The U.K.’s Role in Cross-Border E-Commerce After Brexit
The UK is one of the largest e-commerce markets in the world, with 14.5% of total retail sales now online and those online sales constituting nearly $174 billion. And though it isn’t the largest country in the E.U. in terms of population – that title goes to Germany which has some 20 million more citizens – it is the largest e-commerce market in the region.
So what will Brexit mean for the e-commerce market, and for cross-border e-commerce that involves U.K. merchants and buyers? Consider a few more statistics (courtesy of the Europe E-Commerce Foundation):
- Spending online per shopper in the U.K. is €3073, higher than in any other E.U. country.
- 36% of online shoppers in the U.K. buy online from other countries.
- 20% of U.K. online merchants sell to the E.U.
- About 6.12% of U.K. GDP is from online sales.
The U.K. therefore has e-commerce deeply embedded in the fabric of its economy, perhaps more so than any other country on the planet. It stands to reason that changes in trade agreements, labor rights, and regulatory requirements, which Brexit will entail, will mean some big changes in how e-commerce is conducted both internally and across borders, especially with other E.U. countries.
Though the terms of Brexit will clearly take months if not years to establish, here are some predictions about how the cross-border e-commerce will be affected.
Cheaper exports mean better deals for non-U.K. buyers
The 7% decline in the British pound since the Brexit vote will make U.K. goods and services more affordable to customers in other countries, particularly those in the E.U. who enjoy favorable trading terms with fellow members. Coupled with the upcoming semi-annual July sales season, U.K. retailers could see some uplift in cross-border retail sales over the next few months. Around 44.6% of U.K. exports are to E.U. countries: that could inch closer to 50% as consumers with Euros take advantage of currency arbitrage and buy from U.K. companies, particularly if the pound weakness persists into the 2016 Christmas holiday buying season.
Pricier imports mean worse deals for U.K. buyers
The flip side of the weakened pound is that imports are now more expensive. U.K. consumers may keep a tighter hold on their wallets, so foreign online retailers popular with U.K. consumers may have to sweeten the deals they offer to that country in order to avert a decline in sales. For example, they could offer free shipping where they ordinarily might charge a fee or offer limited discounts to loyal customers. Furthermore, U.K. businesses may need to cut back on their spending on foreign suppliers and delay negotiating new supplier agreements.
Online merchants likely to delay investment
U.K. merchants ready to upgrade their online infrastructure – for example, purchasing a new e-commerce platform or product information software – may delay those decisions for at least another quarter, until the path to Brexit becomes more clearly defined by U.K. and E.U. leaders and to make sure they have enough cash on hand to weather a potential economic downturn. Now is a good time for customer support teams at existing vendors and service providers to check in with their U.K.-based clients and hear their concerns, in order to prepare for any changes in purchase intentions.
It is the longer term implications of Brexit, however, that will have a more lasting impact on cross-border e-commerce:
The U.K. will be less attractive as an E.U. entry point
Many companies outside the E.U. looking to expand their business there tend to test the waters first in the U.K., establish their regional headquarters there, then expand to other countries once they have a better understanding of E.U. trade rules and business norms. With Brexit, the U.K. loses some of its advantages over other E.U. countries. Other E.U. countries with well-developed infrastructure could become more attractive as entry points to the continent for foreign businesses: the Netherlands, for one, has a well-educated, multilingual work-force. For cross-border e-commerce businesses, Germany could become a more attractive E.U. starting point, given its central location and strong e-commerce heritage (in addition to being home to hybris and Intershop, some of the largest e-commerce platform vendors in the world, like Otto Group, are based in Germany).
Revisions in terms of trade will increase competitive challenges for U.K. merchants
Being able to offer the total cost of an order at check-out is an important requirement for online merchants selling cross-border: consumers are likely to abandon carts if they purchase, say, a shirt priced at $39 only to find they must pay a $20 shipping fee as well. One of the U.K.’s biggest retailers, John Lewis, has had success by eliminating this last-minute sticker shock situation: it offers flat fee shipping and guaranteed delivery times for 38 countries, and the rates for shipping to E.U. countries are currently about a third cheaper than to countries outside the region.
