The UK’s retail sector is going to be a particularly sensitive indicator of the effects of the Brexit referendum decision. Retailers, whether they are store-based, online or both, are intermediaries at the end of the value chain – and as such are very close to both consumers and suppliers – so they’ll be at the receiving end of Brexit effects in other sectors ranging from agriculture to car production to financial services.
Any potentially negative impact would come at an already difficult time for retailers. Many are dealing with an already near ‘perfect storm’, including the impact of non-store channels, particularly mobile on large amounts of retail stores; the threat of new entrants; increasing price competition, as well as complex changes in consumer behaviour, including volatility in previously reliable sub-sectors such as clothing.
So far, any short term impact of the Brexit vote on spending levels has not been significant. Let’s look at consumers. Whilst we have seen enormous volatility in exchange rates and in share prices in vulnerable sectors (including some retailers) over the first few weeks following the referendum, these do not themselves drive buying behaviour in the short term, other than for lucky tourists. Many UK citizens will express their feelings about the consequences of the Brexit vote through their consumption behaviour over the forthcoming months and years, and in the light of critical events in the process (whether this be the triggering of Article 50, announcements by Japanese companies, or pontificating by Commissioners or Ministers.)
At least as far as spending is concerned; these feelings are unlikely to be positive, particularly in relation to spending on high value discretionary purchases, which will be deferred should confidence slip or prices increase.
Long term, many consumers will become increasingly price sensitive. Inflation will tick up through price increases as a result of exchange rate effects on import prices. The prices of Apple’s new iPhone and Watch products experienced a 15-20% increase in markup against their initial entry level prices in September 2016. The short-lived spat between Tesco and Unilever over the price of Marmite in October is only the first of what will be a series of battles between suppliers and retailers, and is indicative of the dilemma faced by all food retailers in an already highly price competitive environment. The outcome will determine to what extent suppliers, retailers – or ultimately consumers – will have to absorb the uncertainty premium arising from the Brexit decision, as it works its way through the economic system. What might this mean for consumer behaviour? Certainly a boost to online price comparison services and e-commerce as consumers still wanting to spend shop around for the best deals.
What will retailers do longer term? The prospects for fast growth in European markets have never been very good. In the context of a declining domestic market, the biggest firms will look for higher growth opportunities elsewhere in the world. Equally, overseas entrants, although they might find entry or M&A costs a little lower, may well be deterred from UK openings. If anything, this will precipitate a readjustment of the cost base of many of the larger bricks and mortar retailers, with a faster closure of poorly performing real estate and a greater reliance on online platforms.
So will Brexit wreck the retail sector? Probably not, but it’s not going to help. In the absence of a crystal ball, nevertheless, the sector’s performance will be an extraordinarily interesting bellwether for the UK economy.
Featured image credit: Shopping Cart Supermarket by Michael Gaida. Public domain via Pixabay.