Brexit countdown: How can retailers cope?

The historic moment, nine months in the making since the shock EU referendum vote last June, came as a letter signed by May was delivered to European Council president Donald Tusk at his offices in Brussels.

May told the House of Commons on Wednesday that it was her “fierce determination to get the right deal for every single person in this country” as negotiations on the UK’s EU divorce kick into a higher gear. 

Boardrooms up and down the country, many of whom were in favour of remaining in the Union, are now coming to terms with the fallout, with question marks hanging over the future of EU workers and a slump in the value of the pound pushing up sourcing costs.

Last month, when we spoke to retailers and economists about Britain’s impending exit from the EU, pricing strategies were pinpointed as the major headache.

“Retailers will be grappling with rising costs this year in the form of business rates, a higher minimum wage and the apprenticeship levy”

With the pound still at a near 31-year low, a whole variety of imported goods and raw materials that are sourced in US dollars have become more expensive.

Roger Bootle, one of the City’s leading economists and founder of Capital Economics, says: “Prices will have to go up quite considerably, but it’s a matter of timing.”

The question for retailers, Bootle adds, is: “How far are you prepared to risk market share and profits to protect your margins?”

Fashion bellwether Next has already indicated it will have to raise its prices by around 5%.

However others such as SuperGroup and Asos have said they plan to hold their prices for as long as possible, helped by the fact they are seeing a bounce in international revenues.

Prices to fall?

In the longer term though, Bootle is more positive on the effect on pricing for the retail sector. 

Depending on the arrangements Theresa May and her team are able to negotiate, Bootle believes there is a “good chance” the UK will no longer be bound by the Common Customs Tariff.

The tariff applies to the import of goods to the UK from other EU countries.

“A whole load of things will end up 4% cheaper,” says Bootle. “Everything from irons, beds, chairs, tools.”

This will mean, however, that retailers will be under pressure to pass on these savings to shoppers, says Bootle – in particular in the grocery sector.

Bootle admits that the tariff savings will not be enough to counterbalance the impact of sterling’s collapse, particularly in the case of fashion retailers.

On top of this, retailers will be grappling with rising costs this year in the form of business rates, a higher minimum wage and the apprenticeship levy.

“After the initial shock of the Brexit vote, the UK’s economy appears to have weathered the storm aside from the low pound”

Supply chain savings

Menswear retailer Charles Tyrwhitt is among those that face a pricing conundrum. It sources around 70% of its product in US dollars. Chief financial officer Stephen Geater admits it will have to raise prices “at some point”.

However, he is looking at detail at the retailer’s supply chain to ensure any price rise can be kept to a minimum. “We are working closely with suppliers, but a lot of it is in the planning and ordering process,” he says.

“We will also have a look at the type of fabrics being used. But the one thing we won’t sacrifice is quality.”

Like many retailers, Charles Tyrwhitt is helped by the fact that it has hedged itself against currency fluctuations and Geater says it is “well protected” over the next 18 months.

Much like Asos and SuperGroup, Charles Tyrwhitt is also helped by the fact that it does brisk international trade. “We are very strong in the US and there is potential for us in Canada,” says Geater.

His advice to other retailers is to “look at absolutely everything” in their supply chain, such as how many times garments are handled, to the packaging.

Fragile consumer confidence

The other big factor for retailers remains consumer confidence and the state of the economy. After the initial shock of the Brexit vote, the UK’s economy appears to have weathered the storm aside from the low pound.

The Bank of England upped its growth forecast from 1.4% in November to 2% over the next three years, following the “markedly stronger” than expected performance of the UK economy.

Meanwhile, share prices on the whole have recovered, while interest rates are at a record low of 0.25%.

While there remains uncertainty, the recession that many predicted has yet to emerge.

Nevertheless, there remains concerns over consumer spending power. The Bank of England warned on rising inflation and the National Institute for Economic and Social Research predicted that inflation could peak at close to 4% by late 2017.

Bootle talks of the “squeeze” on wages, which in the short term he says will likely lead to a cut back on spending.

“Real incomes will be falling for at least a couple of quarters this year,” says Bootle. Consumers’ ability to spend will “depend on them dipping into saving or having access to credit,” he adds.

“But I think they might be prepared to do that and see this as a temporary phenomenon as things get back to normal next year.”

Spending squeeze

As such Bootle believes the consumer spending squeeze will be “short-lived”.

The Institute for Fiscal Studies has warned workers face the biggest squeeze on their pay for 70 years.

But Bootle says: “I’m not as worried as a lot of people, as I expect employment levels to be strengthening.

“And for retailers, employment rising could offset the fact incomes are squeezed. You could still get more trade done as there’s more people earning.”

For some retailers there is an acceptance that uncertainty is the new normal. “We’ve reconciled ourselves to the fact that uncertainty is a fact of life,” says Hotel Chocolat’s chief financial officer Matt Pritchard.

The premium chocolate retailer is instead concentrating on what it can influence. “We are focusing on our five-year plan,” he says. “We are trying to stay focused on what we can control and keeping a close eye on any developments.”

International opportunities

Hotel Chocolat is in a fortunate position, says Pritchard, as it still sees plenty of opportunity for growth in the UK. But Brexit has brought into sharp focus how the retailer approaches its export strategy.

Hotel Chocolat already has three stores in Denmark, where Pritchard says it is “learning a lot”.

Northern Europe is of particular interest as countries there already consume a lot of chocolate. But he notes: “That means there is also a lot of competitors.”

He adds: “We need to work out the markets that are attractive with a large number of consumers with premium chocolate.”

On pricing, Pritchard appears stoic, helped by the fact that Hotel Chocolat already operates in the premium space.

“We know we have loyal customers, with a relatively long history with us. And the last time we moved prices it was actually a reduction.”

Workers rights

Aside from this, retailers also have concerns over how Brexit will affect the rights of EU workers.

If there are restrictions on EU workers, Bootle says retailers will have to do more to “tap into the British workforce” to fill the relatively low-skilled jobs.

He also suggests that wages will have to be raised to compete in the labour marketplace.

The other option is making do with fewer people and raising productivity, which is a rising trend anyway, says Bootle.

Ultimately, his advice to retailers worried about Brexit is, “don’t be overly pessimistic, prepare for consumers to carry on spending and keep a close watch on competitors when contemplating raising prices”.

As the Brexit rollercoaster kicks properly into gear, this sounds like sensible advice.