Uncertainty: Brexit and Retailing

This is quite a long post, so apologies.

About 10 days before the EU Referendum I wrote an invited article for the Scotsman on the issues for retailing. It was intended as one of a series on different sectors. They did not use it, and I thought little more about it as the (fateful) day approached.

Perhaps it was being in a University and surrounded by people with degrees or the plethora of young people, or maybe it really is an ivory tower, but I did not see the result coming. Close, yes, but no cigar. Stirling itself was one of the most positive Remain areas on the day, even in EU friendly Scotland, so it was quite a large bubble I was living in. Large but not lonely.

So the outcome is known and the decision is made (I doubt that, as there is no clear road to implementation at this point and there are many twists and turns until we find out what the decision actually means in practice).

My article focused on the theme of uncertainty as both the enemy and the constant backdrop to retailing – and boy, do we have uncertainty in spades now. It probably underestimates the probability of recession and impact on consumer spending, underplays the potential implications for international (EU) internet retailing and may be too sanguine on the volatility of the pound and thus the costs of buying goods for retailers. But, the main themes still apply and are all there. Who really knows what will happen now, or how the situation will unfold, generally or for retailers? Uncertainty reigns.

So, here’s my piece from 10 days or so ago – make of it what you will. All retailers, large and small, will be trying to make the best of the unprecedented situation, in what are likely to be very trying operational times (even before the Referendum), and with little end in sight, apparently.

“On June 23rd the UK will vote to remain in the EU or to ‘Brexit’, though it is rather more complicated than that.  On June 24th, the sun will rise and the world will go on, though the news that Donald Trump will be in Scotland that day may have shortened the odds somewhat.  In retail terms the shops will open and consumers will still be buying, not least food and drink in for the weekend watching of the last 16 games in EURO 2016 (well, perhaps not in this part of these islands).  So what does the referendum mean for retailers?

Retailers on the surface do a very simple job; they buy products, offer them to consumers and sell them to these consumers at a profit.  How difficult can that be?  Well of course, the answer is, very difficult, as our mounting list of retail casualties has shown over a long period of time.  As essentially an open market, retailing in the UK is a tough, competitive business involving local, national and international retailers, suppliers, products and investors.  That makes the retail role of bridging temporal and spatial distances a complex one; the asparagus season, autumn fashions, Chinese imports and New Zealand or Scottish lamb all hint of the difficulties of making money or serving consumers in an uncertain or volatile market, where retailers seek to match demand and supply profitably.

Uncertainty is one of the key dislikes of retailers, yet they operate in an inherently uncertain market for the most part.  This referendum has ratcheted up the uncertainty.  Often contrasted as remain or leave, for retailers it is really remain or which of several variants of leave will we end up with?  Will it be full Brexit, some form of staying in or accessing the Single Market (and on what terms) and how long will it take to sort it all out?  This volatility affects both the retailers themselves and their direct operations, but also critically it affects consumers.

Retailers have to obtain a source of supply of product to operate.  They purchase items, often imported, for resale.  The referendum decision will impact retailers’ ability to import as the volume available, the cost and time to import and the price that has to be paid will be affected.  At this point however it is not possible to say how they will be affected as access to the Single Market, to home produced product and to product from countries across the world will have to be considered, and could differentially be easier or harder, cheaper or more expensive.  We simply do not know the outcome and costs or benefits. But supply will for certain alter if we leave, though it is always under review in many larger retailers anyhow.

These products, once purchased, are then made available to consumers via stores, either physical or increasingly virtual.  This availability presumes a distribution channel and operation from producers to distribution centres to stores and then to consumers.  This channel comprises transport, distribution centres, storage facilities and more subtle elements such as packaging and pack size, standards, and technology platforms and operations.  Key elements of this channel will be affected by a Brexit, as access to transport, across markets and for the non-UK labour which often runs our distribution centres will be questioned.  It might all get sorted out in due course, but in this area, it is a pretty safe bet that costs will increase and distribution become more costly, and potentially more complicated.  Aspects of cabotage, travel across borders and various compliance issues of non-tariff barriers will have to be renegotiated.  If migrant labour for distribution centres is not available then how will they operate?  British workers have not rushed to take such jobs at the minimum wage levels on offer.

