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UK Retailers Face Daunting Challenges as Brexit Unfolds in 2020


Senior Market Analyst at Interactive Brokers

Uncertainties over how the UK’s retail sector will adjust to the unfolding of Brexit in 2020 are likely to increase in complexity, as well as spur dramatic shifts in corporate strategies.

The recent general election victory of UK prime minister Boris Johnson and his Conservative Party has spurred acceptance among market participants that the UK’s departure from the EU has been solidified.

To date, Johnson has been vocal about exiting the EU by the end of 2020 regardless of whether terms in Brussels have been agreed, while the British government works to pass through Parliament a Withdrawal Agreement Bill, which is slated to be completed and receive Royal Assent by the end of January.

The UK will then be set for a transition period, which is scheduled to begin February 1, when trading rules on customs, indirect taxation and goods regulations will apply, and be enforced, until the end of the year.

Analysts at Janney Montgomery recently noted that although the UK election provided the global financial markets with clarity about Brexit, “particularly after the solid win” by the Conservative Party, many investors are now considering what that exit will mean for the UK, “including more expensive goods and possible economic pressures.”

Complex Consequences 

Against this backdrop, the UK retail sector, which already contends with an increasing drive away from physical stores and towards online marketing and sales, is also fraught with concerns about how Brexit may reshape operations – especially concerning supply chains and the adoption of any new regulatory requirements.

William Bain, a policy advisor on Brexit and international trade at the British Retail Consortium (BRC), observed that following the Conservative Party’s election win, attention has “turned quickly to the shape of the future UK-EU trading relationship.”

He pointed out, for example, that retailers moving goods between the UK and France will need to be cognizant of the new requirements in any UK-EU trade agreement, depending on the tariff relationship between both sides and what will count as qualifying content involving third party inputs or processing.

This, Bain said, will “involve additional red tape in terms of proving the origin of goods crossing the border.”

On the application of the new trading arrangements for Northern Ireland (NI), he added that rules of destination will similarly apply to goods dispatched from Great Britain, which may terminate their journey in NI or pass into the EU Single Market through entering the Republic of Ireland.

Retailers Respond

Meanwhile, some of Britain’s larger retailers unsurprisingly consider Brexit among their primary concerns, as they ramp up on strategies to effectively manage increased risks, including potential adverse impacts on supply chains, as well as from tariffs, exchange rates and consumer demand.

Peter Cowgill, JD Sports Fashion’s (LON: JD) executive chair, said that in preparation for a disorderly Brexit, the company “always expected that, for operational purposes, a European warehouse would be required sometime after 2021 with the risks associated with Brexit bringing this decision forward.”

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In September, Cowgill noted the company was working with its logistics partners to secure an initial 80,000 square feet of space at a facility in Belgium, “which will provide us with sufficient capacity” to process footwear product launches for its key brands – slated for early 2020.

Other UK retailers have also developed extensive risk management structures to deal with Brexit-related eventualities.

British multinational clothing, footwear and home products company Next plc (OTCMKTS: NXGPY), for instance, said it has undertaken a detailed analysis of the risks and operational challenges to its business and believes it has “a clear view” of Brexit-related risks and their potential impacts.

Next outlined risks as potential direct impacts on costs and operations, including from increased tariffs, as well as indirect risks that may affect its business through changes to the wider operating and economic environment, such as a weakening of local currency or port bottlenecks due to increased customs declarations for other companies.

Other Ongoing Efforts

Elsewhere, British retailer Tesco (LSE: TSCO) in early December had seen its stock climb after the grocer confirmed it was entertaining a sale of its Thai and Malaysian businesses.

The news had come amid ongoing uncertainties over Brexit’s impact on the direction of consumer prices, and generally fell in line with the firm’s turnaround efforts to shore-up profitability since at least the start of company CEO Dave Lewis’s tenure in 2014. 

A relatively large debt burden and intensified competition from discount retailers in the UK has, over the past several years, spurred Tesco to shed a portion of its workforce and liquidate some of its regional assets.

From 2010 to 2016, the firm had offloaded its operations in France, the U.S., China, Japan, South Korea and Turkey, while recently placing more than 10k jobs on the block.

Economic Signals

In the meantime, consumers’ appetite for spending has largely remained intact despite a high degree of Brexit-inspired uncertainty and pessimism expressed by Britain’s business community.

In fact, the Bank of England noted in its November monetary policy report that consumer spending has been “more resilient to the uncertainties around Brexit,” albeit these appear to have weighed on some discretionary spending and housing.

The BoE noted that while household spending has been underpinned by strong real income growth, consumption growth has “weakened somewhat,” and the household savings rate has drifted up over the past couple of years, despite the strong labor market.

In the second quarter of 2019, consumer spending grew by 0.3% – similar to the average rate since 2017, but lower than the average from 2013–15 of 0.6%.

Retail sales growth has been strong in recent months, according to the BoE, even though surveys of the retail sector have been “relatively gloomy.”

In November 2019, while total retail sales and number of items purchased grew by 1.3% and 1.0% year-on-year, respectively, both the amount spent and the quantity bought in the retail industry fell by 0.3% and 0.4%, when compared with the previous three months.

The Office for National Statistics (ONS) also said the monthly picture was one of declines, with both the amount spent and quantity bought falling by 0.5% and 0.6% respectively.

Meanwhile, online sales as a proportion of all retailing was 18.7% in November 2019, compared with 19.1% in the prior month.

Investors will likely be paying close attention to how the UK retail sector will adjust to the potential impacts from Brexit, as uncertainties become clearer over the course of 2020. In the very near-term, economic updates in the week ahead include:

On the Economic Calendar

Monday, January 6

  • IHS Markit/CIPS UK Services PMI (Dec – F)

Tuesday, January 7

  • Vehicle Sales (Dec)

Wednesday, January 8

  • Halifax House Price Index (Dec)
  • Labor Productivity (Q3 – F)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

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