Kantar Retail’s analyst team has gathered to give our initial views on both short-term and long-term exposure to the effects of Brexit on a retailer by retailer basis.
One of the easiest ways to think about Britain’s Fast Moving Consumer Goods (FMCG) retailer landscape is in three groups:
- Retailers with their headquarters in Britain
- Retailers with their headquarters in the European Union (excluding Britain)
- Retailers with their headquarters outside the European Union & Britain
We have created a chart to help you visualise this landscape.
Retailers with headquarters inside Britain will primarily be concerned in the early stages about the financial market effects. In the short-term their ability to import goods from the European Union will be adversely effected by a weaker Pound:Euro exchange rate. Nearly all retailers will look inward to source locally and we at Kantar Retail feel that the retailers that have done the best job of cultivating good relations with British farms and fisheries will do better than their peers in the immediate term. The prices of fresh produce will definitely go up as much of this is sourced from the EU. In the case of Tesco, for example, almost 50% of butter and cheese consumed in the UK comes from milk sourced from EU markets. Inflationary pressures will further boost the call for locally-sourced/manufactured products as the retailers' ability to source from the EU suppliers offering better trade terms is adversely impacted. Higher commodity prices and tariffs will also impact production of traditional FMCG products, even though a significant proportion of good are produced locally. Supply chain costs are likely to go up due to higher trade tariffs.
Tesco has 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 may reconsider its current Netto business in partnership with Dansk Supermarket. Morrisons is well-situated as its processing plants are based locally in the UK. 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.
European Union Retailers
Europe’s largest traditional retailers have not found strong success in Britain over the years. Carrefour attempted to trade in the UK but gave up on that after poor results in the mid-1980s. Few others have even attempted to trade in the UK. However, Europe’s discounters, Aldi and Lidl, have not only attempted to trade in the UK but they have reshaped the trade in recent years.
There are several factors which will help discounters Aldi and Lidl absorb the rise in food prices and inflation – namely its limited range, having the leanest supply chains in retail and most importantly their economies of scale. Crucially, in their attempts to position themselves as genuine weekly shopping destinations, both Aldi and Lidl have drastically increased and improved their fresh offer, with sales from fruit and vegetable, meat, poultry and bread now accounting for 50% of sales. 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.
Lidl alone will Invest GBP1.5 Billion over the next three years in building new stores, refurbishing existing ones and developing new product new 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 HQs in Germany, is now set to go a lot further. As a result, Aldi and Lidl are certainly primed to be the least affected retailers. Indeed they may be the ones to benefit in the short and medium term.
Non-European, Non-British Retailers
America’s largest retailers have had the most profound effect on British FMCG retailing. Walmart, the world’s largest retailer by sales of directly controlled products, purchased ASDA in the 1990s and has dominated the weekend stock-up shopping trip in many of Britain’s towns and communities ever since. Costco, the world number 3 retailer, has had a more difficult time in Britain with rules constraining the types of members to whom it can sell its services. Amazon has had a much bigger impact in recent years than any of the other non-European retailers with services like Amazon Prime, Amazon Prime Now, and most recently Amazon Prime Fresh changing the nature of retailing and falling high on the list of topics consumers, analysts, and retailers discuss when thinking about how shopping may change in the future. Walgreens, the world’s largest drugstore retailer, has also helped Boots after acquiring the chain a few years ago. The biggest assistance Walgreens has provided is giving Boots better access to global commodities and capital markets.
All of the non-British, non-EU retailers will benefit from a weaker pound in terms of being able to have their investments go further but will likely be hedging their exposure to lower profits and revenues coming from the UK. This will be good for Walmart as ASDA has performed extremely poorly in the last six months. For Amazon and Costco the size of the UK business is still small enough to be of lower concern.
The eCommerce Impact
Amazon should be able to quickly capitalize on the current situation given their position as a “search when you are in a panic” status.
Amazon is also incredibly creative when it comes to working across borders so we expect Amazon to do very well in the short-term.
Ocado on the other hand is handicapped. Imports will be strongly reduced and Ocado will be leaning towards a higher reliance in local suppliers in the short term.
Ocado operates 3 warehouses in London, accounting for most of its employees. The cost of acquiring talent for its technology centres will be higher, but their couriers and warehouse operators will not be impacted in the short term. The main implication in terms of labour will be a higher collaboration with local suppliers, creating a more intricate logistics around the fresh product sourcing.
Next Steps for Retailers
Retailers will need to go to work. Beyond the obvious work around Procurement, HR, and Investor Relations, retailers will need to develop new long-term connections. 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. We see three big areas requiring a large amount of focus for retailers in the UK. These are:
- Data - The European Union has spent extraordinary amounts of time setting rules on personal data privacy, corporate data security, policing of data and other issues related to cloud computing, data sharing and survey work. The types of data that retailers have access to, how they gain access to it, and how they protect it will change.
- Food Labeling and Food Packaging - The European Union has had a powerful effect on how retailers label and package goods. These rules will change and UK retailers will need to take advantage of or react to these changes.
- Social and Environmental - Up to now, the environmental rules and social rules governing retail in the UK have largely been shaped by European Union rules that have a future deadline well in advance of the present. As these change, retailers will likely be able to argue for different regulations and will have to deal with a different group of legislators.
For more information and to read more about the implications for FMCG Suppliers, visit the Kantar Retail website.
Source : Kantar Retail