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How can retail trade suppliers prepare for Brexit?

With the UK’s upcoming exit from the European Union finally confirmed following the Christmas general election, John Leyden FCA, CEO and Founder of Carbon Accountancy, discusses how trade suppliers can prepare for the UK’s exit from the single market…

2019 was undoubtedly a difficult year for UK retailers. Whilst more generous economic analysts may describe the year as ‘challenging’, let’s be under no illusions – we ended a decade of high street fragility with a particularly tough year. According to The Centre for Retail Research, 300 stores closed their doors every week with 2,700 jobs lost with them. We lost no less than 37 high street staples, affecting almost 43,000 employees – Jack Wills, Mothercare, Clintons and Bathstore to name but a few. And within days of ringing in the new decade, Debenhams announced its resolution to their ailing fortunes by revealing the 19 locations that will permanently shut up shop in the coming weeks. 2020 could have started on a cheerier note for retailers.

The crisis on our high street shows no sign of subsiding, as online shopping continues to evolve and provide better experiences for consumers and preferred business rates and overheads for retailers. Other problems, however, have been caused by the ever-looming uncertainty of Brexit. Unfavourable foreign exchange rates have pushed up prices for retailers and consumers alike, whilst the latter’s confidence has sunk to new lows.

The Conservative re-election over the Christmas period has, at the very least, removed one level of uncertainty. Like it or not, the UK will be leaving the European Union. But with it will come further bumps in the road for UK retailers, particularly following the end of the transition period and our exit from the single market. It all relates to the cash impact of VAT imports – and it could be the final nail in the coffin for many more retailers if they aren’t prepared for the changes afoot.

What changes are coming?

As a single market, retailers do not have to pay tax on imports from the EU. This will all change following the end of the transition period on 31st December 2020. At this point, goods will come through a custom border with import duties and VAT payable at the point of entry. This will apply to the majority of goods coming into the UK from EU suppliers. Foodstuffs are one of few exceptions to this rule so major food retailers will be largely spared from these changes.

What could this mean for consumers and retailers?

Consumers will feel the brunt of the cost of import duties, as retail prices will increase to cover these additional costs. And whilst retailers can reclaim the VAT of goods imported from the EU from HMRC in the quarterly VAT return, it is the payment at the point of entry that presents the real problem.

Within the single market, not only are goods imported from the EU exempt from VAT but retailers purchase goods with a significant credit period, which can be up to 150 days for larger retailers. Such a credit period allows retailers to begin selling goods to the end consumer before payment to their suppliers, maximising their cash flow – all-important in the current retail climate. If retailers are required to pay VAT on entry, it could have a significant impact on their business.

For example, a retailer purchasing £100 million in imported goods each year will now need to pay a total of £20 million in tax on these purchases. And with the tax on imported goods payable on day one and, in many cases, unable to be reclaimed for four months – the retailer would lose £6.6 million in ready cash within the first four months of Brexit.

Could this spell the end for more high street retailers? Possibly not. Retailers may already have a solution – and their salvation may come at the expense of their suppliers.

What could be the impact on EU-based trade suppliers?

Word on the street is that large retailers plan on passing the VAT payments on to the trade suppliers themselves, sparing themselves the initial cash hit. It’s an unsurprising outcome considering retailers like – or rather need – to hold on to their cash.

But is it realistic to expect EU-based trade suppliers to be able to take the hit? They too will need to reclaim VAT within the UK, which will require a UK-based branch for them to import their own goods to before selling on to retailers. Whilst such a global infrastructure is likely to already be in place for large companies, it could spell trouble for smaller or medium-sized suppliers. It is these suppliers who may need to prepare for the future.

How could smaller and medium-sized EU-based trade suppliers get around this?

If UK retailers plan on passing the VAT cost onto their EU suppliers, those without a UK presence face a difficult decision. Their first option is to work with a distributor – a separate UK based company who will facilitate the purchase and sale of their goods. Whilst this may be a good temporary solution, it adds a layer of complexity to trade and suppliers lose a significant profit margin. It’s unviable in the long-term.

