Our latest IRUK Top500 report on Strategy & Innovation hits subscribers desks this week. In it we’ve looked at how Brexit might affect multichannel and ecommerce strategies. Here we have an extra interview on that subject with Alex Birch, partner at OC&C Strategy Consultants
InternetRetailing: How do you see the Brexit vote affecting UK multichannel/ecommerce retailers’ international strategies?
Alex Birch, partner at OC&C Strategy Consultants: Brexit is already creating significant complexity for ecommerce retailers in terms of their international strategies, with this complexity arising from a number of sources.
First and foremost is the general sense of uncertainty that Brexit has created: uncertainty about how it will actually be implemented as well as what structural changes there will be in trading arrangements with Europe and beyond. Next, there is the uncertainty of what timeframe retailers should be looking at – short term or longer term.
In the short term, a weaker pound means opportunities to sell more abroad and potentially extends the customer base that UK retailers can serve overseas. In the longer term, competitiveness will need to be underpinned with more than price differentials. Finally, further complexity arises from the differing strategic goals retailers may have for ‘international’. For instance, some may see it as a marginal growth driver; while for others, it may be viewed as core to growth if they already have a strong UK market share position in their category.
Overall, we expect ecommerce retailers to reconsider their international strategies in light of the emerging messages about the shape and timing of Brexit. We may see some delay investments in international growth until matters become clearer, but we do not expect to see withdrawals from international.
International strategy is likely to become more complicated and retailers should be starting to dedicate more time and attention to it, both around strategy for international growth and also ensuring they can maintain their current activity.
IR: Should retailers reconsider their strategies in the light of the vote – and if so, what issues should they be thinking about?
AB: Ecommerce retailers should certainly reconsider or reconfirm their international strategies in light of Brexit. Issues to be addressed will vary depending on the business model, category and degree of exposure to international, but among the key issues to consider are:
Market and territory priorities: which markets are priorities to secure for the future, if domestic sales in a category may be reduced by slower UK growth? If certain markets appear less accessible in the future, what alternatives could be developed starting now?
Trading strategy: Is there a window of opportunity to build sales and brand awareness in certain markets now (based on price advantage), in order to secure an overseas customer base for the future?
Pricing strategy: What pricing strategy should the business adopt, both short and longer term, domestically and internationally? Can differential pricing (by presenting in local currencies) be achieved?
Legal structures: Should retailers establish local subsidiary companies to trade through?
Sourcing and buying strategy: How will product costs – base product cost but also including shipping / freight etc. – develop? Are there opportunities to source in the UK for part of the range?
Logistics and stockholding: Depending on current international assets and scale, should a retailer hold stock in different countries? This might be to pre-empt issues from trading cross border from the UK. For example, might logistics hubs be moved from the UK into Europe so the UK becomes a spoke, and Europe the hub?
IR: The weakness of sterling, boosting sales, seems a short term post-Brexit boost, while there’s potentially a longer term problem about the higher cost of raw materials. What’s your take – and how do retailers deal with this?
AB: The raw materials challenge is likely to play somewhat differently across different categories. In fashion – where many raw materials are purchased on global markets in US dollars it is likely that ecommerce retailers will be presented with a challenge in twelve months and beyond (depending on how much they forward buy) to hit price points that still deliver the margins they need, but don’t cause a drop off in consumer demand.
If retailers want to sustain their trading cash margins, they will need to pass through price rises to their customers. If they want to soften this blow to consumers, retailers will need to think in terms of end to end margin managed through the different parts of their business.
There are ways for ecommerce retailers to avoid having to pass on the full impact of product price rises to consumers by making up the margin in other areas: for example, fashion retailers may change their free delivery policy, charge for returns or manage their mark down better. In other categories – such as electronics and white goods – where products are readily comparable, prices transparent and retailer margins are already slim, UK retailers may have less room to pass on price rises. Instead, they may have to seek marketing support from brand manufacturers to improve their economics. In order to manage this, they’ll need to find real sources of value to offer brands. Multichannel retailers – with face to face access to consumers – may be in a stronger position to do this.
IR: Is this a good time to go on the hunt to increase overseas sales – why/why not? Does it depend on which market?
AB: In principle, we see this as a good time to go on the hunt for overseas sales – the pound has weakened and foreign buyers will see UK prices as a bargain against their domestic prices. UK retailers, with stock reflecting pre-Brexit cost prices, have a chance to exploit this.
However, retailers need to consider carefully what the end point is that they are seeking and align that with how they execute this hunt for sales. Are they seeking short-term payback against short-term investment, for example, through spending more on search marketing overseas? Or are they seeking to build a longer-term presence and brand position in a market, for example, through site adaptation to local language, call centre support, local returns infrastructure, even physical stores and so on.
Thinking further ahead is harder at present, so there may be a tendency towards the short-term approach.
Either way, retailers will need to make choices about where they focus their efforts – which regions and countries. A good analysis of why they are strong in specific markets at present and why they believe they have an opportunity must be the foundation of those choices.”
IR: What other advice do you have in this area?
AB: Ecommerce retailers don’t yet have a clear view of how their international or domestic business will really be affected post Brexit. There are some ‘hard factors’ at play – such as what the future trading relationships with EU countries will be and what level the pound will reach against other major currencies – and some ‘soft’ factors, for instance, consumer confidence in the UK and bargain hunting by non-UK buyers.
As a first step, e-commerce retailers should assemble a fact-base relevant to their own situation. Which countries and categories are they exposed to? What are the current trading arrangements for those at present and how may they change under Brexit? What changes in consumer demand have they already seen?
Based on the facts assembled, they should then develop a set of scenarios of what Brexit may mean for them and how they will react to defend or extend their business within those scenarios. As Brexit implications become clearer – which is likely to happen in stages based on government negotiations rather than one big bang – retailers need to have carefully thought-out plans for how to react.
When the future is uncertain, the critical thing is to plan for uncertainty – it’s never wise to not plan at all.
