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Brexit: Who Benefits?

The U.K. vote to leave the EU continues to divide opinion on its retailer impact.


By Fiona Briggs

In late June, the U.K. made the historic decision to leave the European Union. The Brexit vote— “leave” won 52% to 48%—set in motion a dramatic chain of events including the resignation of Prime Minister David Cameron. The shocking result of the vote wiped $2 trillion off world markets, caused a slump in the value of sterling and triggered fears of another global financial crisis.

The dust did not have the time nor opportunity to settle as the “new broom” and Prime Minister Theresa May swept in to set up a new department to take responsibility for Brexit. That process, which isn’t going to be started until 2017, may take a further two years to negotiate.

The Discount Edge
It’s against this backdrop that leading retail research companies, consultancies, analysts and legal teams have been assessing the impact of the vote on the fast-moving consumer goods (FMCG) landscape, and their views remain just as divided as those of the “leave” and “remain” campaigns. However, on one subject they agree: that price-led retailers and discounters, namely Aldi and Lidl, will be the biggest beneficiaries of Brexit.

Nielsen has surveyed the impact of Brexit on shopper behavior. It found 64% of shoppers believe Brexit will negatively impact the British economy in the short term and 67% think it will mean a rise in grocery prices; only 2% think prices will go down. Habits are poised to change, as a result, with 37% of shoppers planning to switch the supermarket where they currently buy most of their groceries, Nielsen found. A third (31%) plan to buy more local, British groceries; and 41% are planning to change their spending habits to save on household expenses, rising to 54% among younger consumers aged 18-34.

Sophie Jones, Nielsen’s senior U.K. shopper research manager, says: “Short-term volatility is to be expected. We know shoppers—even since the recession—have held onto conservative spending habits. This is likely to be reinforced more heavily in the short term.”

Jones posited that “price-led retailers are those most likely to benefit from shoppers changing retailers or brands to save money, which includes the discounters, Aldi and Lidl. They currently hold 11.4% market share and we expect them to push even harder, and we anticipate more competition between retail channels for shoppers’ spend.”

Louise Workman, corporate partner at law firm Ashfords LLP agrees. “International food suppliers such as Lidl and Aldi are set to benefit from the Brexit vote as the majority of shoppers are looking to change retailers or brands to save money,” she says.

Reshaped Trade
Kantar Retail has analyzed the effects of Brexit on retailers, including British operators, European Union retailers and non-EU/non-British retailers, in the short-and long-term.

It predicts that both Aldi and Lidl are primed to be least affected by the Brexit vote and most likely to benefit due to their ability to absorb a rise in food prices and inflation via their unique operating models, which offer a limited range, have the leanest supply chains and can leverage economies of scale.

Europe’s discounters have reshaped trade in the U.K. in recent years, Kantar Retail reports. “Crucially, in their attempts to position themselves as genuine weekly shopping destinations, both Aldi and Lidl improved their fresh offer, with sales from fruit and vegetables, meat, poultry and bread now accounting for 50% of sales,” it reveals. “In this time, they have been the most proactive in driving provenance and localism, with Aldi
implementing a 100% British fresh meat policy. This heightened relationship with British farmers means they are in a stronger position than their rivals in the immediate term.”

Their future looks bright, too. Lidl alone will invest £1.5 billion over the next three years in building new stores, refurbishing existing ones and developing new product lines. “These investment plans are likely to remain unchanged and, with the value of the pound dropping, the billions of Euros set aside at their headquarters in Germany are now set to go a lot further,” Kantar Retail reports.

For retailers headquartered in the U.K., analysts expect that their ability to import goods from the EU will be hit by a weaker pound-to-Euro exchange rate in the short term. Those retailers that have done the best job of cultivating good relations with British farms and fisheries will do better than peers that have not.

In the medium term, the prices of fresh produce will definitely go up, as much is sourced from the EU, Kantar Research predicts. In the case of Tesco, for example, almost 50% of the butter and cheese consumed in U.K. Tesco stores comes from milk sourced from EU markets. Inflationary pressures will boost the call for locally sourced/manufactured products, as retailers’ ability to source from EU suppliers offering better trade terms will be adversely impacted, according to Kantar Retail.

Movement of People
Labor will be a further consideration for U.K.-based operators, according to Workman at Ashfords. “Food and drink companies, in particular, will feel the hit from a lack of EU workers with lower wage expectations. With the U.K. making the final plans to leave the EU, cross-border recruitment practices would frequently be frustrated because of the associated changes to immigration law,” she says.

