On 24 June 2016 the UK delivered perhaps the most significant referendum result in a generation by voting to leave the European Union.
Less than four months later, the aftershocks are still being felt.
Currency
Perhaps the most dramatic change over the past few months has been the huge currency swings.
The pound has fallen dramatically since the Brexit vote at the end of June.
It declined to a three-year low against the euro following Theresa May’s announcement that the UK would begin formal Brexit negotiations by the end of March and has fallen about 18% against the dollar since the referendum, to levels not seen since 1985.
The currency’s continuing weakness has been accentuated by the cut in interest rates and the Bank of England’s economic stimulus measures.
Sterling’s devaluation has already impacted the sporting goods industry with Sports Direct recently reporting a £15m hit in profits due to a currency hedge that had the opposite effect and cited another potential £20m reduction in profits if sterling remains weak in 2017.
With many of the world’s sporting goods manufactured in the Far East, and purchased in US dollars, it now seems inevitable that, with these higher costs, price increases will have to be passed on to end consumers.
The timing of these increases may vary between manufacturers depending on their currency hedging strategy, the seasonality of their core product ranges and, to some extent, their market development strategy.
With a quarterly launch approach the “mega brands” may see themselves as having a slight advantage versus those brands with two seasonal launches as they have more opportunities to address changes, conversely those brands with key spring/summer business will have already gone to market around the time of Brexit and may not be able to raise prices until SS18.
What is clear, however, is that a weaker pound is likely to be here for the longer term and thus most brands will need to recoup these increased costs from imported goods either through higher prices, margin cuts, or a combination of both.
Certainly by AW17 one would imagine that most retail prices of sporting goods will have risen and will begin to impact the end consumer. In other industries these changes are already happening – the recent “Marmite Wars” between Unilever and Tesco being one of the most recent high profile battles between retailer and supplier – and more will undoubtedly follow.
Export
Of course for every brand that is finding the domestic market challenging there are those companies that have the opportunity to take advantage of the weaker pound and increase their export markets.
According to the Confederation of British Industry (CBI) Britain’s manufacturers are growing “at a healthy pace” despite fears that the Brexit vote would knock the momentum out of the sector.
But, as Anna Leach, CBI Head of Economic Analysis and Surveys explains: “The pound’s weakness is a double-edged sword, as it benefits exporters but also pushes up costs and prices.”
In my own business there has been a positive surge in interest from other global markets and, in particular, the US where the passion for British brands now available at a better price has obvious appeal.
Paperwork
But what about future implications.
Recently attending a Q&A with my local MEP, Julie Girling, I asked what the likely change will be for our industry with regards to UK sports retailers purchasing goods directly from European-based suppliers – as happens right across the market at present.
Her response raised the biggest issue of uncertainty surrounding our exit. “The key issue,” she began “is which trading model we will ultimately adopt.”
The final trading model that we adopt as a nation is, of course, open to wide interpretation and debate and cannot be covered in detail in this article, however her overall conclusion got me thinking.
How easy will it be for UK-based sports retailers to purchase goods from European-based brands if there is an exhaustive paper trail?
Will it further push those suppliers to consolidate their trading partners and only deal with the bigger customers and, likewise, push the retailers to deal with a smaller number of bigger suppliers?
Will the UK-based wholesalers be in a stronger position being able to service the local market much quicker?
Will there be continued positive development of our UK-based eCommerce specialists or will it become harder for them to supply the European markets?
The future
The Prime Minister has met some other EU leaders including Germany’s Angela Merkel and French president Francois Hollande, but formal negotiations on the UK’s departure from, and its future relationship with, the EU have yet to start.
EU leaders have said Article 50 of the Lisbon Treaty must be triggered before negotiations can begin.
The government has not yet set out in detail what it wants from the talks, with reported differences between key figures on the balance between free trade and immigration curbs.
Mrs May has faced repeated calls to set out what she wants Brexit to look like, but has refused, saying there will be “no running commentary”.
So the issues are complex and there are no clear answers – much the same as when we all voted back in June.
But we are starting to see some trends emerging. Yes there will be price increases. Yes the exporters will benefit.
But as inflation takes hold in 2017 and disposable incomes are reduced will end consumers spend less on discretionary items such as sporting goods?
Will the price aggressive brands and retailers experience further growth?
What will our trading relationships be with other markets (European and beyond)?
The are no answers at present. Just more questions.
However as we continue to move through the Brexit process it is apparent that those companies who are best prepared to react to whatever the final outcome will be will most likely be the ones that come out the other side in the healthiest position.
Good luck!
