Verdict Insights – Retailers must prepare for a period of high volatility
The historic vote to exit the EU has put much of the UK in a state of shock, and retailers must now be prepared to deal with a high level of volatility, in both supply chain costs and consumer confidence.
Consumer confidence will be very fragile during a prolonged period of political instability, as the timetable for the exit from the EU is clarified, and the fall out in the main political parties comes to a head, with the possibility of a general election also looming. Consumers will be wary of making big financial commitments, such as buying houses, until they have more confidence in their own personal economic prospects which will hit the sale of big ticket items in the home related markets. Heavy share price falls at housebuilders already point to market concerns over house price falls and a slowdown in the number of transactions, which would lead to a contraction of sales at home related retailers.
The pound’s sharp drop today, with fears that it will weaken further, will increase costs to retailers of importing goods. While retailers may have currency hedges and contract terms already in place with suppliers which will delay the impact on shop prices, they will not be able to hold prices for long. Following the exit from the single market, there could be costly tariffs in place should the UK government fail to negotiate beneficial trade agreements, which will put further upward pressure on prices.
Retailers must encourage consumers to spend now ahead of such rises, but that will be hard in the circumstances. The UK population has become well used to austerity since the recession, so retailers will not see a huge change in consumer behaviour, but a further continuation of the challenges they have been facing over the past few years.
When so few predicted the result, it is hard to take any of the immediate longer term forecasts about how Brexit will impact the economy with anything other than a very large pinch of salt. However, we would expect that any curtailment of freedom of movement of EU nationals coming to the UK will have some impact, given that so many are currently employed by retailers. This constraint to labour supply may push wages up, though this impact may be mitigated by retailers cutting down on staff, in a bid to rein in the increased costs of goods in their supply chain.
By Maureen Hinton, Group Research Director & Patrick O’Brien, Content Director
Source: Verdict Insight, 24th June 2016