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Preparing for Brexit

Uncertainty about the shape of the European Economic Area started when the UK voted by a narrow margin to leave the EU back in 2016 – and still persists today. That’s because, at the time of writing, it is still not clear whether the UK will leave the European Union at all – and if it does, on what terms it will do so. Nonetheless, the vote by the UK to leave the EU has already had significant effects on retailers, shoppers and suppliers.

How falling sterling – and prices – have lifted cross-border business

Immediately following the 2016 referendum, the fall in the value of sterling made UK ecommerce websites more attractive to international shoppers, including from Europe. Retailers from Asos and Burberry to Gear4Music all reported rising online sales as a result of an immediate Brexit bounce.

But since then UK shop prices have risen to reflect higher costs of imports through the supply chain, and more recently, fallen as demand from shoppers has dropped in the light of ongoing uncertainty. The BRC-Nielsen Shop Price Index suggests that in the year to September 2019, prices fell by 0.6% as a result of low consumer demand and stiff competition, with non-food prices at their lowest since May 2018 as the effect of the 2016 fall in sterling stopped filtering through the economy.

That means retailers are feeling the pressure to cut prices in order to entice shoppers who are holding back on spending. However, in the event of a no-deal, cross-border trade with the UK could be hit where retailers and shoppers are faced with new tariffs, VAT payment – and associated paperwork. European retailers selling to UK shoppers, for example, would have to pay import VAT when they send parcels worth £135 or less to the UK – and file a report every three months to the HMRC.

Supply chain issues

While retailers stockpiled ahead of a possible March 29 exit from the EU, that’s been harder to achieve ahead of October 31 because of the all-important peak trading season. Supermarket Tesco has said it will struggle to stockpile as it did in March because of lack of space in its logistics systems. In addition, says the BRC (British Retail Consortium), while retailers are working with suppliers to maintain their stocks of non-perishable goods, “It is impossible to mitigate it fully as neither retailers nor consumers can stockpile fresh food.”

The Freight Transport Association’s (FTA) first Labour Shortages Conference will be held this month: the organisation says recent shortfalls of HGV drivers, warehouse staff, fitters, technicians and mechanics “could be exacerbated by the loss of EU nationals from the UK after Brexit”.

Cash is another factor. Business adviser Duff & Phelps says that fast-moving consumer brands are among those stockpiling both raw materials and finished goods in the UK in a way that risks putting a strain on working capital.

Even those importing non-perishable, zero tariff goods, such as DFS’s sofas, are braced for other impacts. Nonetheless in its full-year latest results, chairman Ian Durant said: “The implications of a sustained drop in the value of sterling and the consequent inflationary effect for imported products is likely to become a key factor affecting consumer confidence for high value household items.”

Just as retailers and brands are trying to stockpile goods and materials in the UK, so UK retailers are also opening warehouses on the other side of the channel. Electrical business AO World and fashion retailers Next and Asos were already taking this approach in order to make their international delivery services as competitive as those at home. However, the trend is likely to have been boosted still further by the Brexit vote.

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