As the all-too-familiar phrase goes, ‘Brexit means Brexit’. There is no going back. Biting the bullet and building a UK presence is by far the most sustainable and simplest option. Luckily, the UK is an easy place to do business.

One saving grace which could soften the blow of Brexit for both retailers and suppliers is the prospect of a trade deal. With no clear visibility currently on what this could look like, we can be certain that it will be a world away from the ease of trade we experience with our European neighbours at the moment. And, of course, that’s assuming a deal can be reached. ‘No deal’ remains a very real prospect, and one our government doesn’t seem too shy of.

What’s clear is that either retailers or suppliers will bear the brunt of the pain once we leave the single market. Just who that will be – we’ll have to wait and see. In the meantime, it wouldn’t do any harm to either to formulate a contingency plan.

About the Author

John Leyden FCA was shortlisted for the Finance Director of the Year Awards 2012 by the ICAEW. He spent 7 years at KPMG before starting Carbon Accountancy, which prides itself on outstanding client service and meeting client needs through trust and dedication. John specialises in business advice, audits, tax planning, corporate finance, due diligence and share option schemes.

The firm was shortlisted in Accountancy Age’s British Accountancy Awards 2012 as Independent Firm of The Year, Greater London and was named as one of the “runners and riders” – one to watch – in Accountancy Age Top 50 + 50 firms in the UK. 

 

Half of global wholesalers feel threatened by manufacturers selling direct

More than half of global wholesalers have witnessed manufacturers sell directly to end customers, driving the disintermediation of the traditional supply chain model and increasing competitiveness between traditional partners, according to new research.

47% of global manufacturers operate e-commerce web stores to allow them to sell directly to end customers while 24% intend to implement an e-commerce solution as an additional revenue stream in the future.

The survey of 559 global B2B organisations found that 41% are using e-commerce to change their business model while 43% are creating a new revenue stream in a bid to move away from selling across channels.

The survey of B2B organisations in Europe, US and ANZ was undertaken by independent market research company Sapio on behalf on Sana Commerce. The survey sample covered food and beverage, automotive, construction, healthcare/medical supplies, electronics, fashion and apparel, home goods and furnishing, machinery and supplies or packaging industries.

An increasing number of organisations are putting e-commerce at the front of their businesses to remain competitive, increase the volume of sales and improve the customer experience.

However, following the implementation of an e-commerce solution over a quarter of businesses failed to meet these objectives due to increased competition and more aggressive marketplaces.

The research found that 33% of organisations felt that manufacturers, wholesalers and distributorsselling direct to customers was driving down the price of products, threatening business profitability and longevity. The research also found that 63% of distributors saw wholesalers as their biggest threat within the market, highlighting the possibility of the supply chain seeing a mass consolidation as organisations purchase rivals in a bid to remain competitive.

Implementing an e-commerce solution as part of a digital transformation strategy has allowed more than half of companies to target new markets and three quarters of global manufacturers want to sell more online.

While 79% of organisations are planning to upgrade their e-commerce solution in the next two years, other companies are already using advanced technology within the sales strategy. 39% of businesses are currently using virtual reality to personalise the buying experience and 39% plan to adopt fully automated ordering using the internet of things.

Michiel Schipperus, CEO and Managing Partner at Sana Commerce, said: “E-commerce sits at the heart of organisations’ digital transformation strategies and continues to drive change throughout the supply chain. Businesses are feeling increasing amounts of pressure from online competitors as they enter new markets. To remain competitive businesses will need to utilise their e-commerce systems for more than just to generate sales. With constant changes with the marketplace businesses need to consider integrating their e-commerce solutions with their internal systems, such as the ERP system to allow them to keep up with competitors.”

For more insight into download the report here.

Ecommerce continues to drive UK logistics sector despite Brexit uncertainty

The UK logistics property market dipped in spring 2018, as economic uncertainty made for heavy weather, according to data from Cushman & Wakefield.

In total, 6.3 million sq ft was transacted between April and June this year, 32% down on the y-o-y total and largely due to uncertainty surrounding Brexit.

