Preparing to cast the die

Project fear, dodgy data, over-optimistic forecasts and general confusion: as we head for the referendum propaganda from both “remain” and “leave” camps continues to muddy the waters, so what will 23 June really mean for retailers? Penelope Ody investigates.

VOTERS HEADING to the polls next month will have forecasts from the “remain” lobby of rising prices, job losses, and a massive downturn in the economy ringing in their ears, while the “leave” campaigners will be stressing the risks of increased migration, terror threats from lack of border control, and a continuing loss of sovereignty: hardly surprising, then, that many feel confused and mistrustful of the wealth of statistics that have been hurled at us over the past weeks.

Those weeks have seen some major retailers come out in favour of “remain” while others – including many major supermarkets and department stores – have stayed determinedly neutral. A YouGov study back in February suggested that 96% of big businesses want to stay in the EU compared with only 47% of SMEs, and Joshua Bamfield, Director of the Centre for Retail Research, suggests these figures probably hold good for retailers as well: “Life is easier if things are stable,” he says. “The majority of large retailers support remaining in Europe. They know the current system well and fear the uncertainty and problems likely to be caused by Brexit.”

Inevitably retail concerns about the possibility of Brexit focus on the potential for tariffs on EU trade, rising prices, labour laws, and possible restrictions on opening stores in the EU (in theory easy now but, as the British Retail Consortium puts it: “…complaints about discriminatory practice…suggest this is not the case”). For those involved in logistics likely labour shortages become more significant with a possible loss of low-cost migrant workers from Eastern Europe – although given April’s increase in the minimum wage many carriers may already be looking at ways to improve efficiency and reduce labour costs.

On the plus side, leaving the EU may mean a relaxation of Working Time Directive constraints, giving greater flexibility to workforce planning. Retailers would also be able to source goods from the cheapest markets free of the EU’s Common External Tariff – designed to protect EU producers – which could mean lower prices for textiles, agricultural products and commodities. We would also be spared any future attempts by the EU to further harmonise VAT rules and rates.

According to Eurostat, 30% of EU online shoppers bought or ordered goods or services from other EU countries in 2015 compared with 25% who did so in 2012, while 18% bought things from non-EU countries (13% in 2012). Eurostat does not break out this data by country, but with 67% of UK retailers offering worldwide delivery and 65% of their online sales revenue coming from international orders, one might assume that UK multichannel retailers provide a significant proportion of these sales. However, since currency issues can be a deterrent for cross-border shoppers, and as we will remain outside the eurozone, it may be that the bulk of the UK’s international sales could in future come from non-EU countries happier to trade in sterling.

CUSTOMS & TAXES

In the event of Brexit, sales to the EU by UK retailers may be subject to some sort of tariff and they may be delayed in customs – much as sales to non-EU countries already are – but, as “leave” campaigners regularly point out, we buy far more from the EU than they buy from us and it would seem highly unlikely that either side would wish to trigger a tit-for-tat trade war. “Say UK retailers are sending 200,000 parcels a month to France,” says Professor Bamfield, “will all these have to be checked through customs and tariffs charged and collected? It could be challenging for the French authorities so there may be a de minimus approach with low value items simply waved through.” Equally a pan-European free trade area already stretches from Iceland to Turkey – both non-EU countries – and since the EU’s trade agreements with Moldavia and Ukraine, the only European countries outside this free trade zone are Russia and Belarus. According to Daniel Hannan MEP “Even Stuart Rose who heads the pro-Europe campaign has accepted that free trade would continue”.

The EU has already introduced new VAT rules for cross-border sales of digital goods or services which mean that the VAT rate pertaining in the shopper’s geography, rather than the seller’s, must now be applied. The UK currently has one of the lowest VAT rates in Europe so, while purchasers clearly benefit from this rule, sellers in low VAT areas lose any advantage they may have had. There are persistent suggestions that in future the EU will extend this ruling to physical goods as well. Currently UK sales to non-EU countries are zero-rated for VAT. For consumers the opposite rules apply with VAT charged on non-EU goods when they arrive in the UK – hence those occasional bills from the postman who delivers your online order from the US. This has caused some in the “remain” camp to argue that prices of all imports from the EU will rise by 20% in the event of Brexit.

However, since those sales would be from an EU to a non-EU country they would be exported as zero-rated, thus saving up to 25% or more on the price quoted in the home market. Prices are more likely to rise in the short-term if Brexit causes the pound to lose value as Professor Bamfield says: “If exchange rates fall, this would have a bigger effect on prices than international tariff agreements. One can argue that sterling is already overvalued and probably in the long run Brexit would mean a lower exchange rate. This is not necessarily a bad thing.” It would certainly be appreciated by exporters.

LOGISTICS

Among companies involved with logistics and distribution there is some concern about increased carrier costs due to customs clearance issues. Andrew Hill, Commercial Director at delivery management platform Electio, finds this a growing concern for his company’s customers. “They believe that freight charges for international deliveries will rise and that will have to be passed on to retailers and ultimately consumers,” he says. “The e-comm companies we work with are less concerned – generally they start international sales in non-EU English-speaking markets and most still feel confident about growth.”

Loss of migrant labour in logistics could be a concern, as Craig Sears-Black, Managing Director at Manhattan Associates has said: “Some professions, such as HGV drivers, are already in crisis due to an ageing workforce and lack of younger workers to replace them – there is a reason noticeboards in many retail distribution centres are multi-lingual”. Under the 1969 Vienna Convention pre-existing migration rights for those who have already benefited from them would be unchanged – so those Eastern European lorry drivers and hospitality staff already here would be able to remain, should they choose to. The Treasury forecast on the implications of Brexit, published in April, states that there are 3 million people from other EU countries currently living in the UK; forecasts also suggest that, if current immigration rates continue, a further 3 million EU citizens will be living here by 2030.

After Brexit, Britain could still admit EU migrants selectively to fill labour shortages as need be. “Greater selectivity in migration would also mean that those Australians, New Zealanders and Indians who used to come here will be able to do so again,” says Joshua Bamfield, “and that could make it easier for retailers to recruit IT experts from India – as well as helping those Indian restaurants who struggle to find chefs.”

Prospects for the EU, should the UK vote to remain, are not especially optimistic. A report in April from The Economist Intelligence Unit predicts a Greek exit from the eurozone within the next five years, which “would represent a huge political failure for the bloc, with potentially destabilising consequences”. While the EIU believes that the “remain” campaign will win the referendum, it suggests that the next five years will see the EU facing: “…a messy process of muddling through, characterised by suboptimal policy solutions and a suboptimal growth performance”.

In his extensive analysis of retail related issues and the referendum, Professor Bamfield argues that: “Economically the advantages of remaining in the EU are now marginal and the advantages of leaving may also be marginal, though there are greater risks on the ‘leave’ side…The real issue is: what will we do with the new-found freedoms of Brexit, or if we vote ‘remain’ what will we do to reinvigorate our economy and society as a newly-committed partner in the EU?”

Come 24 June both options will present their own challenges.