COVID-19  •  Analyses & Studies  •  Sectors & markets

What is the future for retail and trade suppliers?

John Leyden FCA, CEO and Founder of Carbon Accountancy Limited, discusses how retailers and their suppliers can prepare for the coming year – Corona crash and Brexit combined

Last year was undoubtedly difficult for UK retailers, and 2020, which did not start on a brilliant note, is now looking like it will be a bloodbath. The very survival of many high street names and their suppliers is under serious threat.

Even before the Covid-19 crisis, retail was going to be in for a tough year – and in the last year or so we have seen a catalogue of closures and insolvencies. The list of failed retailers includes Laura Ashley, Cath Kidston, Debenhams, Oasis and Warehouse. It has been reported recently that half of retailers face administration by the end of the summer.

So, what exactly is changing, and what further changes can we expect?  Firstly, the Covid-19 pandemic has caused several key shifts globally (probably fundamentally structural, long term shifts) that will affect retail:

Online sales have been given a huge impetus from the whole country being in lockdown – this is going to continue. Online food shopping which was estimated at about 10 percent has increased to about 20 percent of the total according to recent estimates. How many people will revert to going to supermarkets physically, either at all or as often as they did previously?

Whole sections of the population, particularly older people, who may never really have done much or indeed anything at all ‘online,’ have been forced to embrace technology and hope that they can Zoom the grandchildren and buy the weekly groceries without getting scammed.  It is highly likely that these ‘late adopters’ will have found new confidence in online interactions such as shopping and banking, and they are more likely to start transferring that experience to other aspects of their lives.

Businesses, large and small, have adapted to home working – although many realise that technology and the home office could be improved still - and it would also be a lot easier without having to home school at the same time! It is highly likely that many businesses will re-assess the need to operate from large offices – lots of companies are likely to embrace the home working concept (with modifications to improve things) and this will mean fewer people working in the big cities and fewer people going to local retail outlets in their lunchbreak in those cities. It is therefore possible that the smaller towns and cities will see a growth opportunity at the expense of the larger cities.

Some retailers have been very sympathetic to their suppliers, offering faster payments than the normal sixty-to-ninety-day payment terms, and some even paying on delivery - it is likely that this too will continue.

Consumers are likely to take stock of what they want from life – better work-life balance, buying more from trusted or local companies and trying to adapt to a world where social distancing will be a feature of our lives for the foreseeable future.  Many high street retailers may suffer a backlash for the way they have acted – whether it was delaying refunds to consumers or stopping payments to suppliers for goods already delivered, even in some cases to suppliers in the developing world where the financial impact has been extreme on those least able to afford to take the hit. Smaller independent retailers are likely to fair better from this post-mortem on corporate social responsibility.

Suppliers can and should do some basic research to see where their new opportunities lie – with those retailers best placed to take advantage of the above changes - whether that is by targeting retailers who pay quickly, big retailers who treated suppliers and employees well during the crisis or smaller independents who may benefit from a change in personal shopping habits.

Once embattled retailers re-open they will have to deal with a myriad of problems:

Consumers will have less cash to spend due to the economic impact of Covid-19.  They will be looking for bargains and the value players will fare better than others.

On the other hand, the luxury sector has always been largely immune to recessions – those with real money are rarely affectedly sufficiently to impact their spending.  However, I believe that potentially this time there will be one potential aspect that may mean luxury is not immune.  If the scale of the economic impact is as bad as is being suggested, the worst in over 100 years, then it is quite possible that those with real money will not want to be tainted with the conspicuous consumption label – they may well be a bit more restrained in their spending to avoid criticism – this is likely to be true of people most in the public eye and they are trend setters for others.

Brexit – yes, Brexit – will rear its head again, probably around September when the powers that be realise that we only have three months to go and the UK has already hitched its wagon to the ‘no extension’ side of the argument. So, we will have to get a deal in place by the end of the year – won’t we?

So, what does Brexit have in store for retailers and their suppliers in particular?

What changes are coming?

As a single market, retailers do not have to pay tax on imports from the EU. This will all change following the end of the transition period on 31st December 2020. At this point, goods will come through a custom border with import duties and VAT payable at the point of entry. This will apply to the majority of goods coming into the UK from EU suppliers. Foodstuffs are one of few exceptions to this rule so major food retailers will be largely spared from these changes. 

