On the 23rd June 2016, the majority of UK voters made the decision to vote that they no longer wished for the UK to remain a part of the European Union (Brexit). Since then, Theresa May has confirmed that she will trigger Article 50 of the Lisbon Treaty by the end of March 2017, meaning that by mid-2019, we can expect to say goodbye to our EU membership.
The Brexit vote came as a surprise to many. Some smaller businesses were very vocal in their opinion to stay or leave, whereas other large-chain businesses purposefully stayed neutral because ‘retail, like democracy, is controlled by the people’* and they did not wish to alienate either camp of voters. The decision to leave has also shaken consumer confidence, leaving ‘remain’ voters with significant concerns about the strength of the economy and their own financial future.
There has been a great deal of speculation about how our departure from the EU will impact businesses in the UK. So, what does Brexit mean for the UK retail industry?
Key areas of concern
The Drapers Nationwide Survey spoke to more than 300 fashion businesses and stakeholders, including the British Fashion Council and several law firms, in order to determine their key areas of concerns surrounding Brexit. Four primary issues were identified.
36% of those surveyed ranked trade agreements as the number one priority in Brexit negotiations**.
Currently, all UK businesses, including retailers, can trade with EU countries with zero restrictions or additional cost (except some occasional local charges). However, when we leave the EU, this will no longer be the case and it will be necessary to negotiate a new UK trading tariff with EU countries. We don’t know how this will go, but if we fall back on World Trade Organisation tariffs, retailers can expect to pay between 11 and 16% on any clothes or footwear imported from other EU countries. This could have a huge impact on the bottom line of retailers who will need to decide whether to absorb the cost into their profit margin, or whether to increase prices to consumers. The latter could affect the ability of many retailers – particularly small, independent businesses – to remain competitive and they may need to look at more customer-experience-focused ways of attaining and retaining consumers.
However, Brexit does also provide opportunities when it comes to trade, as the UK will be free to open our own negotiations on trade agreements with non-EU countries such as China, Japan and the U.S. We currently import more than £36bn in products from China and £35bn from the U.S**. Creating trade agreements with these countries could secure substantial reductions in import costs and provide some economic relief to the retail industry.
Regardless of which trade deals need to take place, the administrative side of negotiations must be streamlined as relying on extensive paperwork and inspections will cost businesses time and yet further money. And one thing is certain – the extensive process of trade agreements needs to start happening now if we are to have trading security when Brexit finally happens.
There is a lot of uncertainty around the future of the EU workforce in the UK. Around 4% of retail jobs are currently accounted for by EU nationals***. However, with Brexit looming and a push by the UK to take a firmer line on immigration, there is no guarantee that those currently in employment here will be able to simply stay.
One of the biggest concerns is that a restriction on the free movement of people may seriously inhibit our ability to open a trade agreement with the EU. This is because the EU views the four freedoms of movement – people, services, capital and goods, as being inseparable, and therefore we may not be able to restrict one without restricting them all.
Some of the most talented and skilled designers, dressmakers and retail experts are not home-grown, and so there is also real concern that more stringent immigration laws may prevent talented individuals from living and working here in the UK. This could also negatively impact on our presence as a global player in the retail industry. To combat the restriction of movement, it may be necessary to upskill the UK workforce so that they can adequately assume the responsibilities of previously outsourced jobs. However, this will require financial investment now, at a time of relative fiscal uncertainty, to ensure manufacturers and retailers are ready for Brexit.
Funding for Education and Innovation
Currently, universities, the British Fashion Council, The Centre for Fashion Enterprise and a number of other institutions receive hundreds of millions of Euros in EU funding. Judith Tolley, Incubator Manager at The Centre for Fashion Enterprise, states “The EU-funded projects we run deliver real economic results. They create jobs and employment opportunities through business growth, innovation and the development of new products and services”**.
The loss of this financial support will impeach on the ability of the UK fashion industry to grow and develop, and upon our reputation as a breeding ground for fashion talent. This is also a serious concern if investment in the UK workforce needs to happen to make up for a shortfall in migration workers and talent. Whether or not the UK government will step in and replace lost EU funding remains to be seen, but Judith has stressed that waiting until 2019 for an answer to this is simply not an option.
What can retailers do in the meantime? Unfortunately, very little other than use what time they have to develop a post-Brexit strategy for education and innovation, while lobbying to discover what provision the government plans to put in place.
Protection of intellectual property and copyright
Undoubtedly one of the most confusing and complex areas of the post-Brexit retail landscape will the one concerning ownership of intellectual property and design rights. At the present time, the UK fashion industry is protected by EU trade mark and design protection laws. However, what will happen after Brexit is still unclear and there is still a question mark over whether our current trade mark and design rights will be lost or if we can retain them. The UK government will also need to look at our own laws and legislation with regards to intellectual property and adjust or improve these as necessary.
The Chartered Institute of Patent Attorneys has said that in preparation, it would be advisable to ‘review all licences/settlements/delimitation/co-existence agreements relating to portfolios of existing EU trade mark and design registrations now… interpretation may be a matter of contract law rather than IP law’.**** They have however stated that they are working with the Institute of Trade Mark Attorneys to ensure ‘that holders of EU trade marks and design rights will not lose protection in the UK on Brexit’****.
So, with these key concerns in mind, how can retailers prepare for what currently appears to be a relatively uncertain future?
In the short term… the pound has weakened since the Brexit vote, meaning import costs are already beginning to rise and businesses are being forced to revisit their pricing structures. This may need to happen now, but will eventually become a long-term consideration running alongside the negotiation of new trade agreements.
In the medium term… retailers should look at investing in a robust, omnichannel POS and retail management solution that has the flexibility to easily adapt to the inevitable changes in pricing and tax structure, and deliver the analytical power needed to help businesses make difficult decisions. They should also assess their staff structure and consider what countermeasures they can put in place should any EU employees be forced to leave in the aftermath of Brexit.
In the long term… until new trade agreements are set in place and the extent to which our borders will be controlled is confirmed, there will continue to be a cloud of uncertainty. Although there is some concern by those who voted to remain, it has not yet affected consumer behaviour. However, as Brexit approaches we could see more cautious spending, more value-seeking and the deferral of non-essential purchases as consumers wait to assess the stability of the economy. Retailers will be forced to reconsider their strategies to secure consumer loyalty and remain competitive.
There are both advantages and possible disadvantages to our departure from the European Union, but Brexit will undoubtedly change the way in which businesses operate. Flexibility and an ability to react quickly will be crucial as we enter an uncertain retail landscape, but those businesses that are ready to adapt will seek and find a route to success.
If you’d like to know more about the impact Brexit could have on the retail industry, give us a call. We’d love to hear from you!