The June 2016 referendum brought to life even the sleepiest of the analysts, with everyone having their views on how Brexit would reshape the UK economic and social structure – most of them predicting a severe and immediate impact. The more structured arguments signalled immediate impacts on services (Forex, stock markets), near term impact on movement of goods (tariffs, import/export) and mid-term impact on movement of people (labour laws, living laws).
However, some initial panic aside, markets recovered and have since reached record levels. The most significant impact so far has been on the value of sterling, which as of today, is trading 12% lower than its pre-Brexit average. But it is important to see how this decision has affected supply chains as a whole and how are our supply chain leaders geared for this change?
In contrary to a lot of analyst reports, high street sales seemed to hold strong over the winter. While GFK consumer confidence reported a fall of 9 points (year on year) in November 2016, the Christmas sale was down by only 0.1%. Primark reported a 11% growth in sales, which would have been even higher had the sterling not fallen. However, it will be interesting to see how this growth continues into the 2017, with negotiations set to begin.
Bottom line under pressure
October 2016 saw the Marmitegate, which was a standoff between Tesco and Unilever. This was largely due to the rising issue of margins between retailers and producers, which might not be restricted only to Marmite. In this case, both parties held each other off due to the shear negotiation power they hold in the market. If it was any smaller player on either side, they were deemed to get burnt.
Many of our clients, from functions such as logistics and marketing, who had never thought of Forex hedging are now being regularly pulled into related discussions at board levels. Some of our recent engagements have seen large suppliers increasing costs between 3-5%, as they are no longer able to absorb them into their supply chains.
Then there is the skill issue. A large section of our retail labour force, including the shop floor workers, the warehouse operatives and the drivers, are facing an uncertain future. There are multiple reports highlighting a shortage of such skills in the UK labour market. This is bound to hit the bottom line in the short term.
Though these impacts vary based on products, they need to be analysed based on the length of the supply chain and which countries it touches. Never has there been a stronger need to have a full understanding of a supply chain, to understand and prepare for the risks ahead.
Increased cost price is one of the, if not the most, important talks of the town in the last year or so. 4C Associates have been working with our clients largely on understanding the right cost models, the potential impacts and mitigation projects. It is estimated that most of UK retailers buy at least 15% of their products internationally, with over 8% from the EU. However, they will need to understand the threat on the remaining 85% of British produce as well, as they might have roots in the EU. There might be an opportunity in revisiting the logistics network and transport model to achieve optimisation.
It is important for retailers to measure their exposure to the skillset under risk. Whether this calls for more automation is another question altogether. But in the short term, retailers need to measure their exposure across their supply chain. Even if your suppliers manage delivery of products to your warehouse, if there is a shortage of drivers, your business will be impacted by it. It might be important to analyse your contracts and map your capabilities for the next few years.
It is important for retailers to understand the change in sales pattern by products and customer groups in the last year. With most of the retailers having multiple channels, it might be a good idea to understand the shift in customer preferences. This will help in redefining the customer propositions to maximise top line.
Brazing for Impact
In the last 6 months, we have seen more of our clients reconsidering offerings and analysing their supply chains on more than 2 levels. With many of our clients and their suppliers already running tight ships on tighter margins, they will need to get more innovative to keep any increases from the customers. However, with multiple scenarios emerging post Brexit, it is even more important to model the most probable one, identify the right levers and braze for impact.