On the 23rd of June UK voters will be given the opportunity to cast their vote on whether the UK should remain a part of the European Union.
One emerging element in the debate is the impact of Brexit on the retail sector. Although looking at Brexit through its effects on shoppers and retail might seem to be missing the core of matter, it’s important to consider that any effect of Brexit on prices, competition and living standards is likely to be a key factor underpinning any perceived success or failure of Brexit.
So, while no one can entirely predict the impact of Brexit on the retail sector, the factors to consider include the following:
Caution and consumer spending
Economic theory tells us that uncertainty has a detrimental effect on consumer spending by creating an incentive to postpone big spending decisions and increasing the propensity to save, i.e. consumers are likely to tighten their belts until they deem the economy to be secure. The economy has played out to a backdrop of significant uncertainty for six years and Brexit adds to it.
However, given a decent voter turnout (not guaranteed), the eventual result will be supported by a decent chunk of the population. So it’s logical that those who have voted for Brexit won’t be overly anxious about the fallout. Furthermore, recent polls show that most people don’t believe that Brexit would make any difference to their personal situation.
Uncertainty and investment
We can expect that economic uncertainty will have a negative impact on domestic and foreign investment as businesses reserve stores of capital and postpone large investment programmes in the short term. There is also long-term risk of weakened foreign investment if Britain loses appeal as a strategic geography and a familiar route into the European trading block.
Exchange rates and interest rates
HSBC predicts that Brexit would wipe 20% off the value of sterling. Whilst the value of the euro is also likely to be damaged, this will probably only soften the effect of sterling depreciation rather than nullify it.
We already have a trade deficit with Europe and this is likely to get worse with a devalued sterling, particularly in the short term as behaviours take longer to shift away from imports and exports take time to pick up. 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.
Availability of low skilled workforce
With immigration a key topic of the debate, we can assume that the free movement of labour would be repealed. While it’s unlikely that all EU citizens here legally would have to return, it would make it harder for many retailers to recruit for relatively unskilled roles in the supply chain or warehousing. This is likely to cause wage inflation at a time when many retailers are struggling with their cost base following the national living wage and pension auto-enrolment.
Although a relatively small proportion of the retail workforce is composed of EU migrant workers, it is also true that they are heavily employed as transport drivers and in food, drink and tobacco processing. These are all key activities upstream of retail and likely to impact the cost base to some degree.
Looking further into the future, an increased wage bill ongoing could have an additional effect of increasing investment in automation i.e. an acceleration of the rise of the robots, one of the topics of the day.
Tariffs & legislation
Tariffs are generally much lower than they were 40 years ago when we joined the single market. Despite this, any products or materials imported from Europe will suffer a largely inflated price, which ultimately will have to be pushed onto the consumer or be absorbed somehow.
The size of this impact will depend on the successfulness of trade negotiations with both the EU and other nations. But one potential benefit either way will be a greater freedom for UK firms to import goods from traditionally cheaper markets, such as agricultural goods for grocers, which may offset tariffs in some cases.
Aside from tariffs, retailers will be keeping an eye on European ‘distance selling’ legislation which as it stands makes life easier for retailers exporting into Europe – a practise that contributes significant revenue for UK ecommerce retailers. If Brexit goes ahead, this legislation will have to be renegotiated. Do we think Europe will let us continue with existing legislation? Probably; but if they’re difficult and want to avoid contagion, it could go either way.
Ultimately we don’t know what a world post-Brexit would look like. The likely impacts depend upon how well the process is managed, the shape of our future relationships and when they land. But retailers beware; this unpredictability should not be used as an excuse for lethargy. Brexit has the potential to impact businesses in fundamental areas: supply chain, workforce and manufacturing so some serious impact planning must start now in order to avoid looking at a blank piece of paper on June 24th.