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IREU Top500 The Customer Report: 2018

IREU Top500 The Customer Report: 2018

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Into the unknown

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With final Brexit terms still to be agreed none of us know with absolute certainty what life will be like after 29 March 2019. Penelope Ody investigates what retailers should be planning now.

 

“There are known knowns,” as US Secretary of State Donald Rumsfeld memorably said in 2002, but also “unknown unknowns – the ones we don’t know we don’t know”. When it comes to life after Brexit, many retailers are still in that “don’t know” category.

 

Retailers are used to planning for an unknown future – especially in this age of rapid technological change – but the Brexit “unknowns” represent a new challenge which many have yet to fully appreciate. Some of the issues have been well-publicised: possible labour shortages as EU nationals vote with their feet and go home, for example, or predictions of lengthy queues at ports as lorries are delayed by customs on both sides of the Channel. Rather less attention has been paid to how opting out of the EU’s common external tariff (CET) will affect both retail prices and sourcing options, or the implications for inventory of developing a multiple-distribution centre strategy, or the impact on online sales as cross-border trade with 27 EU countries becomes more complex.

 

While East European workers are less commonly found in high street stores their role further back in the supply chain is vital. “It’s a big worry for warehousing and logistics companies,” says Craig Summers, Managing Director UK, Manhattan Associates. “In many cases more than 20% of their workforce comes from the EU and the construction sector has already found that many EU workers did not come back to the UK after Christmas – it could happen in distribution as well.”

 

While there is much talk of robotics in warehousing, Summers suggests that companies are more likely to be improving the efficiency of their existing systems to maintain operations with fewer staff. than invest in automation. However, Jonathan Reynolds, Academic Director of the Oxford Institute of Retail Management and Deputy Dean at Oxford’s Saïd Business School believes a re-evaluation of the cost vs benefits arguments for automation could be on the cards: “If you have a shortage of low-wage staff then the cost of pick and pack goes up and that can be an impetus for automation. Maybe more of those self-driving long haul lorries on our motorways to combat the driver shortage as well?”

 

That existing shortage of HGV and van drivers will be severely exacerbated by departing East Europeans and retailers may need to consider modifying those promises to deliver click and collect orders to stores within hours. “As well as withdrawing the promise, the price of premium services may need to rise to match actual capacity,” adds Reynolds. “The current home delivery model is ripe for reform it has to change.”

 

Potential delays for imports at customs have also been well publicised. According to Peter Ward, CEO of the UK Warehousing Association, there are currently 90 million “frontier declarations” involving non-EU consignments each year of which around 4% are held up for inspection for some reason, either because the documentation is incorrect or customs officials are suspicious about the contents. There are also 210 million annual consignments from the EU that are currently waved through but which will also need a “frontier declaration” in future. “Typical cost for a freight forwarder to get a non-EU consignment through customs is around £25 to £50 per container,” says Ward. “After Brexit that charge will also apply to EU shipments.” Good news for the freight forwarders, perhaps, but a significant expense that must be paid by those further up the supply pipeline.

 

As Ward also explains, those 4% of consignments delayed at the port may involve a lorry waiting around for a couple of hours, half a day or more – costing maybe £100 in terms of lost capacity. Applying a similar 4% potential problem factor to the EU consignments could add £800 million to total shipping costs to be borne somewhere in the supply chain. Delays could also impact fresh produce imports. As Jonathan Reynolds says: “The just-in-time approach adopted by the food sector will be a thing of the past. Retailers will need to build much greater resilience into their supply chains.”

 

Peter Ward agrees: “If there are delays then companies will need to mitigate the risk to the supply chain,” he says, “so building a 24- or 48-hour delay into the pipeline increases lead times and means they will need additional stock – and that means more warehouse space.”

 

STORAGE CAPACITY

 

While that may benefit the warehouse industry, building warehouses takes time – there are planning issues and a labour shortage in the construction sector to contend with, while Ward knows of new sites where it has taken up to two years for the National Grid to connect the power supply. So, given that it is now 10 months to Brexit and a further 21 months likely in “transition”, retailers really need to be calculating their potential warehouse needs sooner rather than later.

 

The location of those distribution centres (DC) will also need careful planning. While centralisation to minimise inventory has been a key consideration in the past, that will change for multi-national retailers post-Brexit. Importing goods, such as fashions or electronics from the Far East, directly to the EU to service customers in Europe rather than channelling them through a UK DC may be a better option. CET on those imports will have been paid and once inside the single market they can be shipped to any of the remaining 27 member countries.

 

Multiple DCs may deliver other opportunities: rather than a multi-national retailer harmonising its range across several geographies it could enable greater differentiation between UK and European assortments to cater for local needs and preferences.

 

This need for EU-based distribution capacity will be a major change for many online retailers, used to despatching parcels from the UK to far flung EU shoppers. Those parcels sent from the UK will be liable to customs delays and duty payments post Brexit, but if they’re posted from a warehouse in Rotterdam or Calais, say, those inconveniences are avoided. “We’re already seeing more interest from retailers in developing a multi-DC strategy,” says Craig Summers, “but it demands granular visibility of stockholdings and good forecasting so that the merchandise is in the right place, as we obviously don’t know how easy it will be to transfer stock between a DC in the UK and one in the EU.”

 

An end to CET post Brexit, may also encourage greater flexibility in sourcing. CET is essentially protectionist with many tariffs – such as up to 17.5% on non-EU fruit imports – aimed at giving European farmers an advantage. CET rates are many, highly variable and occasionally bizarre: 15% on unicycles, for example. Currently those familiar packs of out of season mangetout on supermarket shelves – from the likes of Peru or Kenya – attract a CET of 11.2%. Small wonder then that UK supermarkets are already looking for new non-EU food sources. “Some are investigating Indian farms,” says Ray Gaul, VP for Research and Analytics at Kantar, “Perishable products will always be challenging and shipping from non-EU sources will take longer, but there could be quite dramatic price differences especially for non-EU wines and meat.”

 

With many retailers signing supply contracts a year or more ahead of delivery, decisions will need to be made soon about post-transition sources. “There is so much uncertainty about the final deal that retailers do not know how radical they will have to be,” says Jonathan Reynolds. “Do they find non-EU sources now to provide continuity or wait and see – and find that they’ve lost out to competitors who have already signed up all those Indian farms?”

 

“Anecdotally we’ve heard of buyers now looking further afield,” adds Craig Summers. “The attitude seems to be that if we have to go through customs anyway, then we might as well source more widely.”

 

Without CET, UK retailers will need to crunch the numbers to calculate whether it is better to buy from expensive EU sources, or opt for low-cost countries with higher freight charges. And post-Brexit challenges are not confined to the UK: “EU suppliers are very worried about their wholesale dairy sector if the UK opts for non-EU supplies,” says Gaul. With CET tariffs on bulk milk from third countries up to €182 per 100kg, there could well be price reductions ahead for UK ice cream lover.

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