Strategic Overview: Trading in a changed Europe

 

Chloe Rigby considers what Brexit means – so far – for the UK’s retailers, and considers how multichannel strategies might be recalibrated in response

Brexit came as a surprise for many – and the decision provides a new starting point for retailers planning their international expansion strategies. How are multichannel and ecommerce traders responding, and how might they respond in the future?

Reasons to be cheerful

Back in June, the UK’s decision to leave the European Union seemed momentous. One immediate effect was a slide in the value of sterling from which it has yet fully to recover. In the short term, that provided a sales boost for UK online and multichannel retailers already selling into European markets.

Musical instrument and equipment pureplay Gear4Music, for example, reported a spike in sales immediately after the vote. Sales to Europe were 191% up in the week between 27 June and
3 July, compared to the same week a year earlier. For context, in the week to Sunday 19 June, sales to Europe were up by 120%.

Meanwhile, Burberry said it stood to benefit from the change in currency. When it updated the markets on its figures for the quarter to 30 June, the luxury retailer said that if exchange rates remained at current levels in its current financial year, it would expect profits to be up by about £90m on the same time last year.

Katrina Rattu, associate analyst at Verdict Retail, says other luxury retailers can expect to benefit from the weakness of sterling. “Retailers such as Selfridges and Harrods are currently benefiting from the fall in sterling because of the influx in tourists,” she says. “They would look to take advantage of the lower pound, even if it’s in the short term. I suspect they’d look at their online platform as a strength and make sure they had effective social media posts to drive online traffic to their websites and then convert visitors to purchases.”

She advises that such retailers need to act quickly. “If a retailer is benefiting from the fall in the pound, it would make sense to make the most out of it that you can. That’s about making sure your online platform is good, that social media posts are effective and, that your products are of good quality, durable and multifunctional. If retailers are benefiting from the weaker pound, they should make sure they are doing that as much as possible right now because they don’t know if it will be long term or not.”

Causes for concern

Some retailers have warned longer term of higher prices should the pound’s weakness persist. Next [IRDX RNXT], for example, said that despite hedging that would keep its prices down until January 2017, its cost prices could rise by up to 5% next year.

In the short term, however, retail sales remain buoyant. In July, according to official Office for National Statistics estimates, shoppers spent 3.6% more then they did a year earlier, and
1.6% more than a month earlier. Online sales were up by 16.7% on the previous year and by 1.2% on the previous month. As yet, it is largely through the value of the pound, rising retail sales and the more intangible

“Retailers such as Selfridges [RDX RSEL] and Harrods [IRDX RHAR] are currently benefiting from the fall in sterling because of the influx of tourists”

– though optimistic – measures of confidence that commentators have so far measured the Brexit effect on consumers’ propensity to shop.

But multichannel businesses planning strategies for the longer term will no doubt be cautious about assuming that this increased spending will continue. It’s that uncertainty about exactly what Brexit means that is still concerning for many. “I think the instability has given pause for thought, and caused a lot of retailers to review their retail operations,” says Rattu.

Discounters and homewares retailers, faced with evidence of a slowing housing market, will be less likely to be able to absorb the costs of Brexit, she says, and also less able to pass on costs to their customers: “They will start to see where they can save within the supply chain, because that’s the easiest option. A lot of retailers will start to look at where they can get the better deal. Since we don’t know what the outcome will be of the negotiations, there may actually not be a need to look to manufacture within the UK. We don’t know what the strategies could be. But I would suspect they would start looking at how they could save money after negotiations.”

Evolving strategies

It’s probably too early for retailers to say with any certainty how they will respond to Brexit. That’s particularly true since there is little clarity on what arrangements will emerge from yet-to-be held trade negotiations. But there are some clues in what traders are already doing, and the approaches they are taking. Richard Hewitt, head of digital stores at M&S [IRDX RMAS], speaking to InternetRetailing in an interview ahead of October’s InternetRetailing Conference 2016, said that strategies around the use of data, for example, are best developed little by little. “The real critical piece is the ability to have a vision of where you want to be, and an understanding that you’ll take small incremental steps to get there rather than a two-to-three year road map,” he said. “That gives you the ability to pivot as you go.

“We see the trading landscape can change very quickly, especially with something like Brexit, where you’re immediately having to think in terms of a very different world from the one we would have predicted two or three years ago. If you’ve committed yourself to a very large, long-term road map that doesn’t have that flexibility in it, you can find it very difficult to operate with the agility of a smaller organisation.”

Indeed, some retailers are already working on strategies that could be useful in this time of ongoing uncertainty about the UK’s relationship with Europe.

