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The economic and financial contribution of high-end creative and cultural industries to the UK economy A FRONTIER ECONOMICS REPORT FOR WALPOLE September 2015 Contents The economic and financial contribution of high-end creative and cultural industries to the UK economy Executive Summary 4 Introduction 6 1.1 Approach and methodology 6 1.2 Structure of this report 6 The key features of the high-end creative and cultural industries 8 Key principles and features 8 1 13 Figure 1 Annual value 2 of sales for all 2.1 sectors, 2010-2013, in £ millions 5 3 Key economic and financial indicators 12 3.1 Overall performance 12 3.2 Export performance 13 4 Employment 14 5 Financial contributions to the exchequer 15 6 Capturing the wider economic effects 16 Table 1 Key performance indicators 12 Table 2 Value of sales by 6.1 Main types of wider effects 16 category, 2013 6.2 Travel and tourism 16 6.3 Employment and knowledge 19 15 6.4 Clustering effects 20 Table 3 6.5 Public goods related to the value of place 21 7 Forecast trends 22 8 Policy implications 24 Financial contributions to the exchequer, 2013 Sponsored by Produced by 23 8.1 Intellectual Property 24 Table 4 8.2 Digital governance 24 Projected 8.3 Selective distribution 25 performance 8.4 Market access 25 to 2019 8.5 Visa facilitation and airport capacity 25 8.6 Skills and vocational training 26 3 Executive Summary Walpole is the UK’s alliance of luxury brands representing As impressive as they are, these figures understate the over 170 member companies from the high-end creative full economic contribution of the sector. This is because and cultural industries with members including Alexander they do not capture the value of the significant spill over McQueen, Burberry, Claridge’s, Harrods and Rolls-Royce effects to the British tourism and travel industries or the Motor Cars. Walpole members strive for the highest employment and knowledge spill over effects to upstream quality in all they do – their business models are based on suppliers that support the development of skills-based culture, craftsmanship, creativity, continuous innovation, clusters and the manufacturing capability of the UK. INDICATOR VALUE Value of sales (2013) £32.2 billion Value as percentage of UK GDP 2.2% Rate of growth 2010-2013 7.8% Estimated direct and indirect employment (2013) 113,000 employees Total exports 2013 £25 billion Direct and indirect financial contributions to exchequer £5.2 billion TABLE 1: KEY PERFORMANCE INDICATORS a relentless focus on quality, customer service, highlyThe high-end creative and cultural industries make a clusters. Importantly the high-end cultural and creative Protection of Intellectual Property significant contribution to the British tourism and travel industries make a significant contribution to developing To ensure that the high-end industries are able to Walpole with the support of Charles Russell Speechlys industries through the international appeal of luxury and promoting the manufacturing quality and capability differentiate their products, continue to invest in innovation has commissioned Frontier Economics to carry out a brands and experiences as well as “Shopping Tourism” of the UK. and development as well as their brands and businesses study examining the contribution to the UK economy which attracts visitors from around the world to the UK. of those sectors creating high-end consumer products Furthermore investments made by the high-end industries The research commissioned by Walpole highlights the and services. Walpole is pleased to report that the UK’s into their brands, digital communications, marketing, value that the UK as whole would continue to derive from Digital Governance high-end creative and cultural industries have performed retail experiences and surrounding environments only ensuring a suitable policy framework is in place to enable To ensure that responsible online marketing practises as strongly in the period between 2010 and 2013, with serves to increase the international profile, reputation the high-end creative and cultural industries’ business well as a general Duty of Care on online service providers particularly strong growth since 2012. Key performance and appeal of the UK further benefiting the tourism and models to flourish. are recognised and upheld, as well as policies relating to indicators are set out in the table opposite. travel industries. skilled employment and strong export abroad. with the surety that IP rights will be upheld. the recognition of selective distribution and counterfeiting. The key elements of such a policy framework are detailed The high-end cultural and creative industries also by the sectors grew by a little over 25.4% in the period make a valuable contribution to employment, creating 2010 to 2013. jobs, opportunities to work in dynamic and creative Selective Distribution and expand internationally through trade agreements and environments, providing training and apprenticeships To ensure that the goods and services are distributed in diplomatic relationships with key markets. Even on relatively conservative assumptions, the sectors as well as sustainable careers, currently employing over an appropriate way. To maintain the aura of the product are forecast to continue their rapid growth in the medium 100,000 people directly in the UK. Furthermore, spill or experience, enabling enhanced levels of service and Visa Facilitation and Airport Capacity term. Forecast value of sales for 2019 is between £51.1 over effects created by the high-end industries benefit customer confidence as well as supporting commercial To enable the high-end industries to attract high-spending billion and £57 billion, while forecast employment is upstream suppliers, mostly other SMEs, developing imperatives. visitors to the UK from key markets including China and between around 158,000 and 177, 000. skills, knowledge, as well as expertise and skills-based 4 below: Market Access In nominal terms, the value of goods and services produced To ensure that high-end industries can continue to export the Middle-East. 5 1. Introduction Frontier Economics has been retained by Walpole to 1.1 APPROACH AND METHODOLOGY estimate the economic contribution of high-end creative While the economic importance of high-end cultural and and cultural industries to the UK economy. The analysis creative industries has been recognised, data collection follows the work conducted by Frontier Economics in by official sources on the activities of these industries has 2014 for the European Cultural and Creative Industries yet to be undertaken. In particular National Accounts data Association (ECCIA) of which Walpole is a founding are insufficiently disaggregated to capture the high-end member, which measured the contribution of these elements of the different activities concerned. industries to the European economy. The key metrics of interest in that study, and which are reported in this study, Consequently, the approach used in this report draws on were: total earnings; direct and indirect employment the approach used in the report prepared by the ECCIA, and associated with the industries; exports; and contributions uses reported results at the firm- and industry-level as to the exchequer. the starting point of the analysis. The