The impact of Brexit: what’s in store for the retail sector?
Wednesday 6th July 2016
Andy Brian, retail partner at Gordons, looks at the uncertainty in the sector created by the result of the EU referendum.
The UK’s decision to leave the EU following the recent referendum has, perversely, created huge uncertainty; and the retail sector is no exception.
The only certainty is that nobody can be sure of what the future holds. While the initial reaction to Brexit was one of surprised panic, with global investors retreating to safe havens such as gold, the medium term fallout will see nations across Europe and the rest of the world taking stock of their trading relationships with the UK.
Optimists take the view that it is in the best interests of all involved to maintain relationships that have taken years and even decades to forge and maintain, and that the majority of manufacturers, suppliers and retailers across the world will adopt this view and carry on until things formally change.
A more pessimistic view is that the “wait and see” approach won’t mean “carry on as normal”, but “put this on hold until we know more”. I have already seen and heard of commercial arrangements being cancelled or indefinitely postponed in the wake of the uncertainty.
Status of employees
This general air of uncertainty has already filtered through the jobs market, particularly as many retailers employ people who were born outside of the UK and, amid the political posturing, these workers and their employers are waiting for clarity as to what the future holds.
Due to the lengthy process of leaving the EU, any legislative changes would be unlikely to come into force until late 2018 at the earliest, but with retailers keen to minimise losses in the face of potentially slowing global trade, any aspect of certainty they can bring to the business is welcome – and this includes the workforce.
Currency markets
The uncertainty is already having a direct economic impact on the retail sector. The immediate impact of the referendum vote saw the pound fall to its lowest level against the dollar since 1985, and while this has since recovered, further fluctuations are expected.
Most international trading is done in US dollars, so any fall in the value of the pound versus the dollar may push up prices for UK retailers buying products from overseas. Although this risk can be hedged against and, to some extent, absorbed, the 12 per cent deprecation in sterling that the Treasury forecasted before Brexit would be too much to bear.
Consumer spending
That gloomy forecast may or may not come to pass. If it does, retailers would have to pass some of those cost increases on to the consumer, which would result in higher shopping bills, and lead to belt-tightening.
The recent recession brought about a culture of austerity among shoppers that has been maintained ever since, and so any change in habits is unlikely to be catastrophic in the long term, but the challenge still exists.
Debenhams chairman Sir Ian Cheshire has predicted that the top line of consumer spending will be affected, but conceded that fluctuations in the value of the pound and ongoing uncertainty about how – and even if – the UK’s exit from the EU will take place means the situation is hard to read.
The British Retail Consortium has voiced concern that a downturn in consumer spending will be triggered by a lack of uncertainty about what Brexit means for the country, with some shoppers content to sit tight in the interim.
Inflationary factors
As always, price inflation will continue to be the determining factor in consumer behaviour, and the speed at which retailers react to any changes will have a direct impact on their margins.
Now that the Brexit campaign has proven victorious, retailers are having to realign their strategies, but the uncertainty about what leaving the EU means for the industry, the stock markets, the employment market and the country as a whole means that any strategy will be forged on an element of doubt.
The coming months will tell us more about what is in store for the sector, but until then retailers will be calculating how to stimulate spending and maximise margins in a sea of uncertainty.
If you need legal advice on any retail matters please contact Andy on 0113 227 0354 or andy.brian@gordonsllp.com. For more information about us please visit www.gordonsllp.com/sectors/retail-lawyers/.