Despite overwhelming business support to remain in the EU, the UK has voted to leave, which will cause uncertainty for retail.
Even with a remain campaign that called upon people such as Sir Terry Leahy for support, the UK electorate has voted to leave the UK with immediate and far-reaching consequences.
Prime Minister David Cameron has resigned, leaving uncertainty in the governing Conservative Party as the UK starts down the path of what will be a long and potentially painful withdrawal from the European Union.
Within hours of the vote being confirmed, sterling plummeted to 30-year lows while UK share prices fell amid chaotic market trading.
What happens next?
While retail market panics will be short-lived and there will be a recovery, it is likely that this will be at a lower level than before the leave vote was confirmed.
“Consumers will consolidate expenditure as they watch negotiations unfold”
Jon Copestake, Economist Intelligence Unit
The UK is currently experiencing a short, sharp economic shock but what will follow for UK retailers will be a period of sustained uncertainty, which has been exacerbated by the immediate resignation of the Prime Minister.
From a demand point of view, this means that UK sales will decline in the near term. Consumers will consolidate expenditure as they watch negotiations unfold. Weakened sterling will push up the price of imported goods while the cost base of retailers will rise as they seek to rationalise supply chains that no longer benefit from single market regulation.
This will undermine any growth achieved so far in 2016 and the likelihood is that annual retail volumes will stagnate.
In the medium term
Worse is likely to come as heightened uncertainty takes hold. During the two years of negotiation and decoupling that take place the UK will see retail sales volumes fall further, by more than 3% next year – a decline not seen in decades and double the decline in sales volumes experienced during the worst period of the global financial crisis in 2009.
As the picture becomes clearer the UK will stage a recovery in sales in 2018 as pent up demand is released, but this will be marginal.
“As consumers rein in spending retailers will be scrambling to renegotiate agreements with suppliers and reassess the regulatory environment in which they operate”
Jon Copestake, Economist Intelligence Unit
By 2019 when Brexit becomes a reality sales will fall back once more. Beyond this the UK retail sector will stage a muted recovery but the lost years will have already had an impact.
A weak sales environment will only be one of a number of challenges for retailers though. As consumers rein in spending retailers will be scrambling to renegotiate agreements with suppliers and reassess the regulatory environment in which they operate.
Regulation that is at present consistent across member states will diverge, forcing retailers to consider two sets of rules when assessing UK and European markets.
There are also beneficial schemes that will have to be revisited. Exclusion from the Common Agricultural Policy and Digital Single Market will have both ramifications for retail supply and for cross-border trade with EU markets.
Finally there are workforce implications which may prove difficult for retailers to navigate. At Oxford University’s Migration Observatory there are 442,000 EU citizens employed by the UK retail, hotel and restaurant sector making up almost 8% of its workforce.
If visa requirements come into force then many will have to leave. Although the leave campaign can argue that this will create jobs for UK citizens the scale of switching staff would be costly and difficult to manage.
For retailers all of these complications will add to their cost base, during a period when revenue streams are curtailed by weak consumer sentiment. Something will have to give, meaning a combination of rising prices, lower profitability, corporate austerity, job cuts and, in some cases, bankruptcy.
Benefits will be few
There may be benefits for some retailers. The quick resignation of David Cameron will mean a switch to a pro-leave cabinet, which will dedicate itself to making an economic success of secession. This would see a focus on business and investment friendly policies.
Government investment will soften the blow for some retailers, while interest rates will be kept low to facilitate spending.
The nationalist undertones of the leave campaign also imply that there may be more protectionism and a movement towards sourcing to domestic suppliers, but these benefits will be limited.
While 52% of the British electorate will be jubilant today there are likely to be few in retail that share this view.
- Jon Copestake is chief retail and consumer goods analyst at the Economist Intelligence Unit