data sources include specialist sources, company sources (such as annual The ECCIA report defined the high-end creative and cultural reports and financial statements), and industry survey industries according to a 12-sector classification that data (notably data prepared by EuroMoney as part of its captured the range of activities across Europe as a whole. annual survey of certain luxury sectors). Methodological The classification for the UK reflects the composition of issues relating to specific indicators are discussed in the high end creative and cultural activities in the UK. The relevant sub-section below. The UK’s high-end creative and cultural industries have performed strongly and are worth £32.3bn to the British economy and employ 113,000 people directly and indirectly in the UK sectors concerned are: 1.2 STRUCTURE OF THIS REPORT • Designer Apparel and Footwear The report is structured as follows: • Fine Wines/Champagne and Spirits • Section 2 - describes the key features of the high-end • Luxury Accessories creative and cultural industries • Luxury Jewellery and Timepieces • Section 3 - reports the economic and financial indicators • Luxury Hotels • Section 4 – reports the employment effects • High-end Beauty and Personal Care • Section 5 – reports the contributions to the exchequer • High-end Car Manufacturing • Section 6 – captures the wider economic effects • Art de la table (e.g. glasswear) • Section 7 – describes the forecast trends • Yachts • Section 8 – reports on the policy implications 6 7 2. The key features of the high-end creative and cultural industries The unique business model of the UK high-end creative and 2.1.2 Creative people and craftsmanship the luxury industries are built for the long-term and these the market. In this context, innovation and creativity in the cultural industries is based on a number of key principles The market positioning of luxury products relies on arrangements, spanning many years, are a distinctive high-end industries take a different form to innovation in and features. maintaining high levels of creativity, craftsmanship and feature of the luxury cultural and creative industry supply a number of other industries. In these other cases, cost- quality which is determined by two key factors – the chain (that distinguish them from premium and mass- efficiency gains are important drivers of competitiveness, development and nurturing of creativity and craftsmanship market manufacturers). and are thus the focus of process innovation. However, 2.1 KEY PRINCIPLES AND FEATURES both in a highly skilled workforce and the supply chain. 2.1.1 Aura cost-efficiency gains are of secondary importance to In particular, luxury manufacturers do not favour high- high-end cultural and creative industries. The focus of The aura of luxury relates to the quality of the product and The leading luxury brands all invest heavily in attracting frequency procurement from upstream suppliers, which innovative activity is for the consumer and is focused on the perception of status and exclusivity that is associated and developing creative talent and furthermore in training is based solely on cost considerations, and instead value materials, design and product quality and the overall with it, both in the eyes of the consumer and, significantly, and developing their skilled workforce, as well as in the importance of predictability of quality and the specific experience. amongst the wider public. developing world-class manufacturing facilities. The role skills born out of a long-term relationship with a particular of the creative director and the creative teams for the high- supplier. The advantage of these long term arrangements 2.1.4 Selective distribution This aura, combined with the craftsmanship involved end industries is essential to the overall business success. is a virtuous circle – reducing search costs and in turn The way in which distribution is organised is key to high- in creating it and the associated customer service Finding those creative visionaries, talented designers and increasing the incentives for upstream suppliers to maintain end cultural and creative industries since, as observed constitutes the key point of competitive differentiation marketers requires considerable investment and time and quality and to innovate. Such relationships also ensure the above, it is a mechanism through which the aura of the for luxury cultural and creative industries compared to in very few other industries does creativity play such a transfer of knowledge and skills to the next generation. product is communicated. Moreover, the retail experience other industries. key role in the future success of the business. is an integral element of the bundle of goods and services 2.1.3 Intellectual Property and innovation purchased by the consumer. Key concerns of high-end The aura in part draws on the cultural and traditional Complimentary to the role of creativity, the role of Research, product development, innovation, unique skills cultural and creative industries include pricing strategies heritage in relation to the product’s provenance and the craftsmanship and a highly-skilled workforce of artisans and methods and brand identity are key components of the – in particular, luxury cultural and creative industries fact that this heritage acts as a signal of quality. The is essential to ensure the highest standards of production value proposition to consumers of high-end cultural and do not favour price-discounting since that can adversely consumer is aware that when purchasing a product, he or and quality. The high-end industries make significant creative industries. Furthermore, they are a key source affect the aura of the product. High-end cultural and she is accessing this tradition of heritage and creativity. An investment into providing formal training, apprenticeships, of their competitive advantage and as such Intellectual creative industries will also be concerned about the level important factor behind the “aura” of luxury industries lies courses and qualifications as well as partnerships with Property (IP) and IP protection plays a vital role in the of promotional effort and customer service and care. in the retail service provided to the consumer through, for tertiary institutions. business model. The protection of IP is also central to example, personalised attention and after-sales care. The securing long term investment in innovation and creativity As with all industries, high-end cultural and creative both in products and in processes. industries face a choice of managing distribution through competitiveness of luxury cultural and creative industries In particular, firms in the luxury cultural and creative therefore depends on its ability to provide and control the industries invest substantial resources into screening combination of a luxury product, how it is bought with the and building relationships with the highest quality More broadly, innovation and creativity are central to facilities), or through selective distribution contracts with highest level of service. suppliers. As a result, many supplier relationships in ensuring the product positioning of high-end producers in retailers, who may stock multiple brands. In practice, 8 vertically integrated structures (i.e. wholly-owned retail 9 