Features

Brexit Becomes Reality

by Planet Retail (in partnership with World Retail Congress)

The United Kingdom (UK) voted to leave European Union (EU), following its Brexit referendum on 23 June 2016. Unless agreed otherwise, the UK will remain a EU member for a transitionary period of two years, which will allow businesses to adapt. This triggered concerns in the business sector. Once the UK leaves, the EU will lose around 17 per cent of its economic firepower, which means there are strong implications on both sides. This will lead to either a weaker pound currency, thus hurting households via higher inflation, or higher interest rates, which will hurt corporate investment and housing.

Either way, there is a risk of the UK entering recession. Consumer confidence will likely suffer and retail sales are expected to contract in the UK as insecurity about Brexit consequences will translate into job worries. Almost overnight, the UK has appeared to have become European retail‘s new problem child.

What happens next?

Immediate implications of the Brexit vote will, and already do, involve the free movement of services – mainly visible in Britain‘s vital financial sector.

While the stock markets took a heavy hit, the pound fell to a 30-year low on the day the poll results were published. Over time, there is an outlook of sustainable pound weakness, which will hit imports and drive inflation.

When it comes to medium term consequence, import and export activity relating to the free movement of goods is likely to be reduced over time. Possible trade barriers, as well as diverging product standards, will negatively hit retailers and fast-moving consumer goods (FMCG) as they – more than most other industries – rely on open borders in the 21st century.

In the medium to longer term, the free movement of people should be felt in the British economy, partly in the shape of a lack of workforce in agriculture (potential drop in saisonal workforce immigration), but mainly in the shape of fewer EU talents entering the UK retail and FMCG job markets.

Implications for retailers

The Brexit will have implications for retailers in both Europe and the UK. Generally, the more reliant a retailer is on UK-European trade, the more affected it will be by Brexit. While the soft landing scenario might see the UK remain associated to the EU‘s free trade area, retailers cannot afford to rely on this. They must prepare for alternative scenarios.

Going forward, supply chains will feature a sharper focus on predictable economic areas providing reliable political frameworks and currencies. This will see European retailers buy less from the UK – not overnight, but as part of a gradual process stretching over the next two years. With UK retailers aiming to avoid upward inflationary pressures, they will cut down on imports. In grocery retail, fruit and vegetables, as well as dairy, often sourced from the EU, are high-risk categories for price increases.

Nearly 40 per cent of food sold in the UK is imported. After the costly reorganisation of supply chains, consumers should be left with reduced product choice at both ends of the Eurotunnel.

Implications for FMCG

Again, in a gradual process over the next two years, continental European retailers will sharpen their buying focus and buy less from the UK. Some of the loss of export volumes should be mitigated by the weak pound, making British products more competitive on the continent. At the end of the day, however, expect job losses in UK manufacturing, with export-dependent FMCG businesses likely to undertake rationalistaion and restructuring programmes in an attempt to adapt to new client bases and streamline supply chains.

While the world‘s leading FMCG manufacturers appear committed to the UK, new foreign direct investments (FDI) from the EU can be expected to drop sharply.

Long-term risks

For most British and European retail and FMCG businesses, Brexit should be manageable — not least thanks to the generous transition period.

The biggest risk, however, lies in Brexit heralding the advent of accelerated European disintegration. Populist parties in France, The Netherlands and Denmark, among others, are promoting their own Brexit referendums with a real chance of this happening. In addition, there is the risk of refugee crisis flaring up again, leading to excessive truck waiting times at borders of Austria, Italy, Greece, and Hungary.

Experts believe retailers and FMCGs must open borders and ensure predictable currencies to operate efficiently. Unfortunately, there is a risk Europe might lose some of these advantages on a scale far beyond the Brexit over the next few years.

About the Author

Planet Retail is a leading provider of global retail intelligence. The company partners with over 30,000 retail professionals around the world to drive dynamic strategies through an intuitive online platform and bespoke consultancy service

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