Positioning apparel supply chains for success in the new era of Brexit
The thematic report entitled ‘The impact of Brexit on clothing ‘ describes the effects of the UK’s agreement on the terms of its departure from the EU bloc in December 2020 on the clothing industry.
He says there has been a colossal impact on apparel supply chains, with UK-based retailers that have multi-country supply chains being more affected by Brexit than those with ” simpler UK specific supply chains “.
The challenges include trade tariffs, movement of goods, changes in the labor market, and general implications for consumer attitudes and purchasing behavior in the region.
Despite this, there are opportunities for retailers in the UK, according to the report, and areas such as mergers and acquisitions and potential new trade deals should be explored.
Potential mergers and acquisitions (M&A)
Clothing retailers can use mergers and acquisitions as a means of securing their established presence in EU markets, while also using them as a method to speed up market access outside the EU.
New trade agreements
Brexit has allowed the UK to explore new trade avenues, as it is now free to sign trade deals with countries outside the EU and find new supply partners who can supply goods to lower cost. For example, in September 2020, the United Kingdom announced a new Free Trade Agreement with Japan (CEPA United Kingdom-Japan), which, in addition to allowing the free movement of goods, proclaims itself to be a important stepping stone towards UK membership of the Trans-Pacific Partnership (TPP).
In February 2021, the UK government announced that it had formally applied to join the CPTPP, and the membership process finally began on June 2, 2021. One of the UK’s top priorities is to launch trade negotiations with the United States, Australia and New Zealand, indicating its interest in further integration into the American-Asian bloc.
On June 15, 2021, the UK government announced it had reached a trade deal with Australia – although the final deal has yet to be signed and implemented.
On the US-UK front, although some smaller deals have already been signed, a comprehensive trade deal between the US and UK is still ongoing, as is the case with New Zealand.
The UK has also had to clarify its trade relations with the EU – its most important and closest trading partner. After months of negotiations, the two sides finally agreed to a UK-EU trade deal that entered into force on May 1, 2021. The deal prevents the introduction of additional tariffs and quotas and therefore helps protect retailers against increased trading costs.
Brexit has benefited duty-free retailers across the UK and the EU from January 2021, passengers traveling from the UK to the EU can make duty-free purchases, aligning the duty-free approach of the UK to the EU over the rest of the world.
At the same time, the declining value of the British pound means that passengers traveling to the UK will find it cheaper to shop in the country. However, retailers will not be able to take full advantage of these benefits until all international travel restrictions related to Covid-19 are lifted.
On the other hand, with the aim of aligning its systems of duties and taxes with international practices, the British Treasury announced its decision to end two programs which allow tourists to make their purchases without VAT in September 2020. Previously, all non-EU visitors traveling to the UK were eligible to reclaim the 20% VAT paid on purchases such as clothing and jewelry, which encouraged travelers to shop in the UK. According to Condor Ferries, in July 2019 alone (before the Covid-19-induced travel restrictions were present), international tourists spent more than 2.9 billion euros ($ 3.3 billion) during their summer vacation in the UK.
The UK government’s decision to end VAT-free shopping will impact UK-based luxury retailers such as Burberry and Harrods in particular. In response to the Treasury ruling, Burberry CFO and COO Julie Brown said the retailer would lose its “home court advantage” and be more exposed to competition from other luxury retailers in Paris and Milan. Retailers such as Selfridges, Chanel and Burberry have also warned the UK government that cutting VAT relief for tourists could result in a loss of investment of around Â£ 1bn ($ 1.3bn ).
Maximize Brexit Opportunities
UK-based apparel retailers should take advantage of the uncertainty surrounding Brexit and Covid-19 to rethink their supply chain strategies and operations, with the aim of increasing the flexibility of their investment plan and of transition.
Before Brexit, UK-based clothing retailers and manufacturers relied on borderless free market access to operate their businesses across Europe. Germany, the Republic of Ireland and France are the UK’s main textile and clothing export markets, according to World Bank and World Trade Organization estimates. The UK needs to ensure that the country’s stakeholders remain competitive in the wider market.
According to the rules set out by the HMRC in Chapter 62, as of December 2020, in order for any garment and clothing accessory (not knitted or crocheted) to obtain âcountry of originâ status, they must undergo a tailoring (such as cutting. and sewing) preceded by printing accompanied by at least two preparatory finishing operations (such as pickling and bleaching), if the materials used for manufacture come from developed countries. This follows WTO rules on “double processing” to ensure change of origin.
For items imported from Least Developed Countries (LDCs), âmanufacture from fabricsâ, also known as âone-off processingâ, is permitted. This will help clothing retailers source seamlessly from key locations such as Bangladesh, Cambodia, India, Vietnam and Sri Lanka. Countries like Bangladesh and Cambodia expect continued preferential treatment on zero or low tariffs for textile exports. The United Kingdom-Vietnam Free Trade Agreement (UKVFTA), implemented on May 1, 2021, removes tariffs on imports from Vietnam. Likewise, India is considering better terms for trade with the UK as it is in talks to sign a Free Trade Agreement (FTA) that gives it the ability to negotiate lower tariffs and volumes. higher.
Brexit has led clothing retailers to consider moving operations from EU countries to outside the UK to avoid new taxes and tariffs. This includes obtaining a new business address, opening warehouses and distribution centers, and changing routes for supply chains.
ASOS anticipated the difficulties and opened a warehouse in Berlin in 2019 as part of its international expansion strategy to serve customers across Europe. British sports brand Gymshark envisions international growth by adding distribution centers across Europe to provide uninterrupted services amid Brexit-related disruptions. In February 2020, it opened a warehouse in Belgium in partnership with the logistics company Bleckmann.
Small retailers are also making changes. However, they often do not have the capital, capacity or, in many cases, a customer base large enough to justify building a full warehouse in foreign countries and therefore face more difficulties. In addition, they may have difficulty finding qualified people to advise them on export requirements under new tariffs and VAT regimes. Partnerships with established logistics and warehousing companies that could handle supply chain operations are a viable solution for small and medium businesses.
The next steps
- Review procurement strategies: Retailers need to explore new onshore supplier bases and local channels to ensure reliable and profitable supply chains. By doing so, retailers can also avoid short-term risks resulting from fluctuations in currencies and commodity prices.
- Review the imprint: Retailers need to optimize their manufacturing and logistics footprints, reassess the scope and timing of investments, reallocate production for business benefit, and invest in digital technologies and advanced analytics tools. This will allow them to use the data to make informed decisions based on contemporary market dynamics.
- Inventory management: In the short term, retailers need to adapt their inventory management methods to maintain safety stocks and ensure business continuity during these market uncertainties. In the medium to long term, retailers will need to reassess their safety stock levels as they create new operating conditions to meet their dynamic needs.
- Demand forecast: Retailers need to align their forecasting capabilities to forecast and manage the impact of changes in demand on their inventory levels. They should emphasize flexibility to cope with fluctuations in demand by adopting strategies such as outsourcing.
- Align the product portfolio: Some retailers will also need to prepare to adjust their R&D strategies to handle changes in product specifications. Changes can be triggered by regulatory changes related to Brexit or by changing consumer demands.
Click here for the full report.
An earlier report assessing the sector between 2020 and 2025 indicates that Brexit, Covid-19 and an aging population will continue to challenge the growth of the UK apparel sector over the next year, with the tightening of the purse strings across the population and the focus away from non-essential spending.