UK Retail Industry

post-Brexit
April, 2017

UK Retail Industry post-Brexit 1

2 willistowerswatson.com
UK Retail industry snapshot 12345

£358 billion 3 million 1/3 120,000

Total value of UK People Proportion of Number of EU
retail sales employed in UK consumer spending Nationals that
in 2016 retail in 2015 that goes through the retail industry
retail employs

+2.4% 1.3% 60% 22%

Increase in Amount of UK Estimate of the
Increase in
non-food sales in imports that average tariff
food sales in
three months to currently come on agricultural
three months to
December 2016 from the EU products under
December 2016
WTO rules

Economic outlook for the sector

Resilient demand after referendum outcome
ƒƒ
Figures released immediately after the Brexit vote to
leave showed that UK retail sales actually jumped 1.5% in
the month of July 2016 as shoppers seemed to shrug off
Brexit uncertainty.
ƒƒ
This trend continued into September with data from
the Office for National Statistics which showed that
sales dipped by a mere 0.2 per cent in the month of
September 2016.
ƒƒ
This represented sales figures that were 6.2% higher
than 2015 – indicating that the EU referendum result
was having a minimal impact on consumer confidence
amongst a backdrop of economic and political unease.6
ƒƒ
Moreover, the Confederation of British Industry’s (CBI)
monthly retail-sales index climbed to 35 in December,
the highest since September 2015, from 26 in November
with clothing and hardware stores leading the gain.7

1
http://www.retaileconomics.co.uk/library-retail-stats-and-facts.asp
2
http://www.bbc.co.uk/news/business-37605642
3
http://brc.org.uk/media/57612/retail-2020-report-1.pdf
4
https://www.theguardian.com/news/reality-check/2016/oct/17/how-bad-will-brexit-be-for-uk-farmers-retailers-and-consumers
5
http://uk.reuters.com/article/uk-britain-economy-retail-idUKKBN14U008
6
http://www.retailgazette.co.uk/blog/2016/09/latest-ons-retail-sales-figures-continues-to-defy-post-brexit-fears
7
https://www.bloomberg.com/news/articles/2016-12-20/u-k-retail-sales-grow-at-fastest-pace-in-more-than-a-year

