as “value added tax”. VAT charge in Europe fluctuates anywhere between 7 and 25 percent and is already included in the market price of an item, unlike in the U.S., where tax is an extra amount charged at checkout.
How to qualify for a VAT refund?
To receive the VAT refund you must meet certain requirements. Actually, the VAT rules in Europe differ from country to country. For example, to be eligible for a VAT refund in France, you must spend a minimum of 175.01 Euros at one store. In France, the VAT refund rate is usually 12% if processed in-store via a refund agency. To receive a VAT refund in Italy, a foreign shopper must spend at least 155 Euros at one store. Then, the refund rate is 22 percent if processed by the shopper. In Germany, to qualify for a VAT refund, the total on one receipt must be 25 Euros or more. The refund rate in Germany is 19 percent if you choose to process it by yourself.
Important note: remember, that you must present your passport in store before checkout to receive the VAT refund paperwork. Also, keep in mind that you will have to present your unused purchases to a customs official for inspection. VAT refunds are only intended for products that are meant to be used abroad. So, make sure not to wear your new bag while still on vacation!
Is UK the first country to ban VAT-free shopping?
For decades, United Kingdom has been a beloved destination for luxury shopping. Currently, under the VAT Retail Export Scheme (VAT RES), non-EU visitors can reclaim the 20 percent VAT in the UK. However, that’s about to change very soon. In September 2020, UK government has announced a plan to end VAT-free shopping for non-EU visitors. As you probably already know, UK is leaving the EU. The Brexit transition period ends on December 31st 2020 and it is when the VAT RES is to be abolished. Thus, from January 1st 2021 foreign travelers are no longer able to reclaim the VAT in the UK.
The Association of International Retail (AIR) has already warned the UK it is to become the only European country not to offer VAT-free shopping for foreigners. However, the real question is, will UK still manage to attract international shoppers without a VAT refund scheme? According to a study published by the Centre for Economic and Business Research (CEBR), 90 percent of foreign shoppers are less likely to spend money in UK stores the next time they visit the country, while 60 percent responded that they would avoid visiting UK altogether.
I believe that the VAT-free shopping ban in the UK will negatively affect both tourism and retail. Talking about the retail, heads of several global brands, incl. Tiffany and Gucci, have sent an open letter to the UK government, in which they express their concern about the upcoming VAT-free shopping ban. In the letter they warn the decision to ban VAT-free shopping is likely to cost the UK government billions as international shoppers are now motivated to make their luxury purchases elsewhere in Europe. Furthermore, the ban is putting the UK economics and jobs at risk. Hopefully, the UK government is going to reconsider it.
Question: Would you still travel to the UK despite the VAT-free shopping ban? Sound off in the comments below!
Ever wondered why Chinese tourists in particular call Europe a heaven for luxury shopping? Let me tell you the answer. It’s for the cheaper prices! Luxury prices in China and Asia in general are among the highest in the World, while prices for luxury in Europe are typically the lowest. Luxury prices in Europe are cheaper because Europe is a home to many of those brands. France, for example, is a home to Chanel, Louis Vuitton, Saint Laurent, Dior and Hermes, while Italy is a home to such big names as Prada, Miu Miu, Bottega Veneta and Gucci. A big percentage of luxury goods are also being manufactured in Europe. When European luxury goods are shipped for sale overseas, they typically incur import/duty taxes and higher transportation costs. These extra costs result into higher retail prices abroad.
So, the best rule of thumb to follow: if the brand has its headquarters in Europe, it should be cheaper in Europe. Let’s try to challenge this rule by comparing current price of the popular Louis Vuitton Pochette Metis Bag in the United States vs. France.
In the United States, in November 2020, the price of the Louis Vuitton Pochette Metis in Monogram Canvas with the sales tax is $2,155.73. The sales tax amount varies from state to state. In the given example the bag was purchased in New York.
As of November 2020, the Louis Vuitton Pochette Metis in Monogram Canvas retails for 1,500 EUR in France. According to the current EUR/USD exchange rate, EUR 1,500 equals to roughly $1,777. This means that you would potentially save $378.73 by buying the Pochette Metis in France.
But since you are buying the bag in France you would also claim a VAT-refund, right? A purchase of 1,500 EUR can potentially get you a VAT refund of 180 EUR. This brings the price of the bag down to 1,320 EUR, which is around $1,564. So, your potential savings are up from $378.73 to $591.73. Imagine saving over $500 on a bag that you were already planning to buy! Such savings definitely make a trip to Europe worth it! All in all, this amount might also very well cover some of your travel costs!
Is price harmonization to take away the benefits of shopping abroad?
Luxury brands are very well aware of the consumer practice to buy luxury abroad in order to benefit from lower prices. In an attempt to fight the global price arbitrage, in March 2015, Chanel has announced a plan for price harmonization across regions. Actually, in May 2020, we have witnessed the largest Chanel price increase in Europe to date, with some of the classic bags going up in price for over 20 percent. At the time of writing this blog post, Chanel Classic Flap in the Medium size costs $6,500 (+ sales tax) in the United States and €6,050 in Europe. If you bought the bag in NYC, the bag would end up costing you around $7,077 (considering the NYC sales tax of 8.875%). According to the current EUR/USD exchange rate, €6,050 is about $7,180. At first, it might seem that Chanel Medium Classic Flap is slightly more expensive in Europe. However, a purchase of €6,050 will earn you a VAT refund of €726 in France, this way bringing the cost of the bag down to €5,324, which converts to about $6,320. So, buying the bag in France actually saves you $757!The bottom line:
Are luxury brands still cheaper in Europe in 2020?
Yes, they are! Despite certain brand efforts to minimize global price differences, Europe remains one of the cheapest places to shop luxury. Just don’t forget to claim your VAT refund!