Comment: Brexit may be no bargain for UK retail

The fragility of the UK Government combined with the question mark which hangs over the success of on-going Brexit talks present significant challenges in the year ahead, not least for Britain’s retailing and eCommerce sectors.

While the current climate has created some mixed fortunes, the path ahead is full of uncertainty. With falling business confidence, the potential for further economic challenges, including more fluctuations in the value of Sterling and its potential to impact on consumer spending in the UK, few can predict whether the situation is likely to improve or get worse for both traditional and online retailers going forward.

While June’s figures issued by the British Retail Consortium (BRC) were broadly positive, there’s no shortage of cracks below the surface. It reported growth in total sales of 2% compared to last year and a 1.2% rise increase in like-for-like sales in that same period. The BRC described the figures and those covering the sector’s average performance in the past six months as ones which painted a ‘slightly rosier picture’ given that rising food prices were responsible for much of the overall growth. They also raised concerns about the impact that rising inflation, slowing wages growth and the onset of Brexit would have upon household expenditure.

Meanwhile, July’s IMRG Capgemini e-Retail Sales Index reported UK online retail sales were up 9.5% from the previous period in 2016. While they too appear positive, the story behind these figures is also one of concern as they mark the second-lowest growth rate to be reported in June since 2001. It is also the first time online retail growth in the UK has dipped into single-digit territory since October 2015. An even lower figure of 3.4% growth, recorded during the week of June’s Westminster election, showed how the unanticipated result also influenced online shopping behaviour.

The decline of Sterling, which remains around 20% lower against the US Dollar since last year’s decision by the UK electorate to leave the EU, has so far proven to be a mixed blessing for UK retailers. Earlier this year there were reports of a mini boom as Britain saw a rise in European retail tourists, who were keen to capitalise on bargains resulting from a more favourable Pound to Euro exchange rate.

Online retailers have also benefitted from this situation. Last year Amazon reported a 30% rise in exports from UK businesses within its marketplace with revenues rising to £1.8 billion. According to Volo, the community of multichannel sellers, Western European markets account for more than 50% of the export market for online businesses in the UK. The continuation of a weaker rate in Sterling could help ensure their prices remain competitive against European rivals.

The obvious downside here is that both UK retailers and eCommerce businesses which source goods and materials abroad are now facing significantly higher purchase costs.

These factors, combined with concerns that the UK could soon feel real economic pain with a decline in consumer spending as the formal Brexit negotiations run their course, make it more essential than ever for retail businesses to adopt a strategic approach in their international financial dealings, including their foreign exchange requirements. Businesses which trade globally need to take a very careful look at how they can best conduct their transfers strategically to manage their exposure and secure profitability.

It’s important for a business to clearly understand what their level of exposure is in terms of currency movements and then set out an appropriate budget rate with a suitable hedging plan. Using a combination of forward contracts, option contracts and spot deals in accordance with a set currency strategy can provide certainty and protection. Ultimately, protecting a bottom line and mitigating risk is paramount in these uncertain times. 

Following June’s elections, the potential for further instability in the Pound is likely to increase. With the UK facing at least two years (and likely more) of Brexit negotiations amid what is now a very challenging domestic political situation, the UK retail sector will need to have all its wits about it to successfully navigate its way forward.

The low value of Sterling may continue to provide some short term respite for internationally focused retail and eCommerce businesses here if it’s not cancelled out by rising costs from having to import goods and materials. This must also be weighed up against the potential for forthcoming events like September’s German elections and the unfolding saga of Donald Trump’s presidency to hit the value of other key currencies like the Euro and US Dollar.

It’s therefore crucial for UK retailers to consider all possible scenarios ahead and ensure they make suitable preparations for what could be a rough journey.

Mark Ackroyd, head of desk at London-based foreign exchange specialists Global Reach Partners.

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