In terms of store operations then retailers are probably more affected by UK and Scottish government interventions such as minimum wage, lack of rates revaluation, apprenticeship levy, tobacco and alcohol displays (though here the EU has had a role) rather than directly by the EU itself.  Costs are already rising and adding to these will be a problem; however which outcome has most impact is impossible to say.  On such later decisions and issues around ease of access to markets (especially in terms of internet retailing) will a host of investment decisions by UK and international (EU and non-EU) investors be made, potentially affecting the trading ability of retailers here and the sector as a whole.  Internet retailing to and from Europe will be more complex on Brexit, it would seem as there may be additional requirements, delays or even tariffs/taxes.  Some of course may welcome this.

Finally, the really critical element in this equation is of course the consumer.  They will take their own individual views of the situation based on their positions, the impact on their disposable income and their confidence or not for the future.  Whilst it is a truism that consumers will have to continue to consume, the issue is the volume and value of their consumption across the various retail sectors and the stores and companies in these sectors.

In food for example, the sector has been transformed in recent years by the German discounters Aldi and Lidl.  Whilst they do buy British, lots of their product is imported.  If this became more expensive or less available how would consumers react?  In clothing, might it be the case that non-EU imports will further squeeze out EU products on Brexit?  This might be of benefit to consumers, or at least some of them.  For many local retailers there may be little effect directly, but there will be an indirect effect vice consumer sentiment.

The Brexit question is one of those where despite attempts to couch it as an economic issue by many, in reality it is impossible to say with any certainty what the economic cost or benefits there are that will accrue to retailers, whether local, national or international.  You can make arguments on both sides, but no-one knows for certain, not least as whilst we understand the rules for remain, we have no idea of the potential rules or outcome for any version of Brexit.  Given the time this will take to negotiate and the need for goodwill on all sides (which may be in extremely short supply) there is no clarity or certainty of outcome for those in the leave camp.  It is a hope that it will be better, but little more.

As was said at the outset, retailers hate degrees of uncertainty, and Brexit appears to offer that in spades, for several years.  Might it be better in the end?  It is possible, but retailers fear they will not be around by then to gain the benefits, as a possible further consumer slump due to price uncertainty, a potential fall in disposable income and for some a nosedive in consumer confidence, will drive many out of business.  Volatility of the pound is already occurring and is likely to get worse.

We also have to bear in mind that the assessments of the impact on retailers (and others) is predicated on a view of what regulations and legislation is derived from the UK and what from the EU.  However, it is not clear either that retailers know exactly where these regulations really come from or that after Brexit what the changes might be.  Will UK legislation be re-written or will things continue in much the same way?  The mantra of the Brexiters is that ‘at least the decisions will be made in the UK’ but the price of access to the Single Market might make that impossible on many items that affect retailers.  For many as well there is a belief that regulations and legislation made in London is not better suited to Scotland, than that made for the EU as a whole.

It is for these reasons that the majority (though not all) of the major retailers in the UK, and the Trades Unions (and USDAW and UNITE are large unions with members in shops and distribution centres) have come out for remaining in the EU.  They of course are not, and do not, speak for their members, and certainly not for the consumers who frequent their shops or websites.  Does that mean the sector is mainly a worried one, concerned about an uncertain few years?  Absolutely.  But it is not because they believe one side is better than the other, or has stronger arguments.  Rather it is because the sector believes the macro-economic position in which they and their consumers rely is more stable under a remain decision.  Better the devil you know and all that.”

About Leigh Sparks

I am Professor of Retail Studies at the Institute for Retail Studies, University of Stirling, where I research and teach aspects of retailing and retail supply chains, alongside various colleagues. I am Chair of Scotland's Towns Partnership. I am also a Deputy Principal of the University, with responsibility for Education and Students.
This entry was posted in Academics, Brexit, Buying, Consumers, Costs, European Union, Government, International Retailing, Internet, Online Retailing, Referendum, Regulation, Retailers, Supply Chains and tagged , , , , , , , , . Bookmark the permalink.

5 Responses to Uncertainty: Brexit and Retailing

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