Analysis: No Brexit bongs, but alarm bells could still ring for retail

Whether or not Big Ben actually bongs at 11pm tonight, the fact remains that – after three-and-a-half years – the UK is set to officially leave the EU.

However, despite assertions from Boris Johnson’s majority government that it has succeeded in its election pledge to “get Brexit done”, nothing material will change in the UK’s relationship with its nearest trading block on February 1.

The withdrawal agreement only covers the act of the UK leaving. What the UK-EU relationship will look like after December 2020 is the thing that now needs to be worked out.

The UK government has self-imposed the December deadline and the chances of there being a full trade deal agreed by then are near-impossible – as new EU President Ursula von der Leyen has said.

As the next 11 months play out, as has been the case over the last three years, the pound is also likely to wax and wane in line with how the negotiations are reported and how the two parties choose to spin the talks.

Free movement of goods

Given the short timeframe in which to agree a trade deal and chancellor Sajid Javid’s recent comments that there will be no single market and customs union alignment after December, experts tell Retail Week that retailers that import and export products with the EU are going to have to prepare for delays caused by checks at the borders.

For BRC Europe and International policy adviser William Bain, the number-one concern of retail members is ensuring a deal is struck to remove the possibility of trade tariffs.

“We’ll be lobbying the government for pragmatic solutions on tariffs. It would be disastrous if these talks break down and we end up negotiating not on zero-for-zero, but a tariff-for-tariff basis. That would be tariffs both inbound to the UK and for UK exports.”

“Businesses are always subject to the ups and downs of the economy – whether we’re in or out of the EU. That said, Brexit offers a great opportunity”

Tim Martin, Wetherspoon

A ‘zero-for-zero’ trade deal with the EU would mean that there would be no reciprocal tariffs or quotas placed on goods moving to and from continental Europe after December 

While Bain says this would be the best-case scenario in the limited time allotted, he says the negotiations will still be difficult as the EU has never agreed zero-for-zero tariffs in free trade deals with ‘third-party nations’ in its history – not even with the likes of Norway and Switzerland, which are part of mainland Europe.

“It’s a novel approach,” says Bain. “Certainly, the EU is seeking quite a high bar in its level playing field to achieve that.”

KPMG public policy director Mark Essex agrees zero-for-zero would be the “best-case” scenario come December, but says any deal is likely to be “a thin one”.

“Ideally, you’d see a deal, albeit a thin one, with zero tariffs and zero quotas – but without single market and customs union alignment, you’ll see quite a bit of trade friction. Zero-for-zero is not ideal, but I think it’s the best we can hope for,” he says.

“If you take [Javid] at his word and accept there will be customs friction and inspections, then zero tariffs is as good as it gets.”

In the event of a deal that only governs trade and not the myriad other regulatory issues currently binding the UK and EU, Essex says retailers will still face increased costs once December passes. Given there will be customs checks put in place that currently do not exist, he believes some retailers may begin to look further afield for buying and sourcing products.

However, pro-Brexit businessman Tim Martin – founder and chief executive of Wetherspoon – is more sanguine about the possibility of a no-deal Brexit, claiming: “The UK government can end tariffs and reduce buying prices for many products pubs, retailers and the public buy – including staples such as rice, coffee, oranges and children’s clothes and shoes”.

Co-founder and chief executive of Hotel Chocolat Angus Thirlwell tells Retail Week “volatility has become the new norm” and to mitigate issues with its supply chain the retailer has ensured “all the added value [derived from imported products] happens in the UK“ – as it only imports the raw materials and manufactures the final product in the UK.

The EU and UK are both set to publish agendas and timetables for the negotiations in February.

Access to talent

Another issue of real concern for many retailers is what the status of EU workers in the UK will be after December 2020, and how some can be bought in to work after the implementation period.

Both Johnson and home secretary Priti Patel have spoken publicly in favour of introducing a points-based immigration policy – with points being assigned for higher-education qualifications, language proficiency and so on –  to coincide with the UK leaving, which they argue would “attract the best talent from around the world” and put “people above passports”.

For Bain, if the government won’t drop its red lines around ending free movement of people after December 2020, “there’s not going to be much scope in terms of improving where the baseline is”.

For Martin, businesses and the public are “understandably worried about excessive controls on immigration” but he says retailers should take heart from the fact that “two-thirds of immigrants to the UK came from outside the EU in 2019”.

Essex says the government may well also look to pump money into incentivising certain skilled immigration roles and, for retailers worried about losing out on mid- and low-skilled workers, says they will need to approach things differently.

“Retailers may have to look towards things like automation to increase productivity in warehouses and distribution centres and look to get more UK citizens back into the workforce – looking at offering more flexible shifts to mothers for example and even looking to hire ex-offenders,” he says.

Founder of recipe box delivery service Gousto Timo Boldt says the success of his business has been based on its ability to attract “the best talent from around the world” and his staff hail from 30 different countries. 

He says: “Brexit brings an element of uncertainty [but] we will continue our focused efforts to engage the worldwide tech community. This includes strengthening relationships with universities in the UK with a large European student body. The UK is home to some of the best tech minds in the world and we will continue to support this community.”

This week, the Migration Advisory Committee called on the government to lower its salary threshold for skilled migrants from outside the EU from £30,000 to £25,600. 

Currencies and consumer confidence

As has been the case since the referendum in June 2016, the relative strength or weakness of the pound has been at the mercy of the negotiations between the UK and the EU and how it has been reported.

While the pound has certainly strengthened since the Conservatives’ election victory last year, Johnson’s assertions that his government has delivered on Brexit will come under increasing scrutiny as the negotiations continue.

For Essex, this may be why the government will be keen to make the negotiations as “technocratic as possible, in effect to bore the public so much they stop paying attention to it”.

“Christmas will be a tough this year again, like it was with the election. The December 2020 deadline is going to have a similarly chilling effect”

Mark Essex, KPMG

Bain agrees, saying the negotiations will be based on a 1,700-page document “dense with legalese”. While the media generated reams of copy from both Theresa May and Johnson’s failures to pass bills in Parliament in 2019, Bain says these negotiations “are not going to be thrill-a-minute”.

With the pound likely to fluctuate throughout the year as the December deadline approaches, Essex says the biggest issue for retailers could be if a deal has not been agreed by the run-up to Christmas.

He says the dampening effects on consumer spending seen last year with the December general election could be magnified further if the UK edges towards another no-deal cliff edge.

“Christmas will be a tough this year again, like it was with the election. With the December 2020 deadline, if that’s still running, then that’s going to have a similarly chilling effect that the election did,” Essex explains.

Martin is pragmatic about the effects of fluctuations in currency. He says: “Businesses are always subject to the ups and downs of the economy – whether we’re in or out of the EU. That said, Brexit offers a great opportunity.”

Whether you agree with Martin or Essex, what retail bosses personally think about Brexit is now irrelevant. For good or ill, the die is cast.

How retailers can best exploit the opportunities and weather the coming storms will sort out the winners from the losers come January 1, 2021.