London fears losing luxury shoppers to Paris and Milan

London's luxury retailers fear the city is losing its pull as a shopping destination, with tourists from the United States, China and the Gulf flocking instead to Paris and Milan where tax breaks still offer a way to cut the cost of their purchases.

With finance minister Jeremy Hunt set to present the government's budget statement on Wednesday, the industry wants him to reinstate sales-tax-free shopping for overseas visitors, which ended in 2020 when Britain left the European Union.

Big names including department stores Harrods and Harvey Nichols, Chelsea property manager Cadogan and The Lanesborough Hotel have joined forces with hundreds of retailers to urge Hunt to change the rules.

"We've heard from some brands that they're prioritising Paris for investment in stores," Steve Medway, CEO of the Knightsbridge and King's Road Partnerships, told Reuters in an interview at Harrods, before it opened for the day.

"They're seeing the sales."

Medway noted that international visitors contribute 28.4 billion pounds ($34.5 billion) to UK GDP annually, of which Knightsbridge and the King's Road are a substantial part.

Data from international tax refund company Global Blue shows that while spending by U.S. visitors to Britain has recovered to 2019 pre-pandemic levels, their spending in France, Spain and Italy has shot ahead.

To compound the problem, British shoppers are themselves starting to spend more in the European Union, where they can also reclaim the value-added tax (VAT) charged on goods.

Now, amid signs that some luxury brands are investing more in their French stores on the Champs Elysees than in their London outlets, industry executives say the tax incentive should be restored to keep Britain competitive.

They argue that its continued lack will have an impact on the whole tourism ecosystem, including hotels, restaurants, taxis, museums and theatres.

The government says tourists can still enjoy UK tax-free shopping if they ship goods directly to an overseas address, and that it scrapped VAT-free shopping to raise revenue and after an assessment found it would not have a large impact on tourism.

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Burberry, Britain's biggest luxury retail brand, warned last year that London was losing out to other European cities over the VAT rule. Handbag maker Mulberry cited the axing of VAT-free shopping as a major factor behind the closure of its Bond Street store last month.

Sarah Jaconelli, director of communications for the New West End Company which represents 600 businesses, said Britain had scored a massive own goal: "You can go to Europe and get a 20% discount, why wouldn't you?"

The Global Blue data is stark. It shows spending by American visitors to the UK was back to 101% of 2019 levels in 2022, but that France and Italy achieved over twice those levels at 256% and 226% respectively.

For visitors from Gulf states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE - UK sales were only back to 65% of 2019 levels. France meanwhile was at 198% relative to 2019, Italy 166% and Spain 158%.

More worrying for the future, a Global Blue survey of 10,000 Chinese who visited Europe in 2019 found that Britain was also dropping in appeal.

While it was the second most popular destination behind France among large European countries in 2019, the survey showed only 42% were now planning to visit Britain, down from 70% in 2019, with Spain, Italy and Germany also now more popular.

"The Chinese will be the most critical demographic to watch because they've always been the most price-sensitive," said Medway, whose partnership represents hundreds of businesses in the luxury shopping districts.

"That's why tax-free was so important for them, and now we are the only country in Europe that doesn't offer it."

Harrods managing director Michael Ward said if no action was taken, the impact would be seen far beyond the stores, with hotels and restaurants in London already noting the absence of international shoppers.

Cadogan, the main landlord in the west London districts of Chelsea and Knightsbridge, whose estate spans over 90 acres, also called on the government to act.

"At a time when we should focus on incentivising international travel, we are now at a distinct and unnecessary disadvantage to our neighbouring EU cities," Chief Executive Hugh Seaborn said.

Chinese resident Hang Hen, 22, and a friend were shopping on New Bond Street on Tuesday morning. He said he had not considered the VAT issue before, because he was generally spending his parents' money.

"Maybe I'll keep much more money to go to France?" he said.

($1 = 0.8228 pounds)