Brexit’s impact on UK retail businesses and their supply chain

In the last few weeks, we have seen some progress made in detailing what Brexit ‘may’ look like

As March 2019 approaches and the UK government and its European Union (“EU”) counterparts continue to work towards reaching a solution that allows an orderly UK exit from the EU, businesses face an almost unparalleled degree of uncertainty around the potential impact on their ability to trade and in particular their supply chain. The key challenge of Brexit has been, and continues to be, the lack of detail around the Brexit deal. In the retail space, the uncertainty surrounding Brexit further amplifies the myriad challenges already impacting on the sector – consumer confidence ‘death of the high street’ etc.

No matter where you sit within your supply chain, the outcome of Brexit negotiations will need to feature front and centre in whatever future planning/ scenario building that you undertake as a business. In the face of all the possible ramifications, a concerted and sustained planning initiative is imperative if businesses are to insulate themselves from the more unwelcome consequence of the fall out from the UK finally leaving the EU. 

In the last few weeks, we have seen some progress made in detailing what Brexit ‘may’ look like but with mounting political dissent with the current proposals from the UK parliament, this is far from definitive. Nonetheless the best guide available to businesses is the draft withdrawal agreement which has been ratified by the EU remaining 27 Member States. Under the draft withdrawal agreement, the status quo largely remains during a transition period and businesses will have up to December 2020 to properly prepare for the permanent solution (and maybe longer if both sides agree). The terms of the draft withdrawal agreement does not deal with substance of the proposed future trading relationship and is lacking in detail as to how things will work in practise in the long term. The current proposal is that both sides will use the transition period to finalise the details of any trade deal. The result is that despite the comprehensive and sustained negotiations between the UK and the EU negotiators there remains an unprecedented level of uncertainty for businesses.

Despite all the uncertainty and upheaval, one fact stands; businesses cannot afford to wait and see what happens. Depending on the size of your organisation, time is quickly running out to build in sufficient flexibility within your existing arrangements to ‘pivot’ once we have a clearer picture. Businesses are increasingly looking internally at their processes and a good number are discussing the same with their supply chain either collaboratively or simply pushing the onus to come up with solutions on them.

Some of the key conversations to be having and scenarios to start planning for as a matter of course include internal conversations on the possible impact a ‘no deal’ scenario could present for your business and its immediate impact on your supply chain.

Some key questions businesses need to start looking into (if this is not being done already) include:

  1. Where is my supply chain? How much of it is outside the UK and what are the potential impacts of tariffs following Brexit? It is highly unlikely that the final arrangement will lead to completely tariff free trade so some thinking needs to go in to how this can best be dealt with.
    • How will any additional tariff related costs be absorbed? Will they be wholly absorbed by the supply chain or will a proportion or all of it need to be passed to customers?
    • Can my supply chain absorb the added tariff costs and inevitable administrative burden? Stress testing your existing supply chain ensures that you have an idea of the possible impact on your supply chain and you can account for this when scenario planning. Your stress testing can be as simple as asking your supply chain to confirm what their plans are for a number of scenarios and what, if any, challenges this presents. If your supply chain cannot adapt you will need to quickly identify replacements who can meet the changing requirements.
    • Consider the impact on lead times and what this could mean for existing service levels. This will be of particular importance for businesses involved in the sale of goods with a very short shelf life and/or hauliers.
    • What are other players in the market planning to do about costs and what steps can I take now to ensure that I maintain competitive advantage? There is little merit in playing the waiting game and finding that your competitors are better prepared and have already built in flexibilities and measures that could ease the impact of any future tariffs and as such are able to price you out of the market or materially reduce your market share.
  2. What internal capacity do I have to deal with the added administrative burden from dealing with the EU as a business in a ‘third country’ or with other countries once the UK ceases to be a part of the EU. There is a need to consider and plan for the impact of any additional reporting/accounting that will result from changes in:
    • Customs duties: if a customs border is introduced between the UK and the EU (even if it is only a soft border), this will attract additional costs and require appropriate licencing and registrations.
    • VAT payments and receipts when considering import and export post Brexit.
    • Exchange rate fluctuations on imports and exports will have a direct impact on the costs of trading. Discussions need to be had around how the impact can be mitigated where possible.
    • Internal IT infrastructure may well need to be upgraded with adequate flexibility built in to deal with additional requirements. Staff will need to be trained to handle the changes going forwards.
    • Relocation of some production or distribution hubs: this could be a means of mitigating the potential costs and delays but this will need careful consideration.
  3. The all-important contractual review. This should not be underestimated or delayed. A number of businesses will have long term contractual arrangements in place with obligations and penalties that will need to be carefully reviewed in light of the impending Brexit. Where revisions can be agreed, steps should be taken to begin negotiations and if ongoing arrangements need to be unravelled then the sooner discussions begin the sooner the relationships can be unravelled.

We recognise that the lack of clarity makes specific planning difficult but the risk of adopting a ‘wait and see’ approach far outweighs the cost of commencing contingency planning before the final agreement is reached. There is the very real possibility that for businesses that leave it too late they will find that their options are severely limited as they may be out of step with the rest of the market or their supply chains.

However, it is not all doom and gloom as the continued uncertainty brings both opportunities and challenges for businesses. Opportunity because in addition to potential new trading partners, businesses can revisit/review their supply chain arrangements with a view to streamlining (where necessary), diversifying their current arrangements and renegotiating terms that will work to their advantage in the long run. The ongoing uncertainty notwithstanding, businesses can capitalise on the emerging opportunities and strategically position themselves to maximise new opportunities.

Author: Itohan Odekunle, Solicitor.
Contact 0113 213 4046 or itohan.odekunle@weightmans.com

Please do not hesitate to get in touch with us today if we can help you through any scenario planning exercises or internal reviews. Please contact us at brexit.group@weightmans.com

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