a variety of arrangements are observed, even within 2.1.5 Orientation towards global markets the same firm. These reflect, principally, differences The UK’s high-end cultural and creative industries have in ways in which firms weigh the trade-off between actively drawn on their heritage, provenance, long- the commercial risks of managing retail operations standing traditions of craftsmanship, creativity, style (which may not lie within the core competences of the and perception of high-standards and exceptional quality firm) and the risks associated with loss of control over to export to global markets. In recent years, the high-end retail operations. As such selective distribution is vital cultural and creative industries have achieved strong to maintain control over the value chain and thereby growth in affluent and aspirational customer segments ensure excellence from the creation of the product to in emerging market, notably in South America, East and the relationships with the clients. South East Asia, Europe, the Middle East, and parts of Western and Southern Africa. Recent research in the ECCIA study suggests a trend towards greater direct control: the share of direct retail in While exporting to these markets is an obvious mechanism, the EU is projected to increase from 31% to 40% between a substantial proportion of sales to customers in these 2013 and 2020, even though multi-brand wholesale and markets occurs through travel and tourism i.e. customers department wholesale are set to remain important from these markets travelling to the UK to purchase these channels too. The share of online sales relative to overall products as an integral part of their travel experience. This personal consumption is projected to increase, in the EU has given rise to the phenomenon of “Shopping Tourism”. from under 5% in 2013 to 14% by 2020. The UK’s high-end creative and cultural industries are forecast to continue their rapid growth in the medium term. Forecast value of sales for 2019 is between £51.1 billion and £57 billion, while forecast employment is between 158,000 and 177, 000 The UK’s high-end creative and cultural industries are growing at a rate of 7.8% 10 11 3. Key economic and financial indicators 3.1 OVERALL PERFORMANCE As of 2013, the high-end industries in the UK were valued at £4.1bn and then Luxury Hotels accounting for £2.3bn. A significant factor explaining this performance was growth 3.2 EXPORT PERFORMANCE at approximately £32.2 billion, as reported in Table 2 The total value of the high-end industries is equivalent to in luxury car sales, at a little over 11% per year over that The UK’s high-end cultural and creative industries are, as a below which provides a breakdown by sector of the high- around 2.2% of UK GDP in 2013 at market prices. Figure period. Other sectors grew at just under 4% per annum whole, strongly export-oriented, with 78% of production, in end cultural and creative industries including Designer 1, opposite, depicts value of the sales on a yearly basis over the same period, and just under 5% between 2012 value terms, destined for overseas markets (i.e. around £25 Apparel and Footwear, Accessories, Jewellery and for the years 2010 to 2013. and 2013. The fastest growing sectors in this other group billion in 2013). This is largely in line with the performance were luxury travel goods, and accessories, which grew at, reported for these industries for Europe as a whole. Watches, Hotels, Beauty, Automotive and Marine. The figures show that car manufacturing accounts for over Over that period, the sectors as a whole grew at an annual half the value of the high end industries (which is in line rate of 7.8%. Year on year growth between 2012 and 2013 with figures reported for Europe as a whole) with the next was 9.6%. largest category being Designer Apparel and Footwear respectively, 6% and 7% per year over the period 2010-2013. Export intensities vary across sectors as a whole. Luxury By way of comparison, nominal GDP growth in the UK cars have the highest export intensity, with between between 2010 and 2013 was on average 3.2% 85% and 90% of production (by value) sold in overseas markets. At the other end of the spectrum, luxury wines are mainly destined for the UK market, with around 18% CATEGORY TURNOVER 2013 (GBP BILLION) Designer Apparel and Footwear 4.13 Fine Wines/Champagne and Spirits 1.84 Luxury Accessories 1.35 30 Luxury Jewellery and Timepieces 1.44 25 Luxury Hotels 2.32 20 Super Premium Beauty and Personal Care 1.29 15 Car Manufacturing 18.3 10 Art de la table 0.90 5 Luxury Yachts 0.50 TOTAL 32.2 of production by value exported. The high-end cultural and creative industries accounted for around 4.3% of total UK merchandise exports in 2013. 35 TOTAL EXCL CARS Year-on-year export growth in 2013 was around 12.1%, a CARS rapid increase attributable mainly to a strong performance in the luxury car sector. Excluding cars, export growth was slightly over 4.5%. Both figures are higher than reported growth for UK merchandise exports as a whole over the same period (3%). For the period 2010-2013, exports from the industries as a whole grew by just over 9% per year. 0 2010 2011 2012 2013 FIGURE 1: ANNUAL VALUE OF SALES FOR ALL SECTORS, TABLE 2: VALUE OF SALES BY CATEGORY, 2013* 12 2010-2013, IN £ BILLIONS * Source: Frontier Economics calculations based on Bain data, Euromoney data, and published financial statements Source: Frontier Economics calculations based on Bain data, Euromoney data, published annual reports and ONS data ** 13 5. Financial contributions to the exchequer 4. Employment The high-end creative and cultural sectors contribute to employment directly and indirectly. The direct contribution is attributable to jobs in firms within each of the sectors. The methodology for estimating employment figures is to apply turnover to employment ratios for each of the sectors. The ratios themselves have been derived from The UK’s high-end creative and cultural industries employ over 113,000 people directly and indirectly in the UK The financial contributions made by the industries are The figures for avoided benefit payments rely on summarised in Table 3, below, which shows that in 2013, the assumptions about the duration of unemployment faced industries contributed around £5.2 billion. The contributions by employees in the sectors, should they lose their jobs. consist of tax payments, and avoided costs to the exchequer The probabilities regarding the duration of unemployment in the form of unemployment benefits not paid as a result are based on findings made by the OECD. We adjusted of the employment created by the industries. these probabilities downward to reflect the fact that the data reported by firms, and industry sources. There is OECD numbers were averages, and that employees in some variance in the data reported for employment figures, Corporation tax calculations are based on assumptions high-end cultural and creative industries were more likely, and hence for employment ratios. On the basis of the about company profit margins. These assumptions were in compared to the average employee, to find employment, available evidence, we estimate that: turn based on published financial statement and industry given their skills and training. • Total direct employment is estimated at approximately 101,300 