When the Brexit transition period ended on December 31, many business owners faced the new year filled with uncertainty.
“As a small business, we’ve had no other option but to switch off direct sales to Europe in the short term, while we work out what our next steps will be,” says Katherine Swift, founder of the UK-based Japanese green tea brand OMGTea.
Hit by the extra red tape and haphazard delivery schedules that have ushered in the UK’s exit from Europe, like many small-business owners, Swift plans to increase her stock and reduce the number of shipments without denting cash flow.
With as many as one in five small businesses in the UK classed as exporters, raw materials shortages, lengthening vendor lead times and higher prices have seen some shut up shop for good. Others are in feverish realignment mode.
Whether it’s joining forces with critical European Union suppliers, renting extra warehousing space in key markets or actively chasing new territories, businesses across all sectors are proving nothing if not innovative.
After 47 years of unfettered access to the EU’s 500 million-plus consumers, the UK may no longer be in the club but, as firms battle their way through complex rules of origin, inconsistent duties and unstable supply lines, the end-game is far from over.
Moving onshore to avoid supply chain disruption is politically expedient and earns brownie points among consumers for whom a “Made in Britain” logo will speak volumes in the post-Brexit world.
But while close to 100 per cent of UK sourcing is already within reach for some firms, fast fashion, toys and tech are just three of the industries which remain heavily reliant on supplies from China and the Far East.
“The British toy industry moved to Asia in the 80s oil crisis and although I’d love to bring my production back to Britain, it would never be cost effective,” says Lyndon Davies, chief executive of Hornby.
“As both importer and exporter, we’re happy to serve our European market from a Dutch-owned warehousing facility here in the UK and if the EU tariff regime happens to change overnight, we will take immediate steps to switch to an equivalent facility over there.”
In the long term, the UK could become an attractive base for European businesses looking to export throughout the Single Market.
A 2020 report by management consultancy Alvarez & Marsal predicted that more than £4 billion of retail products could be on-shored to the UK by the end of this year, equivalent to the country’s entire clothing manufacturing output.
The Netherlands and Germany are proving an attractive proposition for many British firms looking to beat Brussels by establishing their own distribution base in the EU, among them JD Sports, or renting warehouse space from suppliers.
While there can be considerable set-up costs involved in employing local warehouse staff or shipping an existing team overseas, once established, a UK business can enjoy both frictionless trade and freedom from the complex sanitary and phytosanitary (SPS) rules designed to protect public health and animal welfare.
“If your EU business consists of many small orders, warehousing would be a good option and I know of many companies that are currently considering this,” says Philip Roe, chief customer officer of DHL Supply Chain.
But there is a downside, as Mike Cherry, national chairman of the Federation of Small Businesses, points out. “Small exporters have been hit by a raft of fresh costs and admin as a result of new EU trading arrangements, forcing many to set up offices on the Continent or, in some cases, relocate there wholesale. That’s time and money spent on navigating fresh rules that should be being spent on adapting and staying afloat in an extremely challenging environment,” he says.
“It was Brexit and the SPS regulations that hastened our determination to set up a joint venture trading deal with a firm in the Netherlands and we feel very positive about it,” says Jamie Gray, founder of the promotional products brand Buddy Burst.
“We can’t export our best-selling seed stick products to the EU at the moment because they either get returned or stuck at customs, but whether our partner uses our machines to make our lines from scratch or simply finishes them off, it makes perfect sense to supply the EU’s £8-billion promo market from over there.”
Danny Hodgson, founder of high-end jeans store Rivet & Hide, says the £200-plus price tags on his internationally sourced denim make warehousing too expensive an option. But with half his online business coming from the EU, he and a partner firm are hiring a specialist Dutch accountant and tax adviser to oversee shipments and returns via a local distribution centre.
“We are at the mercy of different customs agencies at the moment and it’s a mess,” he says. “By having our own Dutch VAT number, we’ll be treated like a domestic company in the Netherlands and, as long as we declare everything properly, it should all work smoothly.”
“We’re taking a hit on the extra duties still being imposed on business-to-consumer exports from the UK to the EU and this inevitably comes off the bottom line. But we are hoping these additional costs are only teething problems that will be solved within the next three or four months,” says Robert Ettinger, chairman and chief executive of the luxury leather goods brand that bears his name.
“We have no intention of deserting our very old and long-established customers in France or Germany, for example, but we are finding the Far East, a more important market for us, has coped far better with the other major headache of the year, COVID, than Europe has.”
While he agrees exporting to new continents is an obvious way forward for UK firms, Ettinger stresses this is “a huge learning curve requiring patience and resourcing”.
For Swift at OMGTea, it’s a case of slowing down in Europe while revving up elsewhere until the EU fog clears.
“Fortunately, we can continue to supply our products to European customers via Amazon, but we also intend to accelerate our expansion into other international markets, such as Canada and Australia, as part of our future growth strategy,” she says.
Watching and waiting
“We are only 40 to 50 per cent through all the changes involved in Brexit and, with the next phase of implementation likely to coincide with recovery from COVID, the full adjustment period is very far from over in our view,” says Roe at DHL Supply Chain.
Although many businesses are adapting supply lines for fear of being left behind, he argues the “key priority is to ensure you have the data you need to comply with the new ways of working and to understand the impact of these changes on your route to market”.
While DHL is able to offer a degree of hand-holding to the many businesses requiring practical help with fulfilment, he believes major post-Brexit reorganisations should be postponed until the dust has settled.
“In the last six months, I’ve been struck by how well companies are working together in the new trading environment, liaising with trade bodies and with the various relevant authorities, and I see this as a very positive sign for the future,” says Roe.
“Businesses have a far better and more sophisticated understanding of the intricacies of logistics than ever before and that too is very good to see.”