“Brexit” i.e. Britain’s exit from European Union marked June 23rd 2016 as one of the most important chapter in the history of Britain and World. Although the outcome of brexit is still ambiguous but its effect on business is important to understand. The effect on prices, competition and living standards is likely to be a key factor at the bottom of any perceived success or failure of Brexit. This article is an attempt to analyze the potential effects of brexit on the retail environment.
Impact of Brexit
According to the latest Retail Sales Monitor Report released today, produced by KPMG and British Retail Consortium (BRC) retail sales were down by 0.5% on a like-for-like basis from June last year, when it increased by 1.8% from 2014. This downfall seems to be majorly because of anticipation of brexit voting results.
There are lot of reasons why aftermaths of brexit seems to be an overall negative for retail in UK and Europe. Let’s see some of the major reasons for negative impact:
1. Economic theory suggests that uncertainty of outcome of this vote is likely to have a detrimental effect on consumer spending and affect consumer confidence (which is already fragile) by creating an incentive to postpone big spending decisions and increasing the propensity to save. Consumers are likely to tighten their belts until they deem the economy to be secure. In words of Jack Kleinhenz, NRF Chief Economist –
“A big risk to the brexit issue is the uncertainty and volatility that puts pressure on financial conditions.”
2. According to HSBC, brexit would wipe 20% off the value of sterling; whilst the value of the euro is also likely to be damaged. For retailers with supply chain in Europe and the world this would mean higher costs to be passed on or absorbed, driving inflation or damaging margins. International tariffs are also likely to be increased and thereby increase in prices in the UK unless trade negotiations produce a successful outcome.
3. Brexit would end the free movement of labor from EU into the UK. People would still come into the UK, but without free access and permanent residency rights. This would result in higher wages and fewer workers which will lead to increase in retail automation, enabling retailers to reduce their operating costs.
Across retailers – varied impact
All retailers will not be affected equally. While grocery is the one to be affect minimum, fashion retailers are most at risk from the brexit fall-out as they buy a significant amount of goods overseas and pay in dollars. They will be hammered by increased import costs from the falling value of the pound. While fashion is most likely going to suffer from this separation, discount retailers are likely to benefit because of consumers conservative spending habits.
These seem to be the most likely scenarios but we don’t know actually what a world post-Brexit would look like. The likely impacts depend upon how well the process is managed, the shape of future relationships between UK & EU and where they land. But retailers need to be careful; this unpredictability should not be used as an excuse for not acting. Brexit will most likely impact the potential fundamental areas like supply chain, workforce and manufacturing, so some serious strategy planning must start now in order to avoid looking at a blank piece of paper later on.