6 Brexit recommendations for UK retailers

A new ResearchFarm report, “No Deal Brexit – Impact Assessment on Retail Sector” finds that a breakdown in EU/UK talks would have severe financial implications for the industry. While the domestic UK market will be harshly impacted, many SME UK retailers, especially on the major platforms, also export to the EU. Under a no deal scenario these companies would have to deal with great difficulties in future. The research identifies a number of precautions these retailers should take now.

Purely viewed in economic terms and leaving aside all the social, political and legal consequences and costs, a breakdown in EU talks is a nightmare scenario that needs to be avoided at all costs. Daniel Lucht, Director at ResearchFarm says:

We do not think it will come to a total breakdown in talks. That said, the risk that developments lead to an accidental no deal outcome none wants cannot be dismissed either.

That said, even in the best possible negotiated outcome, there will be significant disruption, as 40 years of integration get unravelled. This means trade flows will be impacted and the retail sector will feel the brunt. Nevertheless the research highlights a selection of 15 actionable recommendations. Here are 6 of those recommendations given to UK retailers by the authors:

(1) Open a subsidiary/entity in the EU, especially if selling products into the EU. This will help with fiscal representation for VAT purposes, CE and Reach registration, testing and compliance and will enable the company to harness the benefits of the single market. This will need proper staffing and a financial backstop (a letterbox company won’t do) – and also requires some legal help.

SMEs with an EU27 entity should also look to splitting deliveries in the Far East between EU27 and UK shipments. This adds export documentation costs shipping, clearance etc at source but at least gets round the Dover/Calais issue.

(2) Avoid Dover on Brexit day – explore alternative means of getting product into the country. If at all possible rent extra UK storage space and stockpile best sellers, in case the disruption gets out of hand. This of course works mainly with non food products.

Under a no deal Brexit scenario with near 100% certainty Operation Stack will get activated on Brexit day: This will mean total gridlock in the UK with more difficulties further upstream (such as empty shelves, maybe issue to get medical supplies and organ donations into the country).

(3) Think about modal change – sea/air freight etc. Getting trucks off the road might be a step in the right direction and air freight the way forward. This presupposes that airplanes won’t be grounded on Brexit day of course. Lorry owners will quickly refuse cross channel trade as they will lose fortunes in delays.

(4) Smaller retailers could use Amazon as a pipeline for their imports from the Far East into the UK. The online giant is expected to sort out pre-clearance and work around customs and border issues. Amazon would then file the customs declarations. On the downside, Amazon would then be able to work out cost price for products, their origin, and hence margins of the 3P community – this is clearly not ideal, especially against the backdrop of the company competing with its 3P sellers.

Once again, presupposing that airplanes won’t be grounded on Brexit day Amazon and other parcel carriers will use their planes. This will hardly be frictionless or without problems though. Plane loads could carry products from thousands of suppliers and sometimes a single item for a single exporter will need its own clearance.

(5) Ramp up hedging and forward contracts, assume Sterling to take another hit – in continuation of the long term trend that has set in since the Brexit referendum. This alone could guarantee survival, if the hedging benefits can be used to keep price rises to a minimum and hence shift market share away from competitors. Retailers should also try to gain access to financing abroad, if UK networks seize up – or if cross border financial transactions get disrupted. Having easy access to Euros/Dollars might turn out a real winner.

(6) Understand and manage non tariff barriers. Under a no deal scenario rules of origin will become a massive problem for manufacturers and exporters to the EU. They will need to identify all parts/components and ingredients of their goods. This requires cooperation along the entire supply and value chain, in many cases certified documentation, testing and so on.

As soon as the EU and UK diverge for example on CE, all CE marks could become redundant in the UK leading to consumer and retailer confusion. For most companies having separate packaging for the EU and the USA is manageable, as these are geographically separate and large markets. But having separate UK and EU27 inventories of consumer products will drive up costs and prices – primarily in UK – not just for packaging but also for compliance such as incurring extra testing bills.

For exporters the situation could get really tricky. Goods shipped to the EU need “regulatory compliance”; this means that they are produced according to EU’s standards. After a no deal Brexit there will be no British institutions able to certify the compliance, because all equivalence rules have become legally void. And no CE marking means selling products that require the label in the single market becomes illegal.

As a consequence prices will increase while choice will decrease. For many EU27 SMEs the UK market will become less attractive, despite language being less of a barrier and the size of the market being very attractive. And less choice will lead to higher prices over the long term.

Once again, we do not assume it will come to the worst. Daniel concludes:

We also believe that should the UK fall off the cliff, the situation would become so dire, that within days the UK government would try to return to the negotiation table.”