Political turmoil in the United Kingdom over the terms of the country’s withdrawal from the European Union — Brexit — has injected great uncertainty into the plans of companies doing business there. U.S. retailers distributing throughout the EU from the U.K. are especially affected. Should they be making plans now to shift hubs onto the Continent? Or should they wait for a clearer sense of what the future trading landscape will look like? In this conversation with SupplyChainBrain editor-in-chief Bob Bowman, Tom Enright, vice president with Gartner, offers some observations and guidance.
SCB: How will a no-deal Brexit impact U.S. retailers who have distribution hubs in the U.K.?
Enright: As a result of a no deal, things will pretty much change overnight. Retailers won't have an opportunity to get used to a European Union without the U.K. It will feel like a light switch going off. In terms of the actual impact, commercially the big concern is around tariffs. Once the U.K. comes out of the EU, tariffs will be based on World Trade Organization terms. U.S. companies that trade in what’s left of the EU, and ship product from the U.K., will get hit with a second tariff. That will essentially be a double whammy. Their big question will be: How much of this, if any, can we pass on to our customers?
SCB: Up to this point, to what extent have U.S. retailers been using distribution hubs in the U.K. to serve the Continent, as opposed to just the U.K.?
Enright: It does seem to be a pretty prevalent model. Most of the U.S. companies that I speak with that operate in more than the U.K. have typically started there. In such cases, they have the opportunity to move their hub to the EU, then shift a smaller proportion of product back to the U.K.
SCB: Even with all the publicity over the last few decades about use of the Benelux [Belgium, Netherlands and Luxembourg] countries as the ultimate distribution hub for Europe, you're saying that a lot of U.S. retailers have opted nonetheless to base their EU distribution strategies out of the U.K.
Enright: Yes. The majority of the clients who have spoken to me about Brexit set up a U.K. hub mainly because their business started in the U.K. and Ireland. I know Benelux is used a lot historically for industries where there might be more of a Europe-wide appetite for product. But when it comes to opening stores, or thinking about where to serve e-commerce orders from, most companies have said, "Let's start with the U.K., and we'll take it from there."
SCB: What criteria should U.S. retailers be considering when making the decision to stay or move out of the U.K.?
Enright: The cost of closing down a U.K. plant or distribution center and reopening in Europe has got to be absorbed one way or the other. You've then got to think about where demand is across the different European countries, where best to position distribution facilities, and whether there needs to be one or more. Some retailers have hot spots of demand in Europe that aren't in adjacent countries. To create one hub might mean an awful lot of transportation costs to take into account. It really boils down to cost to serve, including the availability of labor in different markets.
SCB: Given that the U.K. is itself a strong market, is it a question of completely relocating these distribution hubs, or opening second hubs on the Continent?
Enright: It really depends on how much of U.S. companies' business is done in the U.K. versus the rest of Europe. If you're looking at 80% in the U.K., for example, you wouldn't want to close that down and then have to ship all that back across the border. You need to have a view of the future — what the picture might look like in four or five years' time.
SCB: How might that decision be impacted if we begin to see the possibility of a new bilateral free trade agreement between the U.S. and the U.K.? Would that further incentivize retailers to either retain or pump up their distribution capabilities in the U.K.?
Enright: It certainly could. The big question mark would be the timing of that arrangement. Historically, these big trade agreements have taken years to complete. The question will always be, how long do I wait if I'm a U.S. retailer with a U.K. hub before deciding whether I should move or not? The other angle is, if Europe is now going to be served by a number of hubs in addition to the existing one in the U.K., does that mean two separate shipments coming from the U.S.? If the U.K. is going to be like a dead end, then the balance of any shipment from the U.S. might go directly to the Benelux countries, then across Europe from there. These are all things that companies are scenario-planning around. They’re trying to look at the numbers to see what makes the most sense in the long term.
SCB: What will be the impact of a no-deal Brexit on the workforce?
Enright: It's yet to be determined as to the future rights of EU nationals to live and work in the U.K. That's part of the negotiations that are going on. In fact I'm one of them, because I'm originally from Ireland. I've been in the U.K. a long time, but I'm not a British citizen. The rights of those individuals to remain working for a U.S. company based in the U.K. are unclear. As a result, we’re seeing higher numbers of EU nationals moving back home pre-Brexit. If there’s a restraint on the employment of EU nationals, we might need to reapply to remain working in the U.K. That could reduce the number of EU nationals available to U.S. companies. And it’s potentially further exacerbated by new laws around EU citizens moving to the U.K. for the first time, to take up the same role as that of their compatriots who left.
SCB: In the short term, given that the situation is changing virtually day to day, what should companies be doing? Should they wait for the smoke to clear, or must they take some kind of action right now?
Enright: We've been advising clients for the last year that there are a lot of things they can do now. We know that many are waiting for clarity, but that’s likely to be some time in a distance. One of the very important things companies need to start doing now is looking across their existing extended supply chains in Europe, to understand if there are any hidden border crossings, both from an import and export point of view. If I'm importing into the U.K. and know I'm going to have to move product onwards into the European market, I can with some degree of accuracy work out the scale, volume and frequency of border crossings post-Brexit. But U.S. companies importing product from Europe are also affected by Brexit, and aren’t necessarily aware of the degree to which it's going to affect them.
Take a U.S. company that’s importing finished product from Germany. They may say, "I don't deal with the U.K." The hidden supplier might be one that’s two or three levels up the supply chain and is based in the U.K. That previously unknown connection could incur potential costs and delays. So we've advised companies to set up an internal research and advisory team to navigate their way across different product groups and sourcing teams, to reach across their wider networks, and identify potential hidden suppliers. That's really, really important.
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