Waitrose [IRDX RWAI] has announced a stepping up in foreign sales, both through the British Corner Shop website – and through Royal Mail’s shop on the Alibaba Group’s Tmall marketplace. Sainsbury’s [IRDX RSBR] has also expanded the range of products it sells through the latter website and in August, it took a leading role in the 8/8 Tmall festival. While China is a difficult market in which to sell through stores, these online initiatives may gain these brands better awareness in the market, as well as some significant sales. There are other innovative responses to selling overseas. Well ahead of the vote, fast fashion retailer Asos [IRDX RASO] had already put in place its own approach to currency fluctuations. Zonal pricing enables it to fine-tune how much it charges in different parts of the world in order to better fit its prices to local market conditions. None of these strategies was developed in response to Brexit, but each one is an example of approaches that retailers might usefully take in the future.

“You’re having to think in terms of a very different world from the one we would have predicted”

Looking forward

Perhaps buoyed by early sales peaks following the vote to leave the EU, some retailers took an early optimistic view of how Brexit may work out for them. Early responses to the vote suggested there were opportunities in the disruption. Seb James, chief executive of Dixons Carphone [IRDX RDXR], which operates Currys [IRDX RCUR], PC World [IRDX RPCW] and Carphone Warehouse, [IRDX RCAR] was fast to tell the market after the vote that his business could see considerable upsides to the result. “Our view,” he said in early July 2016, “is that as the strongest player in our market and despite the volatility that is the inevitable consequence of such change, we expect to find opportunities for additional growth and further consolidate our position as the leader in the UK market.”

Speaking from the InternetRetailing Summit in Berlin, Gareth Rees-Jones, global digital director of Topman, told InternetRetailing: “It’s a disruptive time but I’m hopeful that great opportunities will come out of that.”

Patrick Wall, chief executive of delivery management software business MetaPack, went still further, suggesting that ecommerce could flourish in Britain and Europe, where exports from the UK are already strong. “With an equivalent level of ecommerce imports and two-day delivery from one end of Europe to the other, consumers are enjoying variety, value for money and convenience,” he said. “Future trade agreements need to protect these consumer rights across Europe.

“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. Moving forward, we need to work collectively in order to protect consumers’ access to an open European ecommerce market.”

In this time of change, many retailers are already looking to find ways of how they can make the Brexit decision work for them, while at the same time protecting themselves from whatever negative effects may occur. One thing is for sure – times of uncertainty are also very interesting ones, and it will be fascinating to see how nimble traders will continue to take international strategies forwards, in order to maintain the leading advantage that the UK already enjoys in online export.

OC&C Strategy Consultants has more than once named the UK the world’s largest online exporter, with retailers that are expanding into international markets four times as fast as they are growing at home. As long as that innovative approach continues, there seems little reason why the UK would miss the £28bn that OC&C has previously said it expects the country’s online exports to hit by 2020. Brexit has been a shock to many but with so many borders already taken down in ecommerce, it’s in no one’s benefit for new walls to be put up any time soon.

“Consumers are enjoying variety, value for money and convenience. Future trade agreements need to protect these rights across Europe”

Mentioned in this piece…

Next

Next

IRDX: RNXT

Next is a British multinational clothing, footwear and home products retailer. (more…)

Harrods

Harrods

IRDX: RHAR

Harrods is an upmarket department store located in Brompton Road in Knightsbridge, in the Royal Borough of Kensington and Chelsea, London. The shop’s 330 departments offer a wide range of products and services. (more…)

Marks and Spencer

Marks and Spencer

IRDX: RMAS

Marks and Spencer is a major UK-based retail chain of large stores and convenience outlets for groceries and fashion. (more…)

Waitrose

Waitrose

IRDX: RWAI

Waitrose forms the food retail division of Britain’s largest employee-owned retailer, the John Lewis Partnership. The company is the sixth-largest grocery retailer in the UK, with approximately 5% of the market. (more…)

Sainsbury’s

Sainsbury’s

IRDX: RSBR

Sainsbury’s is a British supermarket chain with a significant share of the UK market. (more…)

Dixons Retail

Dixons Retail

IRDX: RDXR

Dixons Retail plc is one of Europe’s largest specialist electrical retailing and services companies, with 530 outlets in the UK and Ireland and 320 in northern Europe as of 2014.

In May 2014 a merger with Carphone Warehouse was announced.

Dixons operates Currys, Currys Digital, PC World, Dixons Travel and Electro World stores along with many other brands across Europe.
(more…)

Carphone Warehouse

Carphone Warehouse

IRDX: RCAR

Carphone Warehouse is a multichannel retailer of mobile phones and accessories with over 1,700 stores across Europe. The brand trades as Phone House outside Ireland and the United Kingdom and is part of the Dixons Carphone Group. (more…)