As Britain prepares to leave the European Union, it will be cutting its economic firepower by almost a fifth.

For Europe, this may only be the beginning of a wider fragmentation process as the continent’s post-war ideal of an era of united free trade is called into question.

For retailers and their suppliers, the next few years will be about securing crisis-proof supply chains.

As Europe awakes to an uncertain future, Planet Retail considers the way forward.

Key Implications:

  • Retailers and suppliers will need to prepare for political, economic, financial market and currency risk.
  • With Britain to leave the EU and regional independence movements strong across Europe, a future of barriers, border controls, import quotas and customs duties is looking less improbable for the continent than it used to.
  • As of today, the European Union still is the world’s second-largest internal market in terms of economic output. However, with the UK leaving it will shrink by at least 17% and it seems unclear how far this disintegration process will go. This is where the biggest risks lie.
  • In the UK, underlying upward pressure on food inflation might turn up the heat further on traditional grocers, providing discounters with an opportunity to continue their spectacular rise – unless expansion budgets are channelled elsewhere.
  • British and European FMCG businesses will now have two years to adapt to change and avoid a hard landing. At the end of the process, product choice will likely be reduced at both ends of the Channel Tunnel.

As the dust begins to settle, it seems obvious that Britain’s vote to leave the EU will impact European retail on different levels.

These include stability of the political framework, the wider economy, financial markets, and currencies.

However, beyond the immediate repercussions of the Brexit, Europe will also face a wider challenge around the stability of both of the EU and the euro area.

For many retailers and suppliers operating in continental Europe, the biggest risk, perhaps, lies in potential domino effect that could severely impact supply chains and access to consumers.

Political risks to supply chains

In a retail and FMCG industry widely relying on international sourcing and logistics, the biggest risk around European stability now lies on the political level.

This is especially true for European retailers which first and foremost source from European suppliers.

As Britain will leave the EU, Denmark continues to debate a similar move and independence movements in Scotland, Catalonia and northern Italy may take fresh encouragement from yesterday’s UK vote, a future of barriers, border controls, import quotas and customs duties does not seem as distant now as it used to.

As the Russian sanctions and instability in Ukraine continue, more border obstacles can be expected should the refugee crisis flare up again – in which case transport and logistics challenges can be expected around Austria, Italy, Greece, Hungary and Slovenia, to name just the most prominent candidates.

More closed borders would impact very directly on retailers’ international sourcing, as well as logistics, with lorry waiting times at borders facing a risk of skyrocketing and taking out a significant part of the efficiencies on which international retail networks rely.

Whether or not these worries will materialise eventually, retailers and their suppliers will need a plan in their drawers to act when they have to.

It is worth remembering that the refugee issue in particular has also strengthened nationalist movements in the UK, France, Germany, Poland and Hungary, whose anti-European attitude should become more visible in policies going forward as they increasingly take control of political and legislative institutions.

But even with open borders, access to consumers could be complicated by currency fluctuations should the Netherlands and Finland leave the euro area, as seems possible, and should Greece be forced to leave the single currency zone.

Of course, the European Union still is the world’s second-largest internal market in terms of economic output after the US.

However, with the UK leaving it is now clear it will shrink by at least 17% and it seems open where this disintegration process ends.

Inflation and re-nationalisation of supply chains?

Given the combination of upcoming free trade and currency risks, retailers in search for stable and reliable supply chains can be expected to sharpen their focus in buying.

For British FMCG businesses, this implies a risk of losing substantial export volumes in a slow but continuous process over the next couple of years, unless the UK becomes a European Free Trade Association member (far from guaranteed due to the regulation associated with it) or strikes some other form of free trade agreement (could take years to negotiate with the EU showing a tough face to discourage further disintegration tendencies).

The question of how swiftly any lost volumes can be substituted with exports to the US or elsewhere will depend on the success at which the new British government – as will be the case now PM Cameron has announced his resignation – can forge new trade agreements outside the EU.

Previous statements from the US have indicated this process might take time.

Vice versa, continental European products will lose competitiveness in Britain, with a weak pound likely to drive up the prices of imported goods. The medium-term result should be less international product on British shelves, and less choice for British consumers, as well as more continental product ranges overseas.

For continental FMCG suppliers relying on exports, finding new shelf space in their highly concentrated domestic markets will prove a challenge. This might accelerate their push into emerging markets, including opportunities in emerging megacities across CEE, Asia, Latin America, the Middle East and Sub Sahara.

Meanwhile, in the UK, underlying upward pressure on food price inflation might also turn up the heat on traditional hypermarket and supermarket operators, providing discounters with an opportunity to continue the spectacular rise that has recently accelerated so much.

Then again, trade barriers and the bigger currency risk may inspire Aldi and Lidl to shift expansion funds to alternative European markets, such as France, Spain and Italy.

Over the coming weeks and months, retailers and FMCG businesses across Europe will reconsider their strategies. Only one thing is clear at this point: the economic Europe of the future will be smaller and look different for consumers, retailers and suppliers.

Most players will need to adapt to change, but luckily will get two years to do this while avoiding a hard landing. 

  • Boris Planer is Planet Retail’s chief economist and general manager, Germany  
  • For full coverage on Brexit and its impact on retail, click here