Brexit: Hope for the best – prepare for the worst

It was the result that very few of us (including leading ‘Leave’ campaigners) really thought would happen. But it has happened. Brexit is no longer just a possibility. It is a looming reality. And as some 20% of UK online merchants sell cross-border to the EU and 6.12% of UK GDP comes from online sales^[1], it is likely to have a significant impact.

Hope for the best?

 
The problem is that at the moment, we have no idea what the implications of Brexit will be.
 
The UK has voted to leave the EU but this is meaningless until Article 50 of the Lisbon Treaty is invoked by Government. Article 50 is the formal mechanism that will officially remove Britain from the EU; once invoked there is no going back. And this process will take at least two years.
 
In the interim, we can just assume that once the process is completed, there are likely to be adjustments to the regulatory environment, the free movement of goods from the UK to the EU and the probable arrival of new taxes, duties and tariffs, as highlighted in a recent article^[2] by Ecommerce  Europe:
 

• The resurrection of tariffs on products entering the EU, leading to higher prices on British goods.

• Additional costs for cross-border traders: for example, imported goods could have to be quality controlled on entry into the EU as post-Brexit, the principle of ‘Mutual Recognition’ will no longer apply to British goods.

• Legislation

The upcoming legislation of the Digital Single Market on the e-commerce sector will not apply to the UK post-Brexit, so UK-based online retailers will not benefit from simplified rules for VAT and increased transparency on parcel delivery services – though their competitors in the EU will.
 
Other areas are also likely to be affected, such as fulfilment. Hitherto, Amazon has made it easier for smaller online sellers to operate across the EU with its European Fulfilment Network (EFN), which has seen the number of UK businesses using its services grow by more than 90% over the last year[3]. With EFN your stock is held in a UK warehouse and is shipped to Europe by Amazon. As it is Amazon’s responsibility to ship the product, logistically little should change post-Brexit.
 
If, on the other hand, you are using Amazon’s Pan-European FBA option, where your inventory is held in an EU warehouse you could well face additional tax implications beyond the current requirements to register for VAT in each country.
 
Then there is shipping. Post-Brexit UK packages will probably have to pass through customs in the destination EU country. This could mean additional paperwork and costs – plus potentially new import/export duties and extended delivery timescales. None of this will be known until the new trade agreements have been negotiated – but one thing is for sure, shipping to EU countries is not going to be as straightforward as it is currently.
 
In a recent internetretailing.net article, international courier ParcelHero’s  head of consumer research David Jinks expressed concern about the possibility of increased costs in sending parcels to the EU, pointing out that ParcelHero regularly ships to countries that are in Europe but not in the EU (such as Switzerland, Norway and Iceland), and that parcels sent to these countries face customs delays, red tape and tariffs of between 5% to 9% on average. [4]
 
You can find an expansion of these and other likely implications of Brexit in our recent blog.

Prepare for the worst?

 
While we will not feel the effects of Brexit on the areas outlined above for some time, one area has suffered immediate fallout: the currency markets.
 
The initial impact of the vote itself saw Sterling tumbling versus its most traded counterparts – particularly the Euro and the US dollar; and the FTSE also saw excessive value wiped from the index.
 
The markets have rallied since then and approval for Theresa May’s selection as Prime Minister could be construed as being behind Sterling’s renewed air of stability. This could well be a temporary reprieve however, as with regard to Brexit there are still more questions than answers. And, the longer these questions remain unanswered, the greater the risk of a lack of confidence in the new Government – to the detriment of the Pound.
 
So what does this mean for you, the online retailer?
 
The currency-related impact of Brexit on your online retail business will depend largely on:
 

• Where you are based
• Where most of your customers are located
• Where you source your products

 
If you are a UK-based seller sourcing your products in the UK and selling mainly to UK customers, you should be least affected – although your suppliers may increase their prices to you if they source overseas themselves.
 
If you are UK-based and selling into the EU or the US, the depreciation of the pound is to your benefit – enabling you to reduce your prices if you so choose or to pocket the extra margin to set against potentially increased costs in the future.

If you are UK-based but source your products outside of the UK – and particularly if you are paying in euros or dollars (dollars are often used to pay for goods from China, where many online products are sourced), you are likely to have to pay more and either risk putting up prices to absorb this extra cost or be prepared to take a smaller margin.

Sterling’s depreciation makes it more expensive for online retailers from the US and other EU countries to sell in the UK, so one positive is that you may see a reduction in competitors from these areas.
 
With any level of political uncertainty we can undoubtedly expect periods of volatility that will directly impact us all. Frankly, we all have to weather the storm and make the best of a bad situation. This is possibly the most important time to review arrangements for managing the currency exposure of your business. By doing nothing you leave yourself open to currency swings – and that is the biggest risk you can take. Any positive Sterling retracements could well be short-lived so it is absolutely vital to have provisions in place to mitigate the risks to your business – whether the goal is to stem losses or secure profits.
 
While challenging, there are ways the effects of currency volatility can be mitigated; and specialist companies such as Currencies Direct can help you to achieve this
 
 

At the moment, it’s business as usual

 
As for the wider implications of Brexit – at the moment the best advice seems to be to ‘Keep calm and carry on’. Don’t forget however that the best way to keep calm is to make sure that your business is in a good position to meet post-Brexit changes.
 
You could, for example:
 

• Consider moving into new markets, via Amazon and other international marketplaces, particularly those where the exchange rate may be more favourable.

• Foster good relationships with existing suppliers – especially if they are based in areas affected by the pound’s weakness: the EU in the case of the euro and the US or China in the case of the dollar. You need to be well-placed to be able to negotiate best terms from them in the future.

• Investigate potential new local suppliers to avoid the exchange rate issues when sourcing products.

• Focus on delivering excellent customer service to your existing customers to build up ‘brand’ loyalty.

• Look at ways to make your operation more efficient and cost-effective so that you are in a better position to absorb any increased costs or negative currency impact moving forward.

 
June 23rd marked the beginning of a lengthy process that will play out for quite some time. We should all be making use of that time to prepare our businesses to take advantage of new opportunities – or in the worst case scenarios, to weather the post-Brexit storm.