jobs in 2013 • Employment growth averaged around 12.6% per year in the period 2010-2013 estimate. Data from national accounts usually allow some reports. Income tax revenue is based on assumptions measurement of supply chain linkages and associated regarding average wages for the sector, drawing on jobs, but in this case measurement is complicated by the ONS data. fact that national account data is not disaggregated to the level of high end cultural and creative industries as defined • Employment data provided by the ONS suggests that in this report. Using data derived for the EU as a whole, 815,000 jobs were created in the UK in the period 2010- and assuming that the relationships between direct and 2013, suggesting that the high-end cultural and creative indirect jobs in each of the UK sectors are similar to those industries accounted for around 3% of jobs created in exhibited in these sectors across the EU, we estimate that period that the high-end sectors indirectly generated a further 10,000- to 12,500 jobs in total in 2013. The indirect contribution is attributable to the supply chain linking firms within the sector to upstream suppliers and Therefore the combination of direct and indirect employment to downstream operators. These are more difficult to accounts for approximately just under 113,000 jobs. ITEM AMOUNT (£MILLIONS) Corporation tax revenue (21%) 1,517.00 National Insurance Contributions 334.9 Income Tax Revenue 448.5 Savings from avoided benefit payments 2,889.1 TOTAL 5,189.5 TABLE 3: FINANCIAL CONTRIBUTIONS TO THE EXCHEQUER, 2013 14 * Source: Frontier Economics calculations based on industry reports, OECD data, and ONS data. 15 6. Capturing the wider economic effects 6.1 MAIN TYPES OF WIDER EFFECTS As documented in the work Frontier Economics conducted for ECCIA on high-end cultural and creative industries, any account of the true economic contribution of these high-end industries needs to take into account the wider economic effects or spill overs to Travel and Tourism, Employment and Knowledge, as well as clustering and public goods that are generated by these industries. Spill overs reflect the effects that decisions made by “As impressive as the financial figures are they understate the full economic contribution of the sector to the UK, and the significant spill over effects to the British tourism and travel industries.” consumers and businesses in one sector can have on The first channel is through decisions made by consumers Shopping Tourism is also prevalent in locations, of high-end goods and services to purchase particular primarily major cities that have clusters of firms creating high-end products as part of their travel experience. Recent concentrated high-end shopping experiences (for example research by Altagamma (a member of the ECCIA) suggests locations such as Bond Street or Mount Street in London.) that globally, around 37% of purchases from luxury This is valuable to shoppers, principally because it industries are attributable to tourists. An example of this is reduces search costs, reduces travel time, facilitates found in the phenomenon of “Shopping Tourism”. Shopping comparisons of price and quality, and allows them to Tourism is defined by the UN World Tourism Organisation match products that, in their view, are complementary (for as a “form of tourism fostered by individuals for whom example, different articles of clothing and footwear from purchasing goods outside of their usual environment is a different producers). This is a reflection of agglomeration determining factor in their decision to travel”. It follows or clustering effects, which are covered in subsequent from this definition that attractive destinations for shopping sections. While price factors (notably differences in tariffs, tourists will be ones that can provide access to an overall exchange rate and indirect taxes) are among the drivers of shopping experience, which includes access to high quality Shopping Tourism, important considerations include the products, a choice of desirable brands, retail environments, assurance that goods are not counterfeit, the clustering the associated status of shopping in a particular destination of stores that increase choice, the quality of service, the and the highest levels of service. status conferred by particular brands and purchasing another. These spill overs may be positive or negative, those brands in particular origin locations, and the overall but their defining feature is that they are not managed In terms of the UK we can see evidence of Shopping Tourism through formal arrangements (such as contracts). For in the data from Global Blue tax free sales - in 2014 the attractiveness of the setting. example, a hotel may invest in upgrading its facilities A public good is a good or service from which it is not top sources of purchasers of tax free sales in the UK were One of the implications of Shopping Tourism, and specifically making it more attractive to customers. This may attract possible to exclude a person or group of people from consumers from the Middle East 28%, China 25% with the fact that shopping experiences are a determinant more customers, who then consume the services of enjoying, once it is provided; and which the enjoyment by Russian and USA travellers accounting for respectively for travel, is that the tourism and travel industries in a neighbouring businesses. This is a positive spill over one person does not diminish the possibilities of somebody 4% and 3%. Furthermore according to Global Blue, 50% of particular location will grow faster, the more potential from the hotel to neighbouring businesses. Thus the else enjoying it. Clean air is one example of such a good. luxury sales (hard luxury relating to apparel and fashion, visitors value the shopping opportunities in that location. cosmetics and perfumes, watches and jewellery) are tax Consider for example the international appeal of Bond refunded and as such attributable to tourist shoppers. Street or Harrods in London, staying at Claridge’s or latter benefit from the hotel’s investment decision, even if they did not enter into a contract with the hotel to pay 6.2 TRAVEL AND TOURISM for the investment. One of the most significant wider benefits of the high-end visiting the whisky distilleries and castles in Scotland for industries is the spill over effects to travel and tourism. international visitors. This logic is reflected in the marketing Clustering effects arise because of positive spill overs of There are two distinct ways through which spill over initiatives of tourism authorities which have deliberately the sort referred to above. For example, high-end retailers benefits occur. emphasised the shopping and associated experiences are likely to find it attractive to locate closer to high-end • Consumption by travellers of high-end products available in key major cities or areas in order to attract hotels, and vice versa. Moreover, a business may benefit which account for a significant share of the overall tourists. Other specific initiatives are promoted based on from the pull of neighbouring businesses, even if the consumption of these products and services. latter are rivals. This is because customers often wish • The availability of high-end products and services as a to compare prices and services, and this is more easily determinant of choice of destination and thus making done if businesses are located close to each other. particular locations more attractive to tourists. 