Travis Perkins and Next, two industry bellwethers, both revealed their thinking on mitigating the impact of Brexit when they updated this week.
Both said it is too early to call the effect of the Brexit decision on consumer sentiment each flagged a variety of ways in which they believe they can contend with business challenges as a resul tof brexit, notably the devaluation of sterling.
Here we assess to what extent Travis Perkins’ and Next’s responses to the implications of Brexit could be applied by retailers more generally.
Switching to UK sourced products
Wickes-owner Travis Perkins said this would be among the strategies it would deploy to counter the effects of cost prioce inflation.
However it is an approach that some retail sectors would find it much easier than others to implement.
For many, UK manufacturing’s much-publicised decline makes the strategy tricky. In the 1970s, manufacturing represented 25% of UK GDP. Now it stands at around 10% - many retailers would struggle to find viable UK sources.
Fashion retailers would perhaps find this change most difficult to implement. While many high end British labels source from British factories as a quality differentiator, value and mass market apparel retailers source almost exclusively from Asia.
The same is true for electricals, which are mainly sourced in Asia, and increasingly from China.
But grocers may find it easier to source from inside the UK.
“One strategy for grocers could be to increase their focus on seasonal produce to compensate for more expensive overseas sourcing,” says Retail Week Prospect head of research Philip Wiggenraad.
“People are out of touch with what’s available when but perhaps grocers can change that through marketing, and perhaps link it to the health trend.”
KPMG’s head of UK retail David McCorquodale is less optimistic. “We import lots of New Zealand lamb and Danish bacon and if that is cheaper than home sourced products then consumers will want that.
“If currency devaluation makes British produce less expensive than their equivalent then the supermarkets will provide more British food. But it is very early to be talking about this - we don’t know what common agricultural policy will be.”
Next spoke about increased efficiencies that will comie from “new and developing sources of supply such as Bangaldesh, Cambodia and Burma”. The expectation is that, combined with “greater competition between more traditional sources of supply, particularly in China, and newer manufacturing regions” will mean keener rivalry that will benefit retailers.
Travis Perkins also highlighted the opportunity for efficiencies, but did not elaborate further.
Peel Hunt analysts John Stevenson and Jonathan Pritchard agree there is scope for retailers to generate efficiences.
While they urge retail chiefs to ”take a deep breath and try not to do anything rash as a consequence of short-term trading trends,” they also say: “There is pressure on forecasts from [currency devluation], so we would be talking to suppliers, thinking about alternative factories and generally trying to mitigate the impact.”
Improving efficiency does not necessarily mean making cuts of course. Investing in areas such as tech and automation might require some short-term outlay but in the long term businesses will benefit. This is a strategy already being pursued by John Lewis.
For some retailers,achieving efficiencies might be a challenge. The impact of the National Living Wage, due to be felt even more keenly in 2020, and business rates mean that every almost retailer is already hyper-focused on efficiency and productivity.
Increasing sourcing direct from manufacturers
This strategy also forms part of Travis Perkins’ plans. Many retailers already do it on a large scale, but looking again at how to get more value from manufacturers is an option.
Vertically integrated business such as Morrison’s are in luck because they can exploit that to become more competitive.
Wiggenraad says that grocers might also look at taking a leaf out of the discounters’ books. “Aldi and Lidl are so cheap because they have enormous buying power due to their limited ranges,” he says. “Other retailers could also reduce their ranges and so increase their buying power in certain product categories.”
He believes that bigger retailers will be at an advantage when it comes to negotiating sourcing contracts.
“Some of the large players in their markets - AO and Dixons Carphone in electricals for instance - are on such a huge scale that they might be able to leverage that to negotiate better prices. This is especially true for retailers sourcing from China as the Yuan is also devalued.”
Passing cost inflation through to customers
Travis Perkins said it could pass on ”genuine cost inflation where it cannot be avoided”.
This point is a leveller. Retailers’ ability to increase prices rests in part with the competition, as has been evident during the grocery price war. Conversely, if everyone begins to increase prices the market finds its level.
Higher prices may just a matter of time. “We would expect to be putting prices up,” say Stevenson and Pritchard. “But not this year.”
McCorquodale believes it would take years for price increases to be passed onto the consumer.
“We live in a world where there is massive overcapacity on quality retailers and the internet gives even more choice,” he says. “Consumers are savvy at finding the best price.
”It’s a brave person in a competitive market that will put prices up first. Only if the cost of a commodity is up for a while will it be passed on, as we saw in 2010 when the price of cotton rose.”
Lord Wolfson has already spoken of putting prices up in reaction to the costs brought about the introduction of the living wage. In Next’s update today, the retailer spoke of a 5% hike in its cost prices when its hedging began to end, from January 2017.
Whether that will equate to further price rises for Next customers is of course another question, especially when looked at in the context of consumers potentially tightening their own purse strings.
While each of the strategies and mitigating factors outlined by Travis Perkins and Next have merit, many retailers are already pursuing them. Ultimately, Brexit will simply further incentivise them to continue to keep a keen eye on the bottom line.