Ecommerce continued to dominate take-up, accounting for nearly 50% of all deals, with Amazon investing in its first ‘mega’ shed (1.5 million sq ft) in the North East.

The report also revealed that developers are addressing the demand/supply imbalance through new construction, with 8.7 million sq ft of speculative space due to reach the market in 2018.

As a result, Grade A availability has risen by 18% to 23 million sq ft since the beginning of the year, with the South East and North West registering the sharpest increases (59% and 52%) over this period.

Prime annual rental growth for larger distribution units returned toward the five-year average, with Wales (9.7%) and the South East (6.0%) registering the most significant uplifts. Prime yields have stabilised at 5.2%.

In the Investment market, preliminary estimates revealed that £2.5 billion worth of logistics/distribution properties changed hands in H1, down 26% on the corresponding period in 2017. Despite the slowdown, interest in the sector remains strong, particularly from overseas investors.

The report highlighted that, regardless of Brexit, UK logistics property is expected to continue to benefit from the growth of ecommerce which reached a new high in May, accounting for 18% of total sales.

Bruno Berretta, UK Logistics & Industrial Research & Insight, Cushman & Wakefield, said: “With less than a year before the UK officially leaves the EU, many occupiers have turned their attention towards Brexit and this has had a material impact on the deal flow in Q2, with fewer transactions agreed.

“Unless there is a visible breakthrough in negotiations, this uncertainty could extend into the second half of the year, when an official declaration outlining a blueprint for future UK-EU trade is expected during the quarterly EU summit in October. An upturn in activity is possible particularly given that enquiry levels for units of 50,000 sq ft and above have remained relatively stable in H1 2018 compared to H1 2017.”

Gordon Reynolds, International Partner, Logistics & Industrial at Cushman & Wakefield, said: “Recent announcements by the development community suggest that speculative completions in 2019, while unlikely to match 2018 levels, will remain sustained, pushing availability further up. Nonetheless, the market is far from oversupplied and new product will continue to test the rental ceiling.”

Retail community voices Brexit white paper hopes & concerns

The White Paper outlining the UK Government’s proposed future relationship between the UK and European Union after Brexit has received a mixed response from leading retail and supply chain industry figures.

The British Retail Consortium (BRC) issued a statement in which it repeated concerns that in the event of a no-deal Brexit, movement of goods between the UK and EU would be severely impacted, even if the UK kept its border open for goods.

Specifically, it cited:

  • The EU exports £21 billion of goods to the UK and a third of the food consumed in the UK is imported from the EU. The UK’s highly complex food supply chain – and the excellent value and choice it offers UK consumers – depends upon frictionless trade with the EU. The livelihoods of tens of thousands of farmers and food producers in the EU also depend on it.
  • This supply chain is fragile. Failure to reach a Brexit deal – the cliff edge scenario – will mean new border controls and multiple “non-tariff barriers” through regulatory checks, creating delays, waste and failed deliveries.
  • This could lead to dramatic consequences, with food rotting at ports, reducing choice and quality for UK consumers. It could also lead to higher prices as the cost of importing goods from the EU increases.

Richard Pennycook, Chairman of the British Retail Consortium, said: “We must avoid a cliff edge scenario on the 29 March 2019 at all costs. Failure to achieve a smooth transition will create a lose-lose scenario for UK consumers and EU producers. Our food supply chain is complex, highly organised and ultimately fragile. Even if the UK keeps its borders open, the EU application of regulation and tariffs at borders in relation to the UK would cause significant delays and will lead to food rotting in transit.

“Frictionless trade is essential if the industry is to continue to provide the level of choice and value in shops that UK consumers are used to seeing. It is now of the utmost importance that the UK Government gets the Withdrawal Agreement over the line and allows for a smooth transition. We also need the EU to be flexible and creative in negotiation and recognise what is at stake for exports to the UK. Time is running out.”

Meanwhile, James Hookham, Deputy Chief Executive of the Freight Transport Association (FTA), said the solutions outlined offer encouragement for those tasked with keeping the nation’s complex supply chain moving freely, but will require a similar level of imagination and optimism from the UK’s European trading partners.