16 Globally 37% of purchases from the luxury industries are attributable to tourists recognition of the links between these particular activities, and the profile they lend to the city such as London Fashion Week or Design Week or shows such as Masterpiece. 17 These observations in turn suggest that investments development by increasing the attractiveness of the UK undertaken by firms in the high-end cultural and creative for tourists. industries that enhance the attractiveness of their product offerings, have significant spill over effects to the tourism However, while the benefits and wider spill overs to the and travel industries, and that these industries would UK economy are clearly visible this account is not the have been smaller, along with their contribution to the full picture as the UK continues to be at a disadvantage wider economy, without the investments undertaken to European countries such as France, due the current by the luxury cultural and creative industries. In other visa system for Chinese visitors. The importance of the words, these investments can be said to have a genuine Chinese customer is well documented - globally, according multiplier effect to other industries and on the economy. to data reported by the Economist, Chinese consumers accounted for around 29% of global purchases of high-end The high-end creative and cultural industries are a major contributor to employment in the UK, employing over 113,000 people directly and indirectly, providing employment opportunities, training and sustainable careers for people across the UK and importantly in areas outside of London In 2014, prestigious shoe makers Church’s laid out plans to expand their Northampton business, adding a further 140 jobs to their existing operation of around 650 highly skilled employees, making them a leading employer in the region. Church’s commitment to preserving specialist skills and ensuring that they are passed onto the next generation of apprentices, is characteristic of the contribution many regional high-end employers make to providing sustainable careers that boost local economies. Likewise, Burberry’s Castleford factory in West Yorkshire, which manufactures the brand’s iconic trench coat, employs around 600 skilled The spill overs described above are a result of the private products, of which two-thirds took place outside China. workers and also runs a training scheme for apprentices, consumption of luxury goods, but a second type of spill One study suggested that shopping was a vital part of a over effect stems from the enjoyment of the public goods trip for nearly 82% of Chinese tourists. Another reported associated with high-end cultural and creative industries. that 68% of Chinese travellers surveyed spent between funding doubled the size of the UK factory in Bridgewater, These are usually associated with enhancements to the 21% and 50% of their travel budget on shopping. According Somerset and created 300 new jobs in the area. attractiveness of locations. In a report on the linkages to data from the UK China Visa Alliance (UKCVA), the UK between tourism and cultural industries, the OECD is losing £1.2bn annually due the current visa process Due the type of employment and the necessity for highly- observes, specifically in relation to design activities, that which is overly onerous on Chinese visitors, who instead skilled craftsman, the high-end industries provide “Urban design adds to the atmosphere of places, making opt to visit the European capitals under the Schengen 6.3 EMPLOYMENT AND KNOWLEDGE opportunities for both young people through training and them more attractive to local residents and tourists alike”. visa. The UKCVA (of which Walpole is a founding member) In addition to the spill over effects conferred on travel apprenticeship programmes and also provide sustainable Consider for example the significant investment made has been working closely with government to develop a and tourism another spill over effect of the high-end careers for their long-term employment. Many of the by Grosvenor Estates in areas such as Mount Street to number of recommendations to improve the visa application creative and cultural industries is to the enhancement high-end businesses will have skilled craftsman in their enhance the whole area with a combination of attractive process and a recent visa facility sharing pilot with of knowledge and skills and employment opportunities. 70s who are training the next generation and passing on luxury brands and restaurants as well as investment in Belgium was announced in early July 2015. Further policy urban design with water features, road improvements recommendations are outlined in section 8 of this report. providing employment opportunities for young people in the area. Last year Mulberry, with the help of government traditional skills and knowledge. The high-end creative and cultural industries, as noted and planting. These investments have improved the whole above, are a major contributor to employment in the UK, As already observed in previous sections the high-end area for visitors, residents and workers. employing over 113,000 people directly and indirectly. The cultural and creative industries have an extensive network high-end industries provide both employment opportunities, of contractual relationships with upstream suppliers, often as well as training and sustainable careers for people SMEs, particularly in industries such as textiles, fabric and across the UK and importantly in areas outside of London. leather. The intrinsic commercial importance of product From medium and large scale manufacturing to individual quality places a heavy premium on ensuring that the artisans and makers working in regional clusters, the luxury upstream suppliers have sufficient skills and are able to supply chain has a significant footprint across the country, adapt to changing requirements. In such circumstances, providing jobs and training opportunities particularly in the upstream suppliers have incentives for developing a north of England, the midlands and Northampton. High-end reputation for reliability and skilled workmanship, and brands including Church’s, Ettinger, Halcyon Days, Bentley, downstream purchasers have an interest in securing Burberry and Savoir Beds, all have regional centres for long-term supply relationships to ensure continuity of manufacturing and production. supply and to reduce transaction costs. This observation is further supported by the prominence attached to fashionable districts in promotional material developed by tourism authorities. This enhancing effect stems from the investments that luxury cultural and creative industries make to facilities to improve their attractiveness, and the effects on urban geographies of these investments are further reinforced by the clustering effects. A recent study by TNS Sofres established that 74% of citizens in the UK see the high-end creative and cultural industries as a contributor to the UK’s economic 18 74% of citizens in the UK see the high-end creative and cultural industries as a contributor to the UK’s economic development by increasing