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Brexit and the retail industry

How are retailers reacting to the Brexit decision?

INSIGHT ARTICLE  | 

Representative copy - DO NOT PUBLISH.  The British vote to exit the European Union (Brexit) sent shockwaves through the international business community in June 2016. Almost immediately, British currency values fell and many global consumers took advantage of the favorable exchange rates to purchase goods from UK businesses. But that was just the beginning of a changing retail landscape.  In today's global economy, retailers need to understand how Brexit will change their customer base and their business operations.

The challenges will vary for retailers based in the UK vs. those doing business in the UK. It is helpful, however, to see where the most impact may be felt. The following article by our colleagues at RSM UK offers a look at how retailers are reacting to Brexit, and why the outlook, while still unclear, may not be as bleak as originally feared.    


How has retail reacted to Brexit?

 

Many believed that retail would face dark times after the Brexit vote.

But recent figures from the Office for National Statistics show that retail sales were up 1.4 per cent between June and July.

The Bank of England had dropped its forecast for household spending growth by 50 per cent in the aftermath of Brexit, but now predicts growth will hit 1 per cent over the next two years.

For retailers with the right strategies in place, the long term outlook perhaps does not look as dark as might have been expected.

So what are the key issues retailers need to focus on and prepare for in light of Brexit?

Currency movements and sourcing

In the aftermath of the Brexit vote, many forecast that any knocks to sterling would have a negative impact on the sector by increasing the cost of sourcing products from overseas markets. But this may not be the whole story.

Many UK-based retailers had already hedged their next buying cycle before the Brexit vote. This will help protect them from currency fluctuations until later this year or even 2017. Businesses that sell overseas will also see improvements when converting revenues to sterling. This will help offset any reduction in margins experienced by future currency fluctuations.

The best businesses will review their full supply chains and look for best in class suppliers who will work with them to share any increased costs whilst maintaining the quality of product the UK customer needs.

Mergers and acquisitions

The investment environment may be impacted but not necessarily in a detrimental way. With funds restricting withdrawals and investor appetite for returns still high, the retail sector may become an attractive space to invest compared to the volatility of other markets.

Retail has historically offered the potential for high returns on exit. Businesses with the capability to expand internationally continue to appeal to both UK and overseas investors. Businesses need to be mindful of this and prepare early. Ensuring the business is the right size, structure and in good financial and operational health pre-sale is vital to ensuring a smooth sale.

Buyers like to see a track record of focusing on key metrics and plans to improve them. Ensuring that your operations, accounting, legal and tax matters are all up-to-date will help you maximise any value on exit, particularly in light of the vote result.



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Recruitment challenges

Retail has long relied on a large pool of creative and geographically mobile individuals. But the war for talent is very real and in recent years retailers struggled to attract staff across their business. Any changes to the UK’s approach on immigration will further impact the size of the available workforce and the skills they possess.

For many retailers, the shift away from a single sales channel means that the IT or e-commerce director is now seen as a critical hire. Many retailers had started to look internationally for such expertise but it is likely that the ability to attract this talent may now reduce. With uncertainty around immigration post-Brexit, it is likely that retailers will experience further challenges recruiting both senior and junior staff with the right skills and experience.

Against this backdrop, retailers may now need to turn to other solutions rather than simply adding more people to their business. Training in-store teams to provide a seamless customer shopping experience has become ever more important following Brexit. Upskilling existing staff across the business may also help plug skills shortages as competition for talent continues.

Strategies for success

Change and uncertainty in the retail sector is nothing new. Successful retailers will continue to focus on customer experience and product quality.

Whilst UK consumer confidence may have been knocked retailers should remain optimistic for the future.

The best retailers are now focusing on managing a small number of the risks identified above better than ever.

  • Currency movements and sourcing – review locations and consider pricing. Review future currency needs and seek the best deal from a panel of bankers.
  • Controlling cost – speak with suppliers to ensure they are both robust and willing to work with you to protect margins. Speak with other surveyors and other professional advisors to mitigate the risk and impact of any increases in estate costs. You want options at this point.
  • Mergers and acquisitions – ensure that your business ‘health’ is up to date and clear of risks.
  • Employees and customer experience – speak to the team and reassure them.
  • Customer experience and technology - seek to recruit the best talent and look to innovate through both what you sell and how you sell it
  • Product and position – focus on design, with great products at the right prices it will remain possible to beat like for like sales trends.
  • Financial planning and cash flow – review current forecasts and models for sensitivity and potential changes in business performance. Take early steps to drive sales, convert stock and improve liquidity.

By Andrew Westbrook, Partner, RSM UK

The above content is copyright RSM UK Group LLP, reproduced with permission. 

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