Last week, Britain voted to leave the European Union, and the resultant dose of economic uncertainty continues to rock the world economy, which even prior to the vote was struggling to fully rebound from its most recent global financial crisis.
First, the British pound crumbled to a 30-year low on Friday, the day after the vote. Global financial markets then took a similar dive, and consumers around the world saw big chunks of savings and investment wealth evaporate as corporate securities followed suit and slid downward.
So, what can the retail industry expect? Luxury brands are already feeling the heat, and U.S. flagship stores, very dependent on tourism, will likely see decreased sales. Moreover, luxury brands headquartered in the United Kingdom, will immediately experience the impact of the falling value of the British pound on their top and bottom lines.
Longer term, retailers based in the U.K. will face trade complexities and increased trade barriers with other European countries – like import duties and taxes on products sourced from the EU – raising costs in an industry already beset with razor thin margins.
RetailNext asked two of its European-based retail consultants, Caroline Burke and Jacobo Rey for their thoughts on Brexit and its likely short-term and long-term impacts on the retail industry.
What does Brexit mean to retail for the U.K.?
Burke: Whilst the real impact of the Brexit remains very uncertain so early on, it is clear that there will be number of areas impacted. In the short- to medium-term, whilst decisions are made around triggering Article 50 and the negotiations and decisions made thereafter, retailers will be looking at their operating costs, examining new ways to streamline their business and increase productivity, whilst reducing outgoings.
The longer term impacts remain unknown in this unprecedented situation, but certainly the hope is that with the right negotiations and strong leadership, the nation will be one of open, tolerant and ambitious free trading. We have seen a call to arms from big business leaders, asking for focus on securing the access to the single market, talent and intellectual property.
What does Brexit mean to retail for the E.U.?
Rey: Generally speaking, Brexit is not good news for retail industry. The European Union’s 500+ million population represents tremendous market opportunity for retail, with free persons and product movement within the Union. The U.K. represents a €60 billion market in retail fashion alone, the second biggest market of all EU countries in that industry, and the looming impact is sure to be large.
In reality no-one can anticipate what will happen. There are no historic precedents over the EU’s 23-year history, so today it is all about assumptions. Short-term, the uncertainty has had a very negative impact on stock exchanges, and both the pound sterling and Euro have lost strength versus the U.S. dollar. Uncertainty has also been increased with prime minister Cameron’s announcement of resignation. Being clear, the Brexit has taken us all by surprise, even the most ardent Eurosceptics. Having said that, mid-term there should be an stabilization of factors, and long-term is really open to one’s imagination. Also, keep in mind it is expected a two-years period to complete the exit of the U.K. from the EU.
What will Brexit mean to UK-headquartered retailers with operations in the EU?
Burke: In the short- to mid-term, it is expected to be rather business as usual. In the longer term, there will be concerns around supply chain and operating criteria. For retail this means it is critical that operating efficiencies are super slick, productivity can be measured and staff are aligned correctly to meet the needs of the business.
Rey: Economically speaking, the expected fall of the Sterling – some even talk about a pending recession – may benefit the exports of those U.K.-based retailers with operations in the Euro zone. They can now sell “cheaper,” but at the same time may negatively impact the exports or the payment of those services, or imports that most probably many have at the EU zone. So a good financial and exchange rate policy may be key when eying the uncertain situation that is to come. From a fiscal, labor, taxes, VAT (Value-Added Tax), pricing, customs, and other policy standpoints that today were clear on U.K.-based companies as a member of the EU, we will need to wait and see how negotiations go during the transition period. As an example, today the U.K. pays zero on import tariffs on goods from other EU countries; otherwise there would be an average of 5.3 percent tariffs on goods as those coming from rest of world.
What will Brexit mean to EU-headquartered retailers with operations in the UK?
Rey: The lower pound sterling may have a negative impact on the retail sales in the U.K. market when converted to Euro, and on top of that British citizens may hold off on expenses, especially big ones, due the market uncertainty today, which may cause a decrease in internal consumption and stoke the fear of a short-term recession.
Burke: Again, I think there is no reason why the exit of U.K. from the EU should immediately affect retailers, certainly until we can begin to understand the exit strategy and what the plans will be. Retailers will undoubtedly review their growth strategies, but until there is some kind of blueprint on what the trading U.K. will look like following the Brexit, all will remain somewhat speculative.
What will be the impact on store labor?
Burke: In the short-term, retailers need to have reassurances about the status of European employees already working in the U.K., and vice versa. For the future, as we begin to understand the impact on freedom of movement, retailers will be pushing for clarity on defining ‘skilled labour’ and how employment will work. In particular, the ‘unskilled’ lower paid labour in distribution and warehousing will be a worry to overall payroll costs to businesses.
Rey: Brexit may end the free movement of labour from EU into the U.K. and vice-versa. For non-U.K. citizens today (short-term), everything will remain the same; mid- and long-term, they may be considered as immigrants. But, while we would expect that EU workers would still be able to enter the U.K. to meet employment needs, the process could be more complicated and costly for recruiters. The U.K. now has to refine its immigration rules and visa policies. That all will depend on if the U.K. finally negotiates to entirely leave the EU, or to leave the EU but stay in the single market, which would mean to keep the labor principles as today.
What are the anticipated impacts on exchanges rates, tourism, and those trickle down effects on retail sales?
Rey: As we have already seen, the sterling is expected to lose weight, leading to the price of everyday essentials such as food, drink and clothing to rise. On top of that, uncertainty on the overall situation may make people living in the U.K. to be conservative on non-essential purchases, reducing the overall retail market. If this happen there will be a notable impact on the retail economy not achieving the expected results set up before Brexit became a reality.
On the other side, a lower sterling may motivate an increase of income tourism to the U.K., supporting an industry that is valued at £121.1bn (7.1% of UK GDP). In fact, the U.K. is the eighth largest international tourism destination as ranked by visitor numbers, and the sixth largest international tourism destination as ranked by visitor expenditure. Of course, these great tourism market numbers are supported by the fact of the single market, with free movement of people within the EU. The potential impact on tourism will be definitively dependent on the new situation and any new limitations the U.K. may create to that movement.
Burke: It is too soon to tell at this stage what the real impacts will be. The markets remain turbulent in these very early days, and maybe for some time to come. However, the drop in the FTSE 100 is less than anticipated, whilst the FTSE 250 shows a deeper drop and is more indicative of the immediate uncertainty.
Whilst tourists may take advantage of the immediate drop in the pound sterling exchange rate, domestically, retailers will be anticipating careful spending from consumers and again will need to therefore be quick to anticipate and deliver on their customer expectations. The already more savvy spender will more than ever be using technology to ensure the best deal, and retailers, when investing in technology to understand their customer, will need clear, quick and proven ROI’s, that ensure they get their fair share of the spend.
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