the attractiveness of the UK for tourists 19 85% of citizens in the UK see the highend creative and cultural industries as a playing an important role for employment and economic growth relationships developed by the high-end cultural and Knowledge-based activities are typically capital and skills The clustering of upstream supply activities, driven by creative industries, these spill over effects would have intensive, and generate a high degree of local value added knowledge spill overs, also have an important role in been unlikely. Given the close relationship between skills through proprietary knowledge. High-end cultural and stimulating regional development. This is partly because and productivity, and between productivity and economic creative industries themselves are part of the knowledge- of labour market “matching” effects outlined above and growth, these knowledge spill over effects associated based economy and as a result their tendency to cluster also due to the fact the region becomes more attractive with high-end industries constitute a genuine multiplier in specific cities will stimulate the knowledge-based for investment (by nature of the stock of skills). A further effect. Essentially the economy would have been smaller economy in their host regions and countries. But they also channel is the fact that the supply chains associated in their absence. The spill over effects are particularly contribute indirectly to the development of the knowledge- with high-end activities connect these regions to the important in the UK at a time of youth unemployment, as based economy through labour-market effects. High-end global economy. This is particularly important given they increase the skill sets of younger workers, provide a cultural and creative industries usually rely on a highly the difficulties SMEs usually encounter in accessing Such arrangements are conducive to a particular form of choice of training and long-term careers and hence their skilled and creative cohort of employees, who are attuned global markets. knowledge spill overs. In part these may be associated competitiveness in the labour market. to global markets and competing in demanding market with training and other initiatives that high-end cultural segments. These skills and know-how are portable across The automotive sector is the largest by value of the high- and creative industries may undertake to develop the skills A recent study by TNS Sofres established that 85% of industries that require similar managerial and sales skills end cultural and creative sectors and is well known for its of suppliers. These initiatives themselves are not spill citizens in the UK see the high-end cultural and creative sets. The fact that luxury cultural and creative industries clustering effects. An example of a high-end cluster is in over effects but they may generate spill over effects. As industries as playing an important role for employment cluster in specific locations increases the stock of these Oxfordshire where we see a cluster of businesses involved suppliers improve their skills, some of their knowledge and and economic growth and 79% believe that they have skills in those areas, which can make it attractive for other in Motor Sport - which includes luxury and specialist expertise is likely to spread to other supplying firms, either an important role in the preservation of craftsmanship, knowledge-based activities to locate to the same area. manufacturers, including four firms currently involved in through observation, through employment or through know-how and creative professions. This is because in doing so, they are able to reduce their formula 1 racing. More broadly, “Motor Sport Valley”, which search costs by better matching available skills with the extends from Buckinghamshire to Northamptonshire, requirements of these activities. features a network of around 3,500 businesses employing informal networks. 6.4 CLUSTERING EFFECTS Suppliers are also likely to benefit from learning-by- A further benefit conferred by the high-end cultural and doing and the tacit transfer of knowledge and skills, quite creative industries is the clustering of high-end cultural These agglomeration effects via labour markets provide 80% of the world’s high performance engineers. The independently of any formal efforts undertaken by the high- and creative activities. This is most obviously visible one explanation why cities that feature a high concentration industry is a key component of the region’s knowledge- end cultural and creative industries. These tacit effects are in luxury design, services and retail activities in cities of high-end cultural and creative industries also tend to based growth strategy. generally observed where there is repeated and frequent (downstream agglomeration effects); and the clustering feature a high concentration of other high value-added interaction, as is the case with luxury cultural and creative of supply chain activities related to luxury, cultural and activities, such as retail services, professional services, 6.5 PUBLIC GOODS RELATED industries who work closely with suppliers to develop creative industries, reflecting knowledge-related spill telecommunication, and financial services. TO THE VALUE OF PLACE products. Such learning-by-doing effects are generally overs (upstream agglomeration effects). considered to be one of the main channels through which around 40,000 people, and which accounts for an estimated The importance of these public goods was already A secondary channel through which luxury cultural and discussed in relation to tourism activities, agglomeration the stock of skills and knowledge increases within an Clustering of high-end activities that interact directly creative industries generate agglomeration effects in effects and is also valued by residents. Evidence of this can economy as a consequence of trade and investment. with customers create important agglomeration effects relation to knowledge-based activities is through their be found in data from surveys of public opinion in Europe Furthermore these effects tend to diffuse across supply in relation to tourism and travel, as documented above, contribution to the quality of place (see following section regarding the impact of high-end cultural and creative firms in any given area due to employment mobility. either through spill overs of the Shopping Tourism channel relating to Public Goods). Improvements to the quality industries. Data from 2013 suggest that 74% of surveyed or through the Public Goods channel. Other sources of of place enhance the quality of urban settings. This is respondents in the UK thought that luxury cultural and These types of knowledge spill overs are important since agglomeration or clustering effects are related to the important as the labour force associated with knowledge- creative industries made an important contribution to they increase the stock of skills in the UK economy. contribution high-end cultural and creative industries play based activities is typically more mobile than the average. the prestige and appeal of city centres. This figure does Some of these skills may be generic while others will be in developing the knowledge-base of the UK economy (as Enhancements to the quality of place can thus increase not vary materially from that reported in 2009, pointing specific but without the dense network of subcontracting referenced above), which is central to competitiveness. the attractiveness of particular locations. to the stability of this perception. 