Uncertainty will be a feature of the retail landscape for months to come as the timeframe and structure of the UK’s EU exit become clear.
Strategies will need to be developed in the knowledge that they will change as issues become clearer or new questions emerge.
Understanding the key value drivers within your business, and how each is affected under various scenarios, will provide a framework under which plans can be developed and options considered.
Retailers will need to identify, prioritise and address the most important issues facing the business, with five key action points at the forefront of their thinking.
1. Prioritising actions and developing a plan
Based on a picture of uncertain outcomes, retailers have a number of choices and decisions to make, the first of which is the strategic reaction they wish to employ in response to the situation. Three possible strategic responses could be considered:
Wait and see: This is based on a reactionary approach
Pre-emptive action: Designed to protect the business through a proactive response aimed at shaping the outcome before the final position being determined.
Pro-active shaping: Looking for ways in which opportunities can be developed through taking a more proactive approach.
This will allow retailers to understand the potential scenarios ahead and be prepared for any opportunities that may arise during this period of uncertainty.
2. Reconsidering investment decisions and budgets
Pre-Brexit, the high street was already dealing with operational pressures, tight margins, and the dilemma surrounding where to invest to keep up with shopping habits.
Now we are in a period where there is a risk of a sudden downturn, driven by an uncertain consumer environment amid fears over employment, interest rates and the housing market.
There is no clarity on lenders’ appetite for new or existing deals. If there is a flight to quality, pricing may increase and refinancing will be difficult. However, for those with surplus funds, there are also opportunities arising from currency fluctuations and volatile company valuations.
3. Protecting your employee base
The free movement of labour between the UK and other EU member states is a valuable asset to the retail sector.
Without free movement, the retail sector is likely to struggle to recruit and retain staff. This could mean higher wage bills, higher prices, decreased margins or a combination of all three.
While it is not expected that any current EU citizen in the UK would suddenly be deported, retailers do need to identify how such employees would be treated, particularly in respect of visas and families, as well as rights awarded to individuals.
4. Managing working capital and liquidity
The volatility in currency and commodity markets is unprecedented. Costs may be hedged in the short term, but retailers need to plan for when those hedges crystallise.
The fashion sector is likely to be hardest hit from this volatility, as the majority buy their stock from Asia and pay for it in US dollars.
However, there are likely to be winners too. The drop in the value of the pound could see food price inflation, giving a knock on effect to the valuation of the major supermarkets.
Along with the structural changes an exit brings, the consequence of exit also needs to be considered in terms of the outlook for the UK economy.
Our report commissioned by the CBI suggested a leave vote could mean that total UK GDP in 2030 would be around 1.2% to 3.5% lower, primarily due to the uncertainty that dampens confidence and investment.
The long-term outlook is dependent on the nature of the Brexit agreement with the EU, but we expect the UK economy to continue to grow, albeit slowly.
Developing robust plans, while taking appropriate action to address short-term consequences, will ensure retailers are well placed to take advantage of the potential opportunities which may arrive from the ultimate outcome.
- Madeleine Thomson is UK retail and consumer leader at PwC.