UK Retail Industry post-Brexit 1

Uncertainty for 2017
ƒƒ
Yet it would be silly to draw too many conclusions from
just a few pieces of the retail jigsaw bearing in mind
that Article 50 has only just been invoked. While the
government hasn’t clearly elaborated its plan for leaving
the EU, signs are gathering that it’s headed for a so-
called hard Brexit, in which the U.K. would lose access to
Europe’s single market
ƒƒ
Many analysts have therefore been offering more gloomy
predictions for the sector in 2017. Even in the immediate
aftermath of the Brexit vote, the Retail Think Tank
widely recognised that uncertainty – particularly political
uncertainty – has led to a dampening of consumer
confidence, a key driver of the retail sector’s fortunes.
ƒƒ
In particular, less favourable exchange rates due to the
weakness of the pound post-Brexit could begin to affect
large retailers in 2017 and beyond. Most large retailers
will hedge their currency exposure but as this unwinds
the cost of goods purchased abroad will effectively
become more expensive.
Risks of Brexit for the UK retail industry
Free movement of labour and
talent retention
ƒƒ
Free movement of labour is likely to be repealed once
any Brexit deal is settled upon.
ƒƒ
While it’s unlikely that all EU citizens currently legally
working in the UK would have to return, it would make
it harder for many retailers to recruit for relatively
unskilled roles in their supply chain, distribution centres
or warehousing.
ƒƒ
This is likely to cause wage inflation at a time when many
retailers are struggling with their cost base following
the implementation of a national living wage and
pension auto-enrolment.
ƒƒ
Although a relatively small proportion of the retail
workforce is composed of EU migrant workers (around
4%) 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.10
ƒƒ
Looking further into the future, an ongoing increased
wage bill could have the effect of accelerating investment
in automation.11
8
http://www.retailthinktank.co.uk/app/uploads/2016/08/Retail-Think-Tank-The-short-and-medium-term-impact-of-Brexit-on-the-Retail-sector.pdf
9
https://www.ibm.com/blogs/brexit/impact-brexit-uk-retail-industry/
10
https://www.retail-week.com/topics/policy-and-legal/analysis-how-will-brexit-impact-retail-employment-in-the-uk/7008820.article
11
http://ecommera.com/content/brexit-debate-what-does-it-mean-retail-industry
12
http://www.civitas.org.uk/content/files/potentialpostbrexittariffcostsforeuuktrade.pdf
13
https://ecommera.com/content/brexit-debate-what-does-it-mean-retail-industry
2 willistowerswatson.com
ƒƒ
Another concern will be the increased cost
pressures that higher import costs, coupled with the
implementation of the National Living Wage and revisions
to business rates will bring to retailers in the coming year.
ƒƒ
So far retailers have found it hard to pass along
higher costs to consumers but pressure it is almost
inevitable that shoppers will need to absorb some of
this pressure in the form of increased prices in 2017
when one considers that a sharp upswing in inflation is
also expected.
ƒƒ
The Retail Think Tank members predict that in the current
political environment and with UK consumer price inflation
set to rise to 2.5 – 3% next year, any growth in non-
discretionary retail – including food and grocery – will be
offset by a decline in discretionary spend, resulting in an
overall retail growth figure of 0.5% in the year.8
ƒƒ
The Economist Intelligence Unit forecasts real-terms
retail sales could fall by -3% in 2017 on the back of the
Brexit vote, compared to +2% if the UK had decided
to remain.9
Tariffs costs set to increase
ƒƒ
Tariffs are generally much lower than they were 40 years
ago when the UK joined the single market.
ƒƒ
Yet they are likely to increase greatly if there is no new
trade bill in place at Brexit according to think tank Civitas
– both for UK firms exporting to the EU and EU firms
importing into the UK.
ƒƒ
In fact, EU firms would have to pay £12.9bn a year
in tariffs to the UK if Britain turned to World Trade
Organisation terms after it left the EU. In return, British
exporters to the EU would, under WTO terms, have to
pay £5.2bn a year in tariffs.12
ƒƒ
If a suitable deal is not negotiated Import duties may
be imposed by the EU on products made in the UK and
UK retail firms that manufacture in Europe may need to
reorganise their supply chain.
ƒƒ
Aside from tariffs, retailers will also be keeping an eye on
European ‘distance selling’ legislation which as it stands
makes life easier for retailers exporting into Europe –
a practice that contributes significant revenue for UK
e-commerce retailers.13
Supply chains will be disrupted and retail Increased difficulties for online retailers
may have to renegotiate supplier contracts ƒƒ
The EU is Britain’s largest trading partner, while western
ƒƒ
Almost a third of UK retailers are considering changing European markets account for more than 50% of the
suppliers and 28% are thinking about sourcing from export market for online businesses, according to Volo,
different countries following Brexit, according to a the community of multichannel sellers.
report by Barclays. ƒƒ
However, if Brexit does go ahead there’s likely to be a
ƒƒ
Some 32% expect to source more from the UK as result change in rules and regulations for etailers.
of the referendum, while more than a half expect to ƒƒ
For instance, if stock is imported to an EU warehouse as
source more from India and 43% anticipate buying more the first port of entry, then the seller will have to register
from China. a non-resident VAT registration in that EU country.
ƒƒ
Firms also predict they will be sourcing more from Africa ƒƒ
Larger ecommerce companies may well create a base
(38%) while 45% expect a drop in how much they buy within the EU so that it is less costly to sell there.16
from Europe. Just over 13% said they would be moving
manufacturing capacity to different geographies.
ƒƒ
Some 59% expected the costs of supply chain
management to remain the same or increase slightly,
while 15% thought Brexit would bring down costs.14
ƒƒ
In the light of all this, some firms may wish to terminate
long-term contracts and replace them with shorter-term
agreements allowing more flexibility during this period of
change and uncertainty.
ƒƒ
Some retailers are already identifying countries with a
strong treaty network and may begin to channel certain
product supplies via those countries to minimise future
import duty costs.15

14
https://www.cips.org/supply-management/news/2016/august/third-of-retailers-considering-changing-suppliers-post-brexit/
15
http://www.dentons.com/en/insights/articles/2016/july/14/how-will-franchising-be-affected-by-brexit
16
https://www.theguardian.com/small-business-network/2016/jul/12/brexit-what-does-it-mean-for-online-retailers