20 21 7. Forecast trends It is difficult to establish a precise forecast for the high- • Real GDP growth in the advanced economies for the On this basis, a conservative forecast would be to assume Key performance indicators for the sectors under both end cultural and creative industries as a whole, given period 2014-2019 is forecast to be around 2.3% per that the sectors will grow over the period 2014-2019 at scenarios are presented in Table 4 below. the range of factors that may influence performance. year, compared to around 1.3% in the period 2012-13. the same rate as they did in the period 2010-2013. This is The Frontier Economics report for the ECCIA highlighted However, there may be significant downside risks given conservative since the forecasts presented above suggest The projections point to significant growth in the high-end how policy variables – such as Intellectual Property persistent fragilities in the Eurozone, notably. that: (i) key economies would grow faster in 2014-2019 than creative and cultural sectors over the medium term. Further protection and anti-counterfeiting measures, market • Growth in Brazil is forecast to be broadly similar in they did in 2010-2013; and (ii) key emerging markets are growth could be generated by favourable changes in the access, ability to attract tourists, selective distribution and 2014-2019 as was the case in 2012-2013. Growth in China wealthier than they were in the period 2010-2013. A high policy environment notably, more stringent enforcement digital governance – could each have significant effects is expected to be around 6-7% per year, i.e. still robust growth scenario would be to assume that the sectors will of Intellectual Property and Anti-counterfeiting measures. on the performance of the sectors and their economic though dropping off slightly compared to 2012-2013. grow in 2014-2019 at the same rate as they did in 2012- contribution to society. In addition to these variables, Growth in India is expected to increase to an average 2013 (i.e. at around 10.8%). other factors, such as trends in international competition of around 6.4% over the period 2014-2019, compared (including from other firms within the EU) and economic to around 4.5% in the period 2012-2013. Growth in growth in key markets will all have a significant impact Russia is forecast to be lower in the period 2014-2019 on sector performance. compared to 2012-2013. • The outlook for Middle Eastern countries is uncertain PROJECTED VALUE 2019 (BILLIONS) PROJECTED EMPLOYMENT 2019 Assuming that the policy environment remains broadly because of the fall in oil prices and regional instability. Scenario 1 £51.1 158, 775 employees constant, and that patterns of competition remain broadly Assuming oil prices do not revert to their levels of as they are at present, the main determinant of performance 2012-2013, growth is expected to be correspondingly Scenario 2 £57 177,254 employees for the UK high-end cultural and creative industries will slower in the period 2014-2019. TABLE 4: PROJECTED PERFORMANCE TO 2019 be growth in key markets. These markets are: Overall, though the general forecast is for the world • Advanced economies, notably USA, Canada, Japan and the Eurozone countries economy as a whole to grow faster in the period 20142019 than in 2012-2013, there are significant uncertainties • Key emerging markets: Brazil, China, India, Russia given the weaknesses identified in certain regions and • Oil exporting countries of the Middle East strengths in others. This mixed picture is also true of key emerging markets – China, India, Russia and Brazil – that We rely on growth forecasts for these regions prepared have been significant sources of growth for the high-end by the IMF and reported in its World Economic Outlook cultural and creative sectors. database. The key trends reported are: 22 * Source: Frontier Economics calculations, based on industry reports, and IMF data 23 8. Policy implications The key messages of the previous sections are that high- would enable the high-end cultural and creative industries’ 8.3 SELECTIVE DISTRIBUTION 8.5 VISA FACILITATION AND AIRPORT CAPACITY end creative and cultural industries make a substantial business model to flourish. The key elements of such a As highlighted earlier in this report, the high-end industries’ As highlighted earlier, the high-end industries are and distinctive economic contribution to the UK. This policy framework are detailed below: distribution strategy is geared towards maintaining the responsible for a considerable economic contribution aura of the product, to ensure that the goods and services to the tourism industry in the UK by being a determining contribution is both direct – in the form of value added and jobs created and indirect. Indirect effects include 8.1 INTELLECTUAL PROPERTY are distributed in an appropriate way, that maintains factor in choice of destination, through tourist spend on significant linkages with the tourism sector, and in labour The protection of Intellectual Property continues to and enhances the experience, enables levels of service shopping and luxury experiences and also due to wider market linkages, which reflect the significant networks and represent a critical issue for the luxury cultural and and confidence expected by the customers as well as spill over effects of enhancing the appeal of locations. clusters of suppliers that are associated with these sectors. creative industries. A strong framework for Intellectual supporting commercial considerations. Property protection is key for the high-end industries to be However, the UK continues to be at a significant In keeping with trends identified for Europe as a whole, the able to differentiate their products, to secure investment The ability for the luxury cultural and creative industries disadvantage by comparison to European countries, high-end creative and cultural industries appear poised in innovation and development, as well as their brands to closely manage and invest in their distribution models, continuing to miss out on the important economic benefits to continue their strong economic contribution in future and businesses, with the legal certainty that IP rights through the principles of selective distribution (which are of attracting tourists. In the case of visitors from China, by years. The core source of growth in these sectors are will be upheld in both the physical and digital economies. currently enshrined in EU legislation) is critical to future comparison to countries such as France the UK is losing the distinctive business principles that underpin these Furthermore to tackle the specific issue of counterfeiting growth and success and needs to be protected for this £1.2bn annually to the economy as s a direct result of the industries, namely: and to enhance IP protection there is a requirement for unique industry. current visa system. • The aura of the products in these sectors, which reflect tougher sanctions to deter counterfeiters, to improve the the cultural heritage on which they draw, and the rich damages and compensation