Brexit: consequences for European retailers

Opportunities and Challenges

The Brexit signifies the start of an untested negotiation process with unknown consequences for individuals and retail companies resident not only in the UK but in the EU as well. Now, what does the Brexit really mean for you as a Retailer? What opportunities and challenges will you face?

Brexit scenario

Is the Brexit a fact? At this moment only the “wish of the people” is clear, although it seems like it was more a draw than a clear view. The formal procedure is not yet started. The UK government now faces the historic task of engineering the UK’s withdrawal from the EU. As the procedure for the formal request and the subsequent negotiations has not yet begun, it may feel like looking in a crystal ball of a fortune teller. Hereby, we provide you a scenario of what the uncertainty will likely result into on

  • Regulations and taxes;
  • The pound and E-commerce;
  • The UK economy and the Eurozone

Regulations and taxes

While the outcome of the negotiations is unknown, it is possible that a number of EU-rules may no longer be applicable in the UK. Many European retailers with operations in the UK will be confronted with additional rules and have to distinguish whether the products will be sold in Europe or in the UK. There are several scenario’s possible, like the UK would be granted the same treaty benefits as Norway or Switzerland. This would have direct visible consequences for customs and VAT. Importing goods from or exporting goods to the UK might become more expensive, because of additional taxes on the one hand and administrative expenses on the other hand.

From a financial perspective also for CIT this might have consequences as various favorable treatments within the EU might no longer be applicable (0% withholding tax on dividends, interest and royalties). In short, this means that operating for you as retailer will become more expensive and complex. Further, there is a risk for European retailers that the UK might negotiate more attractive trade treaties with former colonies, like US, Canada, Australia, which give operations in the UK an advantage above the mainland. For more in-depth information on regulations and taxes please download the PDF.

Weaker pound and e-commerce

The British pound has weakened significantly (at least temporarily). For UK retailers that are active on the mainland, this may provide a significant competitive advantage if they have sufficiently hedged their currency for their international sourcing needs. In particular, international online players with pricing in GBP will immediately become more attractive to consumers abroad. For example, online British fashion stores are expected by the market to profit well from the present currency imbalance. Dutch retailers should be aware of their UK competition and the pricing advantage they may hold due to the weak British pound.

UK economic downturn and Eurozone uncertainty

When exploring the immediate business impact post-Brexit referendum, we should consider the emotional factors that will affect retail growth namely consumer confidence and business uncertainty. Leading up to the Brexit vote, UK economic growth unexpectedly accelerated with 0.6% in the three months prior to June [1]. Following the vote, however, the UK economy has experienced a dramatic downturn. UK manufacturing confidence has dropped sharply and a study from the IHS indicates a contraction in the UK economy at the fastest rate since the 2009 financial crisis.

Broadly speaking, Dutch firms have significant direct investments worth €177bn in the UK, earning over €9bn in 2013, equivalent to almost 1.5% of Dutch GDP [2]. The Brexit is bringing about immediate negative impact to both consumer confidence and business uncertainty particularly severe in the UK itself that will impact these investments. However, while the Dutch investment in the UK does include large consumer products companies, the good news is that Dutch retail investments are more limited. Should Article 50 be invoked and the UK begins the exit process, Dutch businesses should monitor carefully the progression. The risk that other countries also explore exit scenarios will be influenced by the observed success or failure of the UK to secure a good deal in the process.

Overall view

The exact outcome of the Brexit is not clear yet. Currently, the only direct effect is the weaker pound which would lead to a benefit for UK-based retailers. When the formal procedure is started, the contours of the outcome of the negotiations become clearer. It is expected that it will take hard negotiations, which would take approximately 2 years. Therefore, the direct effects are to be expected at the end of 2018, beginning 2019. Deloitte can help you in the preparation of the scenario’s for a Brexit and a simulation can be prepared to facilitate your decisions. Download the PDF for more in-depth Brexit observations.

2 ONS, IMF WEO, Global Counsel calculations

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