Brexit will mean tariffs on goods and services exported to E.U. consumers, which will require U.K. merchants to raise prices and/or shipping fees. For John Lewis buyers outside the U.K. but in the E.U., that will mean a 30% mark-up since the delivery costs will by necessity increase. There may even be further price increases necessary depending on the types of goods sold and the tariffs set for those goods. These increases, and the accompanying administrative costs that will be needed to calculate new pricing structures, will make it more difficult for U.K. merchants to compete with their peers in the E.U. who will continue to enjoy the benefits of the single market.
Regulatory adjustments will cause headaches for payments providers
Payments is already one of the most complex aspects of cross-border e-commerce: to be able to sell in different countries, a merchant needs to be able to offer the payment options consumers prefer in those countries. And those options vary across Europe: in some countries, like the U.K, credit cards are common; in others, like Germany, customers prefer paying directly from bank accounts or even cash-on-delivery. Should Brexit result in the U.K. revising its financial regulations so that it departs from E.U.-wide standards, payments providers will need to take those into account in the solutions they offer, and make sure they track how those changes might affect the risk from fraud.
U.K. merchants selling online cross-border will face greater recruiting and hiring difficulties
E.U. citizens currently have the right to live and work in any E.U. country. U.K. companies have benefited from this rule since it substantially widened their talent pool. An online merchant selling cross-border needs a variety of employee types and skills: customer support, finance, merchandising, software development, logistics and supply chain, plus multilingual capabilities, understanding of different finance and regulatory systems, and more. A U.K. online merchant can hire a software architect from Poland, an operations executive from Germany, and a customer service director from Spain, and have them all work at its U.K. headquarters.
If Brexit results in requiring U.K. companies to get visas and work permits for E.U. employees, this will increase overhead costs and make the U.K. a less attractive destination for E.U. citizens looking for work. It could even mean that companies with U.K. headquarters that also have significant business elsewhere in Europe might up stakes altogether and shift to other E.U. countries. Vodafone, the global mobile operator which began as a U.K. company , is already hinting it may do so.
The U.K. will continue to matter in cross-border e-commerce, but will need to shift focus outside the E.U.
So will the U.K. continue its cross-border e-commerce growth trajectory if it leaves the E.U.? That depends on a few things.
First, U.K. merchants will need to expand their target markets beyond Europe, perhaps putting more investment into selling to the U.S. and commonwealth countries (i.e. Canada, Australia) and countries where British brands are in high demand, such as the Far East. U.K. consumers may have to do the same if the E.U. becomes more expensive.
Second, vendors selling e-commerce software and services to U.K. businesses will need to be prepared to help those customers adjust to their new reality and provide guidance as to where their future opportunities lie. Despite the uncertainty and confusion the Brexit vote has caused, the U.K. is an island with limited resources and not much manufacturing left to speak of: it will need cross-border e-commerce more than ever, just not perhaps as much focused on the E.U. as a supplier and customer base.
Interested in discussing the Brexit impact on your businesswith a Digital Clarity Group analyst? Contact us for more information.
Further reading on this complex topic:
- Kantar Retail analysts examined the implications for U.K. and E.U. headquartered retailers dealing in fast-moving consumer goods, providing some useful stats on revenue breakdowns by region.
- An owner of a UK-based e-commerce business analyzed how he will manage the risks of currency fluctuation on his suppliers and customers.
- The head of an E.U. trade association for e-commerce provided her organization’s take on the key issues and how they will affect retailers and consumers.
- A supply-chain analyst posted survey results on the impact of Brexit on supply chains
- Online publication Internet Retailer considered the Brexit impact on U.S. retailers.