UK Retail Industry post-Brexit 3

Pension deficits set to increase due to
Brexit and affect retail firm profits
ƒƒ
Britain’s biggest retailers are grappling with a £6bn jump
in their pensions scheme deficits, which threatens to
dwarf stock market valuations and the industry’s profits
for the year.
ƒƒ
For instance, one large retailer is under pressure from
its pension scheme, which will swing into a deficit of
£200m this year from a surplus last year, following the
slide in long-term bond yields after the EU referendum
and the Bank of England’s move to pump more money
into the economy.17
ƒƒ
The issue of pension deficits has also been brought
into sharp focus following the collapse of BHS and the
huge restructuring of a major Steel company’s £15bn
pension scheme.
ƒƒ
The jump in the retail sector’s pension deficit is
equivalent to roughly 10pc of the total value of the
companies, and potentially the sector’s entire profits for
this year.18
Future drivers and opportunities of Brexit for the
UK retail industry
Retailers who become more agile in the
ever-changing retail environment will be
in position to take advantage of Brexit
ƒƒ
It will be critical for success in the post-Brexit world
for retail firms to revolutionise their business models
in order to optimise capabilities.
ƒƒ
Customer-centricity, efficiency, cost-extraction and
agility should be the cornerstones of a post-Brexit
responsive strategy.
ƒƒ
Retailers should be looking to further personalize
the shopping experience and aim to understand their
customers better so that they can spot opportunities
earlier and provide popular products and services
that customers will want to buy.
ƒƒ
They should also investigate foreign consumer
markets. Retailers would be wise to diversify their
retail efforts by selling in markets outside the UK.
ƒƒ
For example, the US is the second-largest market
taking 11% of the UK’s exports, totaling $51B.20
4 willistowerswatson.com
Brexit uncertainty means that retail
firms are finding it difficult to penetrate
new markets
ƒƒ
The outcome of the referendum has undoubtedly left
UK businesses feeling uneasy; with a recent study by
Hitachi Capital Invoice Finance suggesting that over one
quarter (27%) of UK businesses say they are in “survival
mode” and aren’t going to invest for the next 12 months.
Furthermore, 57 % of those surveyed said they had
not sought external finance in the past year and 59%
predicted that Brexit would impact their ability to get
access to finance in the future.
ƒƒ
With statistics like this, you can understand why business
owners are reluctant to consider expanding into new
markets or diversifying product lines, preferring to delay
the decision- making process, once the post-Brexit
storm has calmed. For some businesses and startups,
Brexit presents huge benefits for penetrating into new
areas of potential growth.19
The vote to leave could increase the
importance of UK goods
ƒƒ
Provenance and the opportunity, as well as the
legal permission, to promote locally sourced goods
over imports may well add an extra impact to an
already important trend in food and general retailing,
according to the RTT.
ƒƒ
UK luxury might be a key sector likely to benefit from
this, given that the “British” brand exports well.
ƒƒ
There might also be a spike in demand online from
international customers wanting British goods who
are seeking to take advantage of the weak pound.21
 New found freedom in the supply chain? Inbound Investment to Rise
ƒƒ
It can be argued that Brexit offers retailers new ƒƒ
The UK retail sector was also flagged as a rich
freedoms, especially when it comes to their hunting ground for foreign buyers, especially given
supply chains. the weaker sterling and its impact on valuations.
ƒƒ
If Britain exits the single market then in theory, The RTT noted that while inbound acquisitions fell
retailers can start to buy in the cheapest markets in 2016 – following a particularly active year in 2015
and tariffs that the UK imposes on imports may – next year could see strong appetite in the UK retail
be lower than the EU ones or even zero – in food sector from a variety of countries, including the
imports, for example. United States.23

ƒƒ
Furthermore, retailers who export their products,
will have a price advantage in EU markets against
continental rivals due to the fall in the value
of sterling.
ƒƒ
The next two years will be a period of uncertainty
as retailers have to decide whether to wait for the
outcome of exit negotiations before restructuring
their supply chain.
ƒƒ
Every retailer needs to analyse what this new
freedom will mean for them and start creating
new supply chains.22

Outlook for 2017 – December’s data delivered some

unpleasant omens for this year
ƒƒ
Sales volumes dropped by 1.9% in December, according to official figures – the biggest drop since April 2012.24
ƒƒ
This has generally been taken by economists as a flavour of the pressures to come in 2017 as shoppers adjust to rising
prices on the back of a weaker pound.
ƒƒ
The drop in sterling since the referendum has raised import costs and some of that is now being passed on to
consumers. The UK’s main inflation rate hit a two and a half year high in December.25

WillisTowersWatson will continue to update its retailclients on the potential impact of Brexit as developments become
clearer over the coming months.

17 http://www.telegraph.co.uk/business/2016/09/12/primarks-owner-abf-plunges-into-pension-deficit-as-fashion-and-s/

18 http://www.telegraph.co.uk/business/2016/08/13/retail-pension-black-hole-widens-by-6bn-to-match-annual-profit/

19 http://www.huffingtonpost.co.uk/raj-dhonota/timing-an-international-e_b_13350508.html

20 http://www.datafeedwatch.com/blog/post-brexit-impact-on-uk-eretailers/

21 http://www.retailthinktank.co.uk/app/uploads/2016/08/Retail-Think-Tank-The-short-and-medium-term-impact-of-Brexit-on-the-Retail-sector.pdf/

22 http://www.retailresearch.org/brexit.php

23
http://www.thecsuite.co.uk/cfo/financial-planning-cfo/retail-growth-will-stagnate-overall-in-2017/
24 https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/dec2016

25 https://www.theguardian.com/business/2017/jan/20/uk-retail-sales-december-inflation-brexit-vote-ons

UK Retail Industry post-Brexit 5

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