He added: “[The] White Paper includes positive proposals for many areas which have caused concern for the logistics industry, and should give businesses, which have been worried about a lack of clarity over future trading arrangements, some level of reassurance. It is now Europe’s turn to step up and deliver a similarly supportive, encouraging plan which will minimise the barriers to continued frictionless trading arrangements as the UK leaves the EU.”

Robert Keen, Director General of the British International Freight Association (BIFA) expressed mixed feelings about its contents. He said: “The White Paper addresses some of the issues that BIFA has highlighted over the past two years, including retaining something as close to the Single Market and Customs Union as is possible, with positive ideas on future Customs matters and international trading arrangements.

“But we have to remember that nothing in the White Paper is cast in stone. The proposals on Customs, where the UK is proposing to apply EU tariffs to EU goods passing through the UK, while having the freedom to set different tariffs on goods entering the UK, look complex and untested, something that has already seen negative comment from the EU.

“Other than a facilitated customs arrangement, I suspect that there will be other areas where there will be differences of opinion between the UK and EU.

“Notwithstanding the above, it is the most comprehensive and cogent proposal put forward by the UK Government to date and is a useful basis for negotiation with the EU.

“However, we need to be realistic. It still has to get through parliament, even before the negotiations in Brussels.”

The UK Chamber of Shipping, meanwhile, has given the Prime Minister’s White Paper its seal of approval, and demanded the European Union now ‘gets serious’. Director of Policy David Balston said: “The Prime Minister is to be commended for this detailed paper which shows the government has listened to industry’s concerns.

“This vision for the UK’s future relationship with the EU is bold, comprehensive, ambitious and robust. It is good for both the UK and the EU economy; it guarantees both that the referendum result will be delivered, as well as the free flow of goods over national borders.

“Just as importantly, it will put the UK at the forefront of global customs arrangements, making UK customs processes streamlined not just for European trade, but for trade with countries around the world – allowing the UK to further develop its status as a global trading nation.

“It is time now for the EU to get serious and stop being prisoner to its own dogma. The UK is being constructive, collaborative and realistic. If the EU dismisses these proposals, as it has previous iterations, or tries to push the UK even further, then the risk of a no-deal Brexit will rise dramatically. If that comes to pass it will be because of their own intransigence, and they should be under no illusions: a no-deal scenario would significantly damage the European economy as well as the UK’s.”

BRC warns of food supply issues in event of hard Brexit

The British Retail Consortium has warned Prime Minister Theresa May that a so-called ‘cliff edge’ Brexit could cause significant food supply issues in the UK.

The industry body has written to May and the European Union’s Chief Brexit Negotiator Michel Barnier to highlight the potential for damaging consequences for millions of UK consumers and tens of thousands of EU-based producers if an agreement in the Brexit negotiations is not reached that protects the free flow of goods between the EU and UK from 29 March 2019.

A third of the food consumed in the UK is imported from the EU. The letter highlights how the UK’s highly complex food supply chain depends upon frictionless trade with the EU. It says the livelihoods of tens of thousands of farmers and food producers in the EU also depend on it.

The BRC says the cliff edge scenario will mean new border controls and multiple ‘non-tariff barriers’ through regulatory checks, creating delays, waste and failed deliveries.

This, it says, could lead to dramatic consequences, with food rotting at ports, reducing choice and quality for UK consumers. It could also lead to higher prices as the cost of importing goods from the EU increases. And in the EU, £21 billion of exports to the UK are at stake.

Richard Pennycook, Chairman of the British Retail Consortium, said: “We must avoid a cliff edge scenario on the 29 March 2019 at all costs. Failure to achieve a smooth transition will create a lose-lose scenario for UK consumers and EU producers. Our food supply chain is complex, highly organised and ultimately fragile. Frictionless trade is essential if the industry is to continue to provide the level of choice and value in shops that UK consumers are used to seeing. It is now of the utmost importance that the UK Government proposes a workable solution to the backstop that gets the Withdrawal Agreement over the line and allows for a smooth transition. We need the EU to be flexible and creative in negotiation and recognise what is at stake for exports to the UK. Time is running out.”