for rights holders as well as 8.4 MARKET ACCESS Policy and visa facilitation that enables the high-end tradition of skilled craftsmanship they embody. The a need for further clarification of the safe harbour status. As discussed in this report, the luxury creative and cultural industries to attract high-spending visitors to the UK from industries are export orientated, harnessing the unique key markets including China and the Middle-East is critical 8.2 DIGITAL GOVERNANCE characteristics and appeal to expand internationally. to the success of the industries and further economic • The importance of long-term relationships with a The increased digitisation of our economy brings with it However, trading internationally is not without challenges, benefits to the UK economy. In particular, supporting the network of skilled suppliers, with an emphasis on a wealth of opportunities and with it a responsibility to in particular, high ad-valorem tariffs and domestic taxes recommendations of the UKCVA and the further roll-out product quality that allows the brands in these sectors ensure consumer trust and safety online. In particular in markets such as China are barriers to entry for a of the pilot scheme of visa sharing facility with Schengen to position themselves competitively. policy relating to responsible online marketing practises, a number of SMEs. Policy, trade agreements and diplomatic country, Belgium, to other countries such as France as general duty of care on online service providers, recognition relationships with key markets and other activities that well as reducing the pricing of the 10 year visa to make it of selective distribution, IP protection as well as policy enhance their ability to access international markets is more attractive and encourage multiple visits. and sanctions relating to counterfeiting and the alignment critical to future success. concept of aura also extends to the way these sectors market and distribute their product • The role of Intellectual Property in securing the value added of the final product. The research commissioned by Walpole highlights the of criminal sanctions for on and offline IP infringements value that the UK as a whole would derive from continuing are all key to providing a secure digital environment for to ensure that a suitable policy framework is in place that customers and businesses to operate. 24 25 The high-end creative and cultural industries are forecast to continue their rapid growth in the medium term. Forecast value of sales for 2019 is between £51.1bn and £57bn, while forecast employment is between around 158,000 and 177,00 Charles Russell Speechlys is one of a small number of law firms which provides personalised, considered advice to dynamic and entrepreneurial organisations, as well as astutely commercial advice to individuals and their families. The firm is uniquely positioned to provide comprehensive advice where these two sets of needs overlap and as a result we work with some of the world’s most successful entrepreneurs, The London airports issue is well documented with 8.6 SKILLS AND VOCATIONAL TRAINING research from Let Britain Fly showing that the already The report has shown that the UK as a whole benefits busy airports will be over capacity by mid 2020, with from the employment opportunities and wider spill overs Our approach is to take both a long-term and broad view, helping our clients to make demand set to double by 2050 and business demand to manufacturing, knowledge and skills from the high- the right decisions now and for the future. We adapt to the needs of each of our clients alone forecast to grow by 80% by 2030. Furthermore the end cultural and creative industries which employ nearly and work with them in a highly responsive and personal way, sensitively guiding UK has no direct daily flights to 10 emerging markets – 113,000 people directly and indirectly. However, the luxury but 26 cities in those economies are served by European industries rely on highly-skilled craftsmen, a creative competitors and this is significant as 20% more trade is workforce and numerous SME upstream suppliers to done with countries where the UK has a direct air link. support the business model and there is a requirement the luxury sector, where we work closely with Walpole as a corporate partner. We Research from Let Britain Fly shows that an increase to address the gap between the industry needs and the advise clients in the UK and across the world. of 1,000 passengers a year between two countries sees availability of a highly-skilled workforce. wealthy families and growth businesses. them to the right outcome. Many much larger commercial clients find our approach a refreshing alternative to that of larger, but less personal law firms. We are based in London with a network of international offices and other associations. Our focus is based around a number of key industry sectors and practice area specialisms including HOW WE CAN HELP trade increase by as much as £920,000. Extrapolating Managing your brand, protecting your designs, establishing secure commercial these figures shows that £128m additional annual trade As such policy and activities that recognise the value of could result from one new daily route, or £1bn from a these types of unique skills and knowledge is important new daily route to all eight high-growth economies (these - as is the promotion of vocational training, raising high-growth economies are China, India, Brazil, Russia, awareness of career opportunities in manufacturing jobs your field is essential. Our specialist team can provide bespoke advice to high profile Indonesia, Mexico, Turkey and South Korea). and policies that promote the transfer of knowledge and businesses and entrepreneurs in a wide variety of matters relevant to luxury brands. arrangements and dealing with disputes, along with day-to-day employment, financing and property matters, are riddled with legal and regulatory complexities. That is why working with an enthusiastic team of lawyers who understand and have experience in further support for apprenticeship schemes. The cost to the UK economy is significant and is further exacerbated by reducing the UK’s long-term ability to It is important to underscore that all these aspects are compete internationally as competitors continue to reap sound policy in their own right, and have wider payoffs. For benefits and build important trade links. Following the example, there are clear links between counterfeiting and final recommendations from the Davies’s Report for the criminality, and therefore the benefits of anti-counterfeiting additional runway at Heathrow, commitment is now needed activities will have wider social payoffs. to implement the recommendations and avoid further Frontier Economics is Europe’s largest independent economics consulting group. costly delays to the UK economy. It specialises in the application of advanced economics to help governments make better policies and businesses to add value. 26 27 WALPOLE 2nd Floor Riverside, Building County Hall, Westminster Bridge, London SE1 7JA T +44(0)20 7873 3802 www.thewalpole.co.uk FRONTIER ECONOMICS EUROPE BRUSSELS | COLOGNE | LONDON | MADRID Frontier Economics Ltd, 71 High Holborn, London, WC1V 6DA T +44 (0)20 7031 7000 F +44 (0)20 7031 7001 www.frontier-economics.com