Our producer Lukas Schleritzko spent several months talking to more than a hundred British online retailers in preparation for our yearly Savant eCommerce conference in London. Combining the insights from these conversations with the ones gained from research for his master thesis on Brexit, he has written the following piece about the impact of Brexit on online retailers.
Let’s start with a short definition: Brexit is the process of removing the United Kingdom (UK) from the European Union (EU), following a popular referendum in June 2016.
Since the EU consists of a multitude of political and economic agreements, most notably the single market guaranteeing the free movement of goods, services, capital and labor between member states, demerging the two is a complicated task. Brexit requires a comprehensive deal between the parties to ensure an as orderly as possible exit, that maintains a close trading and regulatory relationship. If for whatever reason no deal can be agreed upon the UK would overnight lose the benefits of the EU’s free trade agreements with more than 70 other countries, in addition to the loss of access to the single market with its most important trading partner, the EU.
The impact on the British economy, despite all the preparations the government and private businesses have taken, is expected to be severe, especially in the case of “No Deal”, which would significantly disrupt Britain’s export-oriented economy. As of this writing a deal has been agreed to, but it has not yet passed the British and European parliaments, which is necessary for its ratification and application.
It is also important to remember that even after a deal is agreed, it will only trigger the transition phase during which EU law will still apply to the British economy until the end of 2020, during which further negotiations will take place for a future relationship between the two, which could still result in a “No Deal” scenario.
Striking a deal
Depending on the deal struck between the parties, international online retailers will have to factor in that their products will have to pass newly erected custom checks, regulation conformity procedures, custom duties and many other disruptions. This will result in longer waiting periods as well as higher costs and additional taxes for deliveries across the British border. Considering the high return rates in some areas of ecommerce, Brexit will significantly raise prices and delivery times for British products sold in Europe and vice versa. Ultimately, making trade between the UK and EU less attractive. In case of a “No Deal” scenario these disruptions would be significantly worse. Also licenses and approvals issued by the UK would no longer be recognized by the EU. Furthermore, retailers will have to keep a close eye on the rules of origin of their products, being able to prove where their products were produced, and which tariffs apply for all its parts.
Brexit, with or without a deal, will also have a strong impact on the European supply chains as components sourced throughout the continent become more expensive and harder to come by.
According to a PWC study, the countries which will suffer the most economically will be the UK’s close trading partners Ireland, Netherlands and Belgium. Thanks to its strong exporting base, Germany will be able to avert a lot of damage to its economy by finding additional markets for their goods. On the other hand, from a non-European standpoint depending on the deal reached between the parties, Brexit could have a positive impact on ecommerce practitioners, as the British government is expected to demand lower standards of products sold in the UK than the EU does. The British government is also expected to lower tariffs for international (non-EU) trade making it easier and cheaper for non-European countries to export and import.
However, international companies exporting to the UK and/or the EU will need to adjust their shipping and selling policies to account for the new reality of the UK and EU being separate economic entities with their own rules and regulations. British companies exporting either to the EU or internationally will have to abide by new regulations and be prepared for additional taxes, tariffs and duties.
More challenges to come
Another challenge for ecommerce practitioners will be the fluctuations in the value of the pound as politicians figure out the new relationship between the UK and the EU. In order to avoid duties and waiting times post-Brexit, British consumers will focus on British products, making imported products less attractive. Several large retailers like Sainsbury’s, Asda and Waitrose have announced that fast moving consumer goods could be facing major disruption and delays due to Brexit, which could harm the development of this ecommerce sector for years to come. Large companies like Amazon have announced preparation for the weeks of disruption by increasing their warehousing capabilities.
New Deal or No Deal
The announcement of a new deal between the UK and the EU has eased the minds of a lot of British retailers, as it makes crashing out with “No Deal” less likely. Yet throughout 2019 retailers both on and offline have suffered from Brexit uncertainty, which has made consumer demand tenuous and unpredictable. Most analysts expect retailers will keep prices low and offer discounts to keep consumers happy. Overall holiday commerce is expected to experience below one percent growth, which is low compared to the years prior.
The compounding effects of the American trade war are most likely still to come in 2020, with some tariffs getting delayed until December of this year. Those who have recently filled up their warehouses and reconfigured their supply chains away from China may be able to avert the worst of the fallout.
B2C businesses will suffer more in the coming months as tariffs and waiting times will take their toll and force them to raise prices and lower expectations in regards to delivery time. B2B businesses will have to step up with importing large enough volumes of products in order to compensate.
Please keep in mind that with Brexit nothing is certain and the amount of surprises and deadlock we have experienced in the British parliament could mean that the decision on Brexit will be pushed well into 2020 – which again, only signals the start of the transitional period. It will be several years, if ever, until the United Kingdom removes itself from the European Union the way it wants to.