Read the letter here.

KEY FACTS

• 50% of Britain’s food is imported and of that 60% comes from the EU-27.
• In 2016 3.6 million containers from the European Union passed through UK ports, just under 10,000 per day, delivering 50,000 tonnes of food to UK consumers.
• Salad leaves can be picked and loaded onto lorries in Spain on a Monday, delivered to UK stores on a Thursday and still have 5 days’ shelf life.
• BRC analysis finds that food and beverage products would face an average increase in the cost of importing from the EU of up to 29% from non-tariff barriers, under a no-deal scenario.
• BRC figures estimate that more than 12,500 small retail businesses will be at high risk of going bust in the event of no deal.

iTradeNetwork expands fresh food supply chain solution across EMEA…

The leading global provider of on-demand supply chain management purposely built for the food industry, iTradeNetwork, has confirmed it is expanding its offering for the EMEA market after experiencing substantial success in the US.

Headed by the VP for EMEA, Bob Godfrey, a newly appointed team will focus on delivering the organisation’s solutions in key segments such as retail, food services, distribution, and manufacturing across the region. Furthermore, it will will continue to develop on its existing network of suppliers, retailers, food service distributors and operators including five of the top five food service management companies; nine of the top 10 food service distributors; and 16 of the top 20 food retailers. 

Godfrey said of the expansion: “Highly functional fresh produce departments are key drivers for customer satisfaction, customer loyalty and profitability. But the fresh food supply chain, which is more demanding than staple goods, has a unique set of challenges, with high inventory turnaround and variables in both the quality and availability of stock.”

He continued: “Supply chain directors know there is a need for much smarter logistics management and complete transparency to adhere to new food safety rules. iTradeNetwork’s product suite offers supply chain traceability, in addition to easing the day-to-day aspects of the commercial buy/sell transaction.”

The company claims to offer the only solution that integrates visibility, control and insights to quickly get products to the retail shelves; meanwhile optimising costs and minimising waste across the entire food supply chain.  

 

Learn more about iTradeNetwork here 

Guest Blog, Daniel O’Toole: The importance of data in supply chain

Changing consumer trends are placing retailers under tremendous pressure, as well as the highest expectation to have exactly what consumers require in stock at the time they want it. Gone are the days of apologising and promising to get an item delivered in store at a later date; if you haven’t got the stock available there and then, your competitor more than likely will.

Retailers who struggle with managing stock can put it down to their supply chain. Supplies come from all over the world and customer behaviour is predicted by increasingly complex data sets that sometimes can build more confusion rather than provide clarity.

At Retail Merchandising Services (RMS) we have worked in distribution centres, retailer warehouses and on the shop floor. Thanks to this, we’ve seen all aspects of the supply chain, and the problems that can be encountered. In a demanding environment, it is important retailers accurately track their stock and have the tools in place to help them do so; or risk losing an already indifferent customer base.

Cloud-based software is something I have personally seen retailers productively use. Stores generate reams and reams of data on a daily basis, and it’s a shame to see it wasted. There are different programmes about, but when retailers use these to manage the supply chain each aspect of the chain can get real-time updates regarding stock levels, and respond accordingly. This, coupled with an electronic tagging system, will allow retailers to effectively manage their stock levels and help to improve the supply chain flow.

Of course, all this can be as streamlined as possible; however unexpected problems can still occur. Disruptions to the supply chain are fairly unpredictable and extremely hard to overcome, but there are networks that have the ability to predict supply chain disruptions and help companies to adapt their supply chain to lessen the effect on their business.

When it comes to predicting consumer behaviour, having a supply chain that can instantly respond to demand is the best way to overcome this. Implementing real-time visibility across the supply chain means that manufacturers, distribution centres and warehouses can respond to the demands in store as they happen. Recording data will also help retailers to identify trends that are specific to them.

I am constantly reading articles encouraging retailers to become omnichannel; meaning customers want to have the same shopping experience online as they would offline. This methodology also applies to the supply chain; the effort to ensure you have a high level of stock in store must be applied online. Customers who load up their shopping baskets only to be told that the item they want is out of stock at the online checkout, or worse when payment has been processed, won’t be coming back to your website any time soon.

