Business management

How retail and leisure are weathering the Brexit storm

Having avoided the hardest of Brexits, how are retail and leisure businesses coping with life outside the EU?

One of the trends was, of course, managing the implications of Brexit. It described the trade agreement between the UK and EU struck at the end of 2020 as “a much-awaited resolution” that “establishes a level of certainty for UK retailers and leisure operators sourcing from the EU, and for retailers selling directly to consumers in the EU”.

The level of certainty that the agreement delivered is “the main theme for retailers and leisure operators,” says Richard Lim, chief executive of Retail Economics. He adds: “On the spectrum of possible outcomes, a hard Brexit could have been a catastrophe.”

David Scott, national head for the retail and leisure sector at NatWest, agrees: “While Brexit means opportunities in exploring new markets, many businesses will be relieved that they can sensibly continue the relationships they already have with trade partners in the EU.”

Lim points out that the post-pandemic work the retail and leisure sector is doing on supply chain resilience will align with the preparatory work that was being done in the run-up to Brexit – at least until other free trade agreements (FTAs) can be negotiated, and border controls streamlined. Nevertheless, as the short-term dip in trade between the UK and EU shows, Brexit is not pain-free in several dimensions.

New trade frictions

Lloyd’s Register Group assists global companies to manage logistic risks. Maurizio Pilu, its group vice president of digital innovation, says: “Brexit might even turn out to be bigger than the pandemic in terms of changing the business and industrial landscape. The pandemic will be beaten – fingers crossed – but Brexit will create long-term structural changes.”

According to the State of Spend report by global procurement consultancy Proxima, for FTSE 350 companies, supplier costs were 76% of total costs for retailers that sell discretionary items (non-essentials like fashion, cars and electronics), and 84% of costs for retailers that sell consumer staples (food and drink, household goods and hygiene products) in 2020. This makes profit margins in these sectors vulnerable to trade frictions. “If these costs have not already been addressed, they need to be addressed now,” says Simon Geale, senior vice president for client solutions at Proxima. “Most retail and leisure businesses look very different from how they did a year ago, as do many supply markets.”

Although the Brexit agreement offers tariff-free trade, this is a small part of the current friction where agility and just-in-time procurement matter. In the short term, and maybe for longer, retailers will need larger inventories of goods and components, which imposes higher costs and swallows up working capital. The EU represents 50% of UK imports and exports, and recent research by Make UK found that more than half of companies had increased costs and a third had lost out on sales because of delays moving goods in and out of the UK.

Supply chain flexibility

Both coronavirus and Brexit are encouraging talk of reshoring for retail and leisure businesses. Geale counsels: “While there is a lot of noise around automation and onshoring complex supply chains, the reality is that many global supply chains are still located where the best balance of cost and expertise is to be found.”

Automation and reshoring might be a long-term solution, Geale adds, but that does not help now. Instead, he says, businesses need to focus on flexibility.

“The pandemic has highlighted supply chain fragility,” Lim agrees, “and left retailers thinking about how they should build back resilience, with a diversity of suppliers, perhaps nearshoring or reshoring.”

Brexit might even turn out to be bigger than the pandemic in terms of changing the business and industrial landscape

Maurizio Pilu
Group vice president of digital innovation, Lloyd’s Register Group

A people business

What are we to make of the labour market?

“In the pandemic, we have focused on how many workers will lose their jobs,” says Scott. “In the recovery, there is still some uncertainty surrounding the impact of Brexit and coronavirus – issues that acutely affect retail, leisure and hospitality businesses.”

In January 2021, the Economic Statistics Centre of Excellence reported an “unprecedented” fall in the number of foreign-born residents in the UK, estimating that 1.3 million overseas nationals (700,000 in London alone) have left.

According to the British Retail Consortium, prior to the pandemic, 170,000 EU nationals worked across the retail industry, and a third of the permanent workforce in the food and drink supply chain was made of up EU nationals.

Innovation, economic recovery and changing patterns of demand make it difficult to predict whether there will be staff shortfalls or surpluses as the economy recovers. But ending freedom of movement with the EU has choked off an easy supply of foreign workers.

Rules of origin

One aspect of the Brexit agreement with a long-run impact on the retail and leisure sectors are rules of origin regulations for imports and exports, which apply to goods made from imported components that are then re-exported. HMRC has provided an online tool to help classify goods.

Jeremy Thomson-Cook, chief economist at Equals Money, an international business payments specialist, warns that exporters must establish the origin rule applicable under the FTA and then develop origin determination, calculation, certification and record-keeping processes.

“This is, needless to say, a lot of work,” he adds.

Duncan Reed, partner at UK law firm TLT, concurs. “There’s often a very subtle difference between what counts as a ‘substantial change’ to an imported product and what doesn’t, which could result in a tariff being applied. This is going to affect a lot of food and drink manufacturers, but also clothing and accessories brands and other craft industries.”

Retail Economics also points to the increasing desire from customers to buy local products for sustainability reasons, and Reed says rules of origin labelling means it will be clear which products are local. “The new rules will have a significant impact on any business whose customers are particularly motivated by where their purchases come from,” he explains. “The pandemic has made people even more conscious about buying local or buying British or UK goods.”

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

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