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PKF International

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Insights

Retail and Brexit: Minimising the risks. Maximising the opportunities

01 Nov 2016

Martin Firbank, Head of Retail at PKF Cooper Parry, explores the possible implications of the Brexit vote on UK Retail Businesses

The Brexit referendum result in June has created more uncertainty in the retail market place, with businesses all over the country trying to get to grips with the implications of the decision.

The longer term impact is incredibly difficult to predict. And when the government officially invokes Article 50, we expect a lengthy period of negotiations, which may trigger a change in laws and regulations as well as in trading arrangements and tariffs. In the meantime, retailers cannot afford to stand by and let time pass.

The Brexit decision will bring into focus some of the risks that retailers face, but will also present opportunities.  The test will be about how the risks are managed and opportunities taken to see who comes out best in what was already a very challenging and competitive retail landscape. 

One question that might never be answered is how much planning was done before the referendum for the consequences of a Brexit vote.  The reality is that those who didn’t are playing catch up, although planning will still be difficult for most given the lack of clarity over the possible outcomes.

Cost base and the £

The management of the cost base will be key to success. And whilst the challenges of the business rates’ system, the introduction of the National Living Wage and apprenticeship levy were already being faced, the fall in the value in Sterling could significantly impact the sourcing of products.  Some retailers may have been protected against the short term impact by having hedging arrangements in place, but as these mature and are replaced, the rate change will hit.  This might not just have an impact on direct suppliers either, as even if UK suppliers are being used, there might be a secondary cost if they are sourcing goods from overseas as part of their production process.

On the flip side, customers from overseas could take advantage of a weaker pound when visiting the UK or shopping online (so marketing strategies could be tweaked), and foreign investors may use the opportunity to start circling UK businesses for investment opportunities.

Risks

Potential changes in the immigration regulations could also further impact on the cost base.  The retail industry – including its suppliers, British farmers and the logistics networks – are reliant on migrant labour from inside and outside of the EU.  If this flow of workers gets restricted, wage costs could increase and put more pressure on margins.

A rise in costs, changes in the political and economic environment and general uncertainty are factors that could also increase the risk of fraud.  Supply chain risk – including adulterated or counterfeit goods – as well as theft and misappropriation could grow.  In addition to the potential reputational damage, this could have a significant impact on the bottom line, so it’s even more important that retailers have a robust fraud strategy in place to manage these risks and their costs.

The Bank of England recently announced its decision to cut base rate.  We will have to wait and see whether this has a positive impact on lending banks, who may well want to see a higher return on their money in uncertain times.  However, it does mean that retailers will need to be selective and think hard about investment decisions, particularly as not investing could have more of a negative result than doing so.

Possible opportunities

These risks also create opportunities for retail businesses. If they can stand back and look at their model to understand what works and where they can build in efficiencies and cost savings, they can become more flexible and effective and maximise return.  Lessons learned from the last recession may help.  Working with their suppliers, other providers and bankers to find a better way, might help in the short term and open up future opportunities.  Looking at their business model and strategic plan, including KPIs, may also be advantageous at this time.

The strength of consumer confidence is something which continues to be assessed.  Uncertain times may see a tightening of the purse strings and a reduction in discretionary spend.  Attempts to pass on any increases in the cost base could have a negative impact, including a loss of trust which could be hard to win back.  Understanding the customer and what they value will be key to delivering the right message and positive results.

Where the UK retail industry ends up post-Brexit is unknown, but the referendum result should focus the minds of retailers on the risks their business faces.  Staying alert and flexible so they can understand these risks and their severity and the possible range of strategies to deal with them, will go a long way to putting retailers on a firmer footing.  The wait and see approach is unlikely to be successful as while one business sits by there will be plenty more working hard to see how they can make the most of the opportunities and build a competitive advantage.

If you have any questions, please contact Martin at martinf@pkfcooperparry.com or one of PKF Cooper Parry’s Brexit Brigade


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