It is much easier for customers to shop elsewhere online, as it is a case of just opening another window, and with image search customers can find a product as close to yours as possible.

Again, this comes down to collecting data and improving visibility across the supply chain. Retailers must get better at predicting consumer behaviour and delivering the best shopping experience possible, whether that’s in store, online or through a catalogue. Retailers can no longer get away with not utilising the data they generate, and will soon suffer the consequences if they do.

 

Daniel is managing director at Retail Merchandising Services (RMS). RMS provides retail support services across the sector, including in- store and warehouse merchandising and back-end technology. Daniel is responsible for ensuring the company’s partners are providing the best retail experience to their customers. 

Industry Spotlight: How Fashion Formula has revolutionised the supply chain mechanism of its customers…

Fashion Formula is an innovative, easy-to-use online platform whereby customers can create their own printed fabric, wallpaper, accessories or gift-wrap, manufactured in our state-of-the-art production facilities in North London. The company works closely with clients from couture, high street and premium fashion retailers; alongside DIY crafters and design-makers.
The platform allows independent pattern designers to upload their designs and create their own ‘mini-store’, granting the possibility to market their designs without holding stock or committing cash, and earning them up to 20 per cent commission on anything they sell to the general public. Fashion Formula manages all the production, dispatch and customer service, reducing a lot of the risk inherent in a small design business.
The second facet of the business, using the same ethos, is on-demand manufacturing for fashion and interior design retailers. The company is designed around the concept of mass customisation and personalised production – think Moonpig for fabric and wallpaper. The effects of this are tremendous; a reduction in the length of the supply chain for customers and changing attitude in the way designers and fashion retailers hold stock and run their own businesses. Through short-run custom manufacturing, they can achieve this without reducing the ability to efficiently service their customers.

 

In itself, digital textile printing is an enabling technology allowing mass customisation through ‘batches-of-one’ – diminishing the necessity for costly set ups and the requirement to produce and hold large amounts of stock, as well as giving it a great advantage over traditional textile printing methods. Mass customisation enables reduced lead-times on customised items so customers can manufacture in volume on a standard product whilst rapidly altering only the print within seconds – ‘achieving distinctiveness through customer-specific assembly of modules’.
Conjoined with the advancements in global communication – not to mention distribution – mass customisation has impacted significantly on the traditional standard of manufacturing. Companies can now manufacture only what is required, allowing them to respond rapidly to trends, as well as reducing stocks and capital expenditure. For fast fashion houses such as Zara, globalised rapid response can mean the fast-paced process of designing using CAD in one country, manufacturing in a second and distributing to a third, all in a matter of days or even hours.
Whereby a fashion retailer might traditionally have to order 5000m of one design to achieve a good price point, with Fashion Formula, there is little difference in cost between supplying 5000m of one design or 50m each of 100 designs. For the smaller high street or independent retailer, this provides the opportunity to offer a greater range of products and design without a large outlay. Additionally, Fashion Formula’s delivery times are days and weeks, not months; the retailer can order little and often, flexing to their seasonal demand. In this uncertain retail climate, the ability to reduce your supply chain risk is a powerful asset.

 

Find out more about Fashion Formula here 

 

Barclays: Supply chain at the forefront of retailers’ minds following Brexit vote…

A survey carried out after the EU referendum by Barclays has shown that many retailers are already reviewing how their supply chains operate as a result of the Brexit vote; suggesting the origin of products on British shelves could potentially change to suit any upcoming changes.

With this said, in a potentially positive sign for the British economy, 32 per cent predict that they will source more from the UK, with only 12 per cent expecting a reduction. Asia could also reign supreme; 52 per cent expect to increase supply chain activity in India and 43 per cent in China.

However, the research did encounter mixed opinions amongst retailers when considering the effect of the referendum vote on their supply chains. Although 52 per cent think that their business is unprepared for Brexit, a small majority (56 per cent) believes that Brexit will have no real impact (41 per cent) or a positive impact (15 per cent) on their supply chain.

Read more on the research here