What could this mean for retailers and their suppliers?

Consumers will feel the brunt of the cost of import duties, as retail prices will increase to cover these additional costs. And whilst retailers can reclaim the VAT of goods imported from the EU from HMRC in the quarterly VAT return, it is the payment at the point of entry that presents the real problem.

Within the single market, not only are goods imported from the EU exempt from VAT, but retailers purchase goods with a significant credit period, which can be up to 150 days for larger retailers. Such a credit period allows retailers to begin selling goods to the end consumer before payment to their suppliers, maximising their cash flow – all-important in the current retail climate. If retailers are required to pay VAT on entry, it could have a significant impact on their business.

For example, a retailer purchasing £100m in imported goods each year will now need to pay a total of £20m in tax on these purchases. And with the tax on imported goods payable on day one and, in many cases, unable to be reclaimed for four months – the retailer would lose £6.6 million in ready cash within the first four months of Brexit.

Any UK business with a foreign VAT registration in the EU may now face the obligation to appoint a special VAT fiscal representative. This applies in 19 of the 27 EU states. These agents hold direct liability for any unpaid VAT, and therefore require cash deposits or bank guarantees in exchange.

By way of compensation, the UK will introduce a Postponed Accounting import VAT deferral scheme, so no cash VAT payment has to be made by business importers to UK customs. However, many EU countries do not offer the same scheme for UK businesses importing their goods.  The full details of the deferral scheme will evolve over time and may require bank guarantees or a UK presence of some sort.  It is best to be prepared for every eventuality – if you set up a UK company now and get a UK accountant it is a good start to being prepared. We are happy to offer a free initial consultation to any fellow French Chambers member.

Could this spell the end for more high street retailers? Retailers may already have a solution – and their salvation may come at the expense of their suppliers, but with the economic impact of Covid-19 on top of Brexit it could get ugly for many.

What could be the impact on EU-based trade suppliers?

Word on the street was that large retailers were planning on passing the VAT payments on to the trade suppliers themselves, sparing themselves the initial cash hit.  This would be an unsurprising outcome considering retailers like – or rather need – to hold on to their cash.

But is it realistic to expect EU-based trade suppliers to be able to take the hit and especially in what will be a vastly different economic situation post Covid-19? Suppliers will need to reclaim VAT within the UK, which will require a UK-based branch for them to import their own goods to before selling on to retailers. Whilst such a global infrastructure is likely to already be in place for large companies, it could spell trouble for smaller or medium-sized suppliers. It is these suppliers who may need to prepare for the future.

How could smaller and medium-sized EU-based trade suppliers get around this?

If UK retailers plan on passing the VAT cost onto their EU suppliers, those without a UK presence face a difficult decision. Their first option is to work with a distributor – a separate UK based company who will facilitate the purchase and sale of their goods. Whilst this may be a good temporary solution, it adds a layer of complexity to trade and suppliers lose a significant profit margin. It is unviable in the long-term.

As the all-too-familiar phrase goes, ‘Brexit means Brexit.’ There is no going back. Biting the bullet and building a UK presence is by far the most sustainable and simplest option. Luckily, the UK is an easy place to do business and it can be done very cost effectively.

One saving grace which could soften the blow of Brexit for both retailers and suppliers is the prospect of a trade deal. With no clear visibility currently on what this could look like, we can be certain that it will be a world away from the ease of trade we experience with our European neighbours at the moment. And, of course, that is assuming a deal can be reached. ‘No deal’ remains a very real prospect, and one our government does not seem too shy of.

What is clear is that either retailers or suppliers will bear the brunt of the pain once we leave the single market. Just who exactly will bear the brunt though? We will have to wait and see. In the meantime, it would not do any harm to formulate a contingency plan and open a UK company.

Finally…

Much of the next five-to-ten years will depend on how quickly or slowly we bounce back.  The Flu pandemic of the early twentieth century was followed by a massive boom (the Roaring Twenties) in the economy once it was all over, followed by a stock market crash, but it takes time to get through the pandemic.  This time we seem to have had the pandemic and the stock market crash both at the same time. Hopefully, we will see that sort of decent outcome once the worst of the initial period is over.

 

John Leyden FCA spent 7 years at KPMG before starting Carbon Accountancy, which specialises in business advice, audits, tax planning, corporate finance, due diligence and share option schemes.

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