The Threat of a Hard Brexit and The Impact on Retail Markets
With less than eight months to go before the UK leaves the EU, the possibility of a “no-deal” Brexit became a hot topic during July. The Government was thrown into disarray early in the month by the sudden resignation of Brexit Secretary David Davis, who warned that the “general direction of policy will leave (the UK) in at best a weak negotiating position, and possibly an inescapable one”. He was replaced by Dominic Raab.
Many European governments may not have been too shocked by his departure as apparently, he had held only four hours of talks with his Brussel opposite number this year according to government records.
Against a backdrop of mounting concerns over the implications for trade and the movement of goods, Parliament broke up for the summer recess. Looking ahead, Prime Minister Theresa May and her minority government have much to resolve before a deal can be achieved. In a newspaper interview with French newspaper Le Figaro, Business Secretary Greg Clark acknowledged that a no-deal scenario would be “bad for all countries and all citizens of the EU”.
Although the EU’s Chief Brexit negotiator, Michel Barnier, described the UK’s Brexit White Paper as a “real step forward”, he stopped short of agreeing to the proposal that the UK will collect customs duties on the EU’s behalf, saying: “The EU cannot and … will not delegate the application of its customs policy and rules, VAT and excises duty collection to a non-member”.
As if to raise tensions further Liam Fox the international trade secretary suggested that he believed the risk of a no-deal scenario had increased, pinning the blame on the European commission and Brussels’ chief negotiator, Michel Barnier.
For investment markets during July Brexit did not weigh heavily on markets. The FTSE 100 Index rose by 1.5%, while the FTSE 250 Index edged up by 0.2%. Retail sales volumes fell by 0.5% month on month during June, compared with a rise of 1.3% in May. A weakened sterling has in fact contributed to stock market rises.
Retail wise Supermarket retailer Sainsbury’s revealed a slowdown in first-quarter like-for-like sales as discounting activity took its toll. Meanwhile, homeware retailers Dunelm and DFS Furniture and online fashion retailer ASOS all issued profit warnings in July.
The environment for the retail sector is set to get even tougher, according to Ernst & Young (EY). Profit warnings issued by companies in the FTSE general retailers sector doubled to 20 during the first six months of 2018 compared with the same period last year. EY urged retailers to increase investment and take more risks in order to remain in “this ever-changing game” but acknowledged that many companies have insufficient capital to move forward. Looking ahead, it is likely to become more difficult for retailers to secure funding and credit insurance; moreover, landlords are expected to take a tougher stance towards the use of company voluntary arrangements (CVAs).
Perhaps the biggest retail news has been the collapse and rescue of House of Fraser by Mike Ashley demonstrating that even in a more challenging retail environment opportunities exist for proactive entrepreneurs. The best news is that this is likely to lead to jobs being saved.
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By Sabre Financial | Wednesday, August 15, 2018