Brexit: opportunity and challenge. Brexit means Brexit, says Theresa May, but eDelivery asks what it means for retail? The industry responds…
The result of the EU referendum came as a shock to many with retailers calling emergency board meetings to discuss the impact and bringing into operation their ‘Plan B’ scenarios. Sterling plummeted ahead of a weekend of increased sales from overseas customers looking to bag a bargain. Consumer confidence in the UK fell initially but has since picked up along with the sunshine and a sense of nationalism as the UK’s Olympians soared to success in Brazil.
Retailers are still looking to EU markets for cross-border sales – since 50% of UK goods are exported there – other markets such as the US and China still offer an opportunity post-Brexit. The advantage to overseas customers of the lower value of the pound may make for increased sales but its flip side is the increased cost to UK retailers sourcing from abroad. Will this result in more domestically-sourced goods? A survey by Barclays believes so.
One luxury retail brand told InternetRetailing in the initial aftermath of the results that it instantly saw the effect of the drop in sterling as sales over the three days following the referendum increased by 8% as customers in other countries rushed to make the most of the ‘lower’ prices of British goods.
Other retailers too saw an increase in overseas sales as their prices became more attractive to cross-border shoppers. Some 27% of delivery volumes recorded by the IMRG MetaPack UK Delivery Index were sent overseas in June – the highest figure for June in the index’s five-year history. Cross-border shopping continued at this heightened level throughout July but order values were at a lower rate than expected.
Commenting on the data, Andrew Starkey, Head of e-logistics, IMRG said that while it’s hardly surprising that cross-border volumes have risen since the Brexit vote, the question is whether this upturn in orders will be temporary or sustained over a longer period. As the July average order value has risen on June, we might surmise that shoppers initially used the opportunity to snap up a bargain or two, but are now realising that the deals are very attractive and are loading up their baskets with more goods each visit. While this upturn is good news in a way, clearly there will be pressure on margins due to all products being discounted for cross-border shoppers, in effect.”
Kees de Vos, Chief Product Officer at MetaPack agreed saying that July is usually a month in which retailers enjoy a mini-peak in sales, but the impact of Brexit on shopper confidence is now being felt. “The increase in order values from EU consumers snapping up bargains thanks to the drop in sterling is welcome, however. We expect that over the next few months we’ll see a return to much greater volume growth, ensuring that forecasts for the year are met,” he says.
He also commented that the post-Brexit trade landscape will start to take shape as the process of negotiating new trade arrangements begins. What those trade agreements will look like is still unclear. David Chau, Executive Director International Markets, Trusted Shops comments that should the UK follow a model of a bilateral treaty similar to Switzerland, shoppers purchasing from the UK from within the EU will be hit with customs tariffs and import duties. There is the possibility though that a high value ‘de minimis’ threshold could be set between the UK and the EU so that the majority of online orders are exempt.
However, as one Swiss retailer told InternetRetailing, tariffs make it prohibitive for goods which are returned from customers in the EU to be brought back to its warehouse in Switzerland. It’s cheaper to destroy them than import them back into the country he explains.
In the best case scenario, according to Chau, the EU and the UK signs a free trade agreement – similar to that agreed between the EU and Norway which has remained in the EEA.
Other options could be negotiated, such as a similar set up to Turkey’s membership of the European Customs Union or the default ‘most favoured nation’ position applicable to the UK as a member of the World Trade Organisation. This allows for individual trade agreements to be negotiated with non-EU countries and with the EU as a whole.
“At first glance it might be thought that cross border ecommerce is at the mercy of forthcoming complex trade negotiations, but this need not be the case,” says Patrick Wall, CEO, MetaPack. “Moving forward we need to work together collectively to protect consumers’ access to an open European ecommerce market.”
In its recently published ‘UK exit from the European Union and potential developments for e-commerce’ whitepaper, MetaPack explores all of the trading models that are now being considered by UK and EU trade negotiations, including the Norwegian, Swiss and Turkish models as well as a default to the WTO approach. The company’s conclusion is that following the sensible precedent of agreements around the world, using a high de minimis, the majority of ecommerce could simply be exempt from the more complex duty requirements.
Whatever the outcome of negotiations, it’s clear that supply chains will be crucial to trade deals post-Brexit. “As we move closer to Brexit, it remains to be seen how new bilateral trade deals will be able to provide an environment where supply chains both across service industries and manufacturing can remain competitive,” says Dr Christos Tsinopoulos, Senior Lecturer in Operations & Project Management at Durham University Business School.
He believes that the most pressing trade agreement should be one that prioritises access to innovation. “Although access to markets for trade is essential, a longer sustainable competitive advantage will come from ensuring that UK businesses and the associated supply chain benefit from developing innovative products,” he says.
In a potentially positive sign for the British economy, a third of retailers predict that they will source more from the UK, with only 12% expecting a reduction, according to a survey by Barclays. Asia could also be a winner; 52% expect to increase supply chain activity in India and 43% in China. Consumers can expect to buy more products with an African supply source (38%), but Europe fares less well, with 43% of respondents anticipating a reduction in what they source from the region.
Commenting on the findings, Ian Gilmartin, Head of Retail & Wholesale at Barclays, said: “Getting your supply chain strategy right can be the key to success for retailers. It’s a mixed picture, but there are some encouraging findings in our post-Brexit survey. Retailers are not overly pessimistic about the impact of the vote on their supply chains, and yet they are still thinking carefully about what they need to do now, in particular with regards to which regions they source from and their foreign exchange strategy.
“It’s also reassuring to note that most retailers don’t intend to pass on costs to their customers and will instead look for other ways to tackle supply chain issues. The really significant news is that a third of retailers surveyed intend to increase domestic supply chain activity. At a time when we’ve all got to pull together to encourage growth in the UK this is a very positive sign.”
While the UK government’s new departments – the Department for Exiting the European Union (DExEU) and the Department for International Trade – debate and negotiate what the future of trade with the EU and other countries will look like, PM May has said that Article 50, which will mark the start of the UK existing the EU, will not be triggered before the start of 2017.
Time enough for the industry and its associations to raise their voices and ensure that the needs of ecommerce supply chains and cross-border fulfilment are taken into account in the forthcoming negotiations.
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