Brexit and COVID-19: even separately, their impacts would have been profound. But they didn’t occur separately. The United Kingdom officially left the EU in January 2020 (though it will continue to participate in the EU customs union and single market until the end of the year due to a transition agreement). By February, COVID-19 was propagating globally. The synergistic coupling of these events has incurred unprecedented disruption and massive pain to both markets and civil life.
Brexit sent a strong tremor through global markets, and COVID-19 followed with an economic tsunami that triggered the deepest recession since World War 2. The ways we interact, shop, and work have been transformed, and many if not most of these changes are long term. Some will be permanent.
No economic sector has been more affected by these double blows than retail. Brexit has forced retailers that traded within the EU to reassess supply chains, key markets, product lines, GTM strategies, VAT, regulations, data storage, funding, and employment. COVID-19 worsened this uncertainty, particularly in regard to supply chains: consumer demand and supply have fallen in lockstep due to the pandemic.
Further, COVID has accelerated retail trends that existed prior to the lockdown, particularly the movement toward digital. Consolidation also has quickened, and weak or lackluster brands have suffered accordingly. Many of the brands that were struggling prior to Brexit and COVID already have perished; more will follow.
In sum, the only predictable quality of Brexit and COVID-19 is unpredictability. But while uncertainty and ambiguity will continue to reign, some new realities are also emerging:
- UK retailers are demanding a free trade agreement with the EU that is streamlined and free of excessive regulations. Simultaneously, EU companies fear that liberalized regulations post-Brexit could give British firms an unfair advantage. This sets up a stalemate—and may increase the likelihood of a “hard” Brexit.
- If COVID becomes a long-standing or perennial issue, “made at home” warehousing may expand, checked only by cost and efficiency differentials.
- Brexit will likely swell the domestic talent pool, particularly among junior positions.
- COVID could presage a major and permanent diminution in the free movement of people. This would serve as further stimulus to remote working, which is rapidly gaining momentum and looks increasingly like the new labour paradigm. An example: on recruiting a recent position, Paul Murphy, a partner at the London-based VC firm Northzone, stated “For the first time in our history we listed it as a remote job. This means we don’t have to worry about visas.”
- An adjunct to the cessation of free movement: home workers could become viewed as a reservoir of “cheap outsourcing.”
- A push-pull dynamic has developed regarding stock. In the run-up to the January 2020 Brexit, retailers increased their stockpiles, a response that may be repeated if further frictions with the EU develop and inventory and supply chain concerns are heightened. Conversely, many retailers found themselves burdened with excessive stock during the pandemic, particularly seasonal inventories; this has led to drastic discounting across the board.
- Larger companies may maintain higher inventory levels to mitigate for delayed deliveries caused by Brexit border checks. Small and medium enterprises with lower margins may not have this option, putting them at greater risk.
- Sustainability was emerging as a major retail issue prior to Brexit implementation and COVID, and has maintained its momentum. In conjunction with Brexit and the coronavirus, wildfires in Australia and on the US West Coast and general climate change impacts are re-enforcing the feeling that something fundamental is “wrong” with current economic models. Retailers are acknowledging as much, due either to market pressures or a sense of social responsibility. The Brexit-induced shift to near-shore or onshore production and shorter supply chains will reduce greenhouse emissions. The improved warehouse efficiency and reduced waste resulting from the pandemic is likely to serve as further proofing for Brexit. Thorntons, a subsidiary of Ferrero and an Astound Commerce client, recently pledged to employ 100 percent reusable, recyclable, or compostable packaging by 2025.
- Still, the commitment to sustainability is not necessarily uniform in degree. While the EU is maintaining strong policies and procedures on CSR and sustainability governance, concerns have been raised that an independent UK may not share these priorities in pursuit of short-term efficiency and “getting it done.”
Retailers and brand managers are working furiously to identify paths forward through the twin crises, with determination the watchword rather than despair. As luxury handbag designer Anya Hindmarch noted to the Financial Times regarding Brexit, “It’s not at all what I want, but we have to move on. Like the good Brits we are, we will find the positive in this.”
It’s clear that the adoption of new strategies and technologies is paramount for retailer and brand survival. Klarna usage has doubled during the pandemic, and Buy Now Pay Later will only increase if prices spike due to Brexit repercussions. Also, many of retail’s best customers—particularly in the fashion vertical—are young people with minimal spending power; BNPL offers a good alternative to credit cards.
Brexit may drive more opportunities for artificial intelligence in the UK, given that the EU data protection laws have stymied widespread use of AI. But the opportunity must be seized without hesitation: Microsoft has warned of an AI skills gap in Britain.
While both Brexit and COVID are working to unwind globalisation, consumers remain resolute in their desire for international products. Luxury is essentially a European industry, but much of the demand is from China, accounting for at least one-third of sales in recent years. But new rules resulting from Brexit, social and economic impediments from COVID, the diversification of mass production away from China, and tensions between China and the US are inhibiting international trade.
Moreover, these impediments are hitting brick and mortar particularly hard. But as a consequence, more opportunities for ecommerce are emerging. As a podcast from the London School of Economics and Political Science recently noted, a retreat from globalisation means more virtual interaction. This is particularly true for fashion, where catwalks are being reimagined and reconfigured for online, interactive platforms. But it’s also true for retail generally: many verticals have seen persistent demand matching “peak” (i.e., Q4) volumes.
Indeed, store closures and enforced social distancing have dramatically shifted retail to digital through August, with many verticals posting orders matching “peak” volumes.
But not all ecommerce platforms are equal. Suboptimal websites cause friction and drag in online journeys, alienating consumers and resulting in high bounce rates, high customer care volumes, and missed retention opportunities. COVID and Brexit have created a Darwinian digital ecosystem, with only the best and the brightest profiting.
So what’s next? For Brexit, an extension on negotiations is almost certain. During the autumn, we can expect intense trade talks between the UK and the EU, with Germany and France leading. Some flexibility among the parties already is evident. Companies will be permitted to defer customs forms and tariff payments for six months, whilst checks on EU goods entering the UK will be phased in next year, allowing businesses time to adjust.
The future is murkier regarding COVID-19. Retail hasn’t seen the full impact of the pandemic to date, and subsequent waves of the virus will only exacerbate disruption. Successful companies will share a common quality: resilience. Given that ecommerce is among the brightest spots in the gloom, retailers and brand managers must upgrade their digital assets and constantly explore new ways to deploy them. They must stay ever alert for new and unorthodox ways to market and sell. And more than ever, they must cater to the customer. Not merely cultivate—cater. In today’s unforgiving environment, merchants and brands must anticipate not just the customer’s needs, but her desires—even her merest whims.
You can also sign up to access Avalara’s 2020 indirect tax summit, which included multiple sessions on Brexit and COVID-19 recovery. And hear directly from Astound Commerce UK Managing Director Terry Hunter, who participated in the Avalara event.