Cloud-based software provider Epos Now surveyed 500 of its customers, all independent retail or hospitality businesses with revenue of less than£500,000 annually, and while the majority (64%) said they are optimistic about Britain’s future outside of the European Union, 42% also said they believed the cost of staffing will be most impacted.

Back at Kantar Retail, analysts don’t expect labor costs to be significantly impacted following the introduction of minimum wages in the U.K. However, the availability of talent—from senior leaders to store staff—will be an issue, it says.

Shell, which has the largest convenience store network of the oil majors and operates 45,000 locations across 80 countries, has called for continued free trade and movement of people post-Brexit. Speaking at an event in London just days after the referendum, Shell chief Ben van Beurden (a “remain” campaigner), said: “Shell has always been clear about the benefits of the single market and free movement of people, both for the U.K. and the EU as a whole. I hope that the future relationship between the U.K. and the rest of Europe will continue to provide the right conditions for economic growth. We believe in the power and the relevance of free trade and free movement of people.”

Among the U.K. headquartered retailers, Kantar Retail said Tesco’s strong interests in Central Europe (Poland, Czech Republic, Slovakia and Hungary) and Brexit will impact cash inflows and outflows, as well as the company’s ability to invest. Sainsbury’s, meanwhile, has already called it quits on Netto, which it ran in partnership with Dansk Supermarket, because of stiff competition from rival discounters Aldi and Lidl.

Elsewhere, Morrisons is well-situated as its processing plants are based locally in the United Kingdom. However, it will be more exposed to commodity price fluctuations due to its membership in the European buying group AMS. Marks & Spencer sources most of its products locally, but its French supermarkets will be exposed to the Brexit changes.

Meanwhile, all of the non-British, non-EU retailers—Asda (Walmart), Costco, Amazon, Boots (Walgreens), Superdrug and Savers (AS Watson)—will benefit from a weaker pound as their investments will go further, forecasts Kantar Retail.

Time Lag
Despite the mixed assessments on the influence of the referendum vote on retail spend—a study of 1,000 U.K. consumers by retail marketing specialist Live & Breathe found 63% say they plan to spend the same amount on food despite Brexit, contrary to Nielsen’s findings—there’s been no dramatic effects to date. Indeed, the latest grocery share figures from Kantar Worldpanel for the 12 weeks ending July 17, 2016, show the EU referendum result has had no immediate impact on the prices retailers are charging or the sales volumes consumers are buying.

Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel, says: “The nation’s average shopping basket is 1.4% cheaper than a year ago, exactly the same level of deflation as reported last month, and it remains to be seen if the Brexit vote will bring about any price rises this year.”

Nick Gray, managing director of Live & Breathe, claims too much post-Brexit airtime had been spent scaremongering, rather than creating a united front. “While people are sure to be feeling unsettled, it appears many of us are just carrying on as normal—especially when it comes to our spending habits,” he says.

Jones at Nielsen also suggests that there is typically a six-month lag in any change to consumer spending following a change to sentiment. “Underlying demand in FMCG will change slowly and the triggers to any change in spend will be an increase in food inflation or changes in disposable income, which may occur in 2017,” she says. “The current supermarket price war is expected to continue, which will mitigate any immediate upward pressure on prices this year.”

The U.K.-based Association of Convenience Stores (ACS) is relatively upbeat. “The convenience sector tends to be robust and less affected by international relations than some other sectors, so we do not expect Brexit to have an immediate impact. We will continue to focus on working with the U.K. government to get the best deal for local shops when it comes to regulation, and will urge them to consider reviewing any EU legislation that has an adverse impact on local shops, such as rules on packaging, waste and employment,” ACS Chief Executive James Lowman said.

It’s now a case of “watch this space,” but tempered with advice for retailers to get to work. “Beyond the obvious work around procurement, HR and investor relations, retailers will need to develop new long-term connections,” says Kantar Retail. “Regulations are going to change. Retailers will need to keep up on these changes and make a different set of plans to manage these changes.”

In the face of increased competition from consumer spend, retailers will also need to ensure they have the right price and promotional strategies in place to avoid people switching, says Jones at Nielsen. They will also need to review product ranges to ensure categories are protected in the short term.

Brexit is an historic decision—and the history is still in the making.

Fiona Briggs is a retail business journalist. She can be reached at fionalbriggs@gmail.com.