Brexit has been hailed as an opportunity and bemoaned as a blight by value retailers. But how much impact has the leave vote really had?
The decision to leave the EU referendum is a blessing or a curse for general merchandise value retailers, depending on who you ask.
B&M boss Simon Arora brands the result as positive for business owing to fragile consumer confidence and price inflation leading to shoppers “seeking out a bargain”, something the value retailer is well-placed to provide.
However, price inflation is a double-edged sword for many value businesses, because razor thin margins and low prices could be impacted more by currency fluctuations than the average retail business.
General merchandise retailer Wilko, which posted an 80% slump in full-year profits last month, lays this woeful business performance at Brexit’s door.
The retailer also says its outlook for the year ahead and beyond has been reduced as a result of the vote and subsequent fall in sterling’s value.
Poundland’s trading director Barry Williams has little sympathy for retailers attributing sluggish sales and falling profits to Brexit.
“Brexit is good news for the people who can operate in uncertain times,” he says.
“For retailers that can’t deal with uncertainty and want to blame everything that is going wrong within their business on all the factors that are happening outside of their business, it’s a nightmare.
“There’s a whole plethora of options in front of you but if you’ve not woken up the challenges and you only react to them after they’ve hit you then the bottom line is that you’ve missed the boat.
“I’m not accusing Wilko or Sports Direct of being in that position but it is quite convenient to blame it on Brexit, isn’t it?”
So which value retailers are successfully navigating Brexit and its consequences so far, and what can other businesses learn from them?
Sniffing out sourcing deals
One of the greatest challenges facing all retailers in the wake of the Brexit vote is sourcing costs, and low-price retailers are especially affected by this.
However, there are opportunities for retailers at the value end of the market to negotiate a canny bargain.
Retail Week Prospect analyst Philip Wiggenraad highlights B&M and rival Home Bargains as two businesses that have managed to do this particularly well.
“Both of these retailers’ core strengths lie in their supply chain capabilities – being able to source directly from overseas manufacturers but also their ability to sniff out a deal, for instance by picking up clearance lines, end-of-lines, close-out and distressed products,” he says.
Providing a lean but trend-led product offering can help value retailers stand out from their rivals while keeping a tight lid on costs.
“A lot of customers have a preconceived idea about the relevance and fashionability of the product, so the more we can innovate and surprise them the better”
Poundland trading director Barry Williams
Williams highlights shifting legacy stock from Poundland and focusing on a more seasonal range as a key part of the retailer’s strategy in the wake of the Brexit poll.
“Having the freshest, most up to date seasonal offer you can is really important in our marketplace,” he says.
“In a way, that’s more of an opportunity for a business like Poundland than others because a lot of customers have a preconceived idea about the relevance and fashionability of the product, so the more we can innovate and surprise them the better.”
Williams also highlights a return to UK manufacturing as an effective means of controlling internal costs in the wake of the EU referendum vote.
“The things that we are really focused on are how to seize the opportunity in all this uncertainty.
“Does this bring back an element of UK manufacturing, because there’s more stability around it? And if that’s the case, how do we engage with that and start to lead on it,” he says.
“When you look at the cost of goods there is a proportion of it that’s directly affected by currency fluctuations, so if you can’t manage that you need to look at how you on-board more UK-based production.”
Having a more selective product line with a quick turnover is a strategy that can control sourcing costs and create a sense of urgency for shoppers – both of which are key to maintaining sales momentum and profitability.
Wiggenraad says: “Both B&M and Home Bargains have a range of about 5,000 items, while in some Wilko stores this can be four times as much.
“Because they are able to concentrate their buying power into fewer ranges, they have found it easier to manage their margins and have more leverage to negotiate with suppliers.
“They’re also very flexible in terms of adding new products and this freshness ensures a steady stream of footfall.”
Holding off on online
It is a retail truth universally acknowledged that shoppers flock to the value end of the market in times of economic uncertainty.
Value retailers have certainly benefited from this dynamic in recent years.
However, Wiggenraad is not convinced there is very much additional windfall for value retailers now that budgets are being squeezed again post-Brexit vote.
“The discount sector thrived after the last recession as there was a flight to value as household budgets came under pressure,” he says.
“However, the upside might be more limited this time as many consumers have kept shopping with the discounters despite the economy having picked up pre-Brexit.”
Canaccord Genuity analyst Sanjay Vidyarthi
So without a surge of new shoppers, how can value retailers further drive sales?
Ecommerce may seem like an obvious place, because it is the fastest growing sales channel for the vast majority of multichannel retailers.
However, for a value operator the perceived wisdom that online is a vital tool in a retailer’s arsenal may not ring true.
Vidyarthi adds that etail powerhouse Amazon has stopped collecting returns on certain items as a cost-cutting measure.
“It goes to show that it often costs more to pick up purchases and do the reverse logistics,” says Vidyarthi.
“If that dynamic is true for Amazon within the environment of Prime and all the added value things it’s doing, then a pure value retailer just can’t justify the cost.”
Online makes up a nominal proportion of sales for value retailer Home Bargains. However, Poundland recently wound down its ecommerce operation and Arora has previously said ecommerce is not a priority for B&M.
For most value retailers, the key to navigating the fall-out of Brexit may lie in diversifying its offer through existing sales channels, rather than branching out into new ones.
Poundland’s expansion into multi-price and tie-up with Steinhoff-owned clothing retailer Pep&Co earlier this year is one example of this, and Williams is confident that value retailers that are reactive to changing market conditions are best place to succeed post-Brexit.
“There are enough controllables inside a retail business that, if you’ve got a grip of it, you can weather the storm,” Williams says.
“If you adopt that approach, you’ve got an opportunity of winning. But if you just want to sit there and moan about it then you kind of get what you deserve.”
The impact of the Brexit decision on value retailers may continue to divide opinion but it is clear that, for canny operators, it can present as many opportunities as challenges.