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Brexit and weak Pound have raised holiday costs, but do shoppers care?


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Much has been written about the consequences of Brexit and the possibility of a “no deal” divorce from the EU. Financial services businesses, especially forex brokers, have considered relocating to the EU to retain their respective customer bases. The loss of jobs in the labor market and the ensuing “brain drain” have also been cited, but hopefully, the recent Tory victory at the polls will help subdue the uncertainty and lead to more stability on all fronts, especially with the Pound and its cost impacts.

The uncertainty of Brexit timing and an acceptable departure deal, however, have also wreaked havoc on Pound Sterling. Before the Brexit referendum, £1 could fetch $1.50 at forex dealer market desks, but for the past year, the exchange rate has roughly averaged $1.25. Yes, the Tory victory brought a welcomed surge, which seems to have settled in at $1.33 and some change, but these market realities are far too late in the game to impact prices that holiday shoppers might encounter for imported goods. Many merchants have gradually raised prices to cover their 20% or so increase in costs, but there are a few shops that held back from offending customers. They are struggling.

Depending upon the product, retailers book anywhere from 20% to a third of their annual sales during the holiday shopping spree. Merchants are hoping for a major shopping revival this season, but this chart, courtesy of FX Street, is disconcerting:

The correlation between Consumer Confidence and Retail Sales figures is obvious. The “disconcerting” part is that the GfK composite index has hit “-14” in November, its lowest reading since 2013. The implications are that retail shopping this holiday season could be weak. Consumers have had plenty of time to adjust to higher marketplace costs, due to Brexit and its impact on foreign exchange rates, but trying to guess what could happen over the new few weeks is pure speculation at this stage of the season. In other words, it will be what it will be.

Retailers, however, cannot close their eyes and just accept their fates. They must plan on how to position existing products and when to conduct those all important “bargain sales”, a process that begins with a best guesstimate of what could prevail. A recent harbinger of things to come can be derived from the recent results for “Black Friday” and “Cyber Monday” sales efforts.

Here, at last, we have a bit of good news. Per the Guardian:

Barclaycard, which processes about £1 of every £3 spent in the UK, said it was an “outstanding” Black Friday compared with last year. It said transaction value was up 16.5% compared with last year, with the volume of transactions up 7.2%. It added that Cyber Monday had also got off to a strong start, with transaction volume up by 6.9% compared with 2018.

Black Friday is a rather new phenomenon in the UK, introduced by Amazon in 2011 and then taken up by retailers nationwide. The question is whether the earlier shopping has taken away from sales that would follow in December and well after the Christmas holiday. One firm that has followed these events closely is Springboard, which has developed an internal process for gauging consumer behavior. It literally tracks shopper foot traffic figures at some 450 different retail locations across the UK.

Some retailers may have appraised the Black Friday shopping event as a short-term “fad”, but recent results may have solidified commitments going forward. According to Diane Wehrle, Springboard’s insights director:

This positive result may well seal the deal for retailers in terms of their commitment to Black Friday moving forward, as they will have claimed shoppers early on in the Christmas trading period giving them the opportunity to steal a march on their rivals.

The debate may not be over. Observers have noted that this Friday fell on the final payday for the month. Shoppers had cash in hand, and foot traffic picked up decidedly after 5:00 pm, thereby suggesting that many shoppers went directly to stores, as soon as the workday was completed. As the frenzy picked up steam, there had been reports of “shopper fatigue”, but it is not evident from the level of increased buying.

What about after Christmas? What then? Springboard Wehrle adds:

Post-Christmas it is expected that footfall on 27, 28 and 29 December will be higher than on Boxing Day, which historically was the key sales day. In 2018, footfall on each of these three days was a third higher than on Boxing Day as many consumers now initially search for bargains online before venturing to the stores themselves.

But what about consumer attitudes? They have demonstrably changed over the past few years to adapt to Brexit uncertainty and its impact on foreign exchange rates. Buying patterns are different, as well as how the consumer shops in the first place. For example, nearly 20% of festive shopping now occurs online. Mall traffic has suffered, especially in high street shops, where “About 16 stores closed their doors every day in the first half of 2019 while only nine opened, resulting in a net decline of 1,234 chain stores on Britain’s top 500 high streets”.

Dr. Liliana Danila, economist at the British Retail Consortium, explained:

High streets are undergoing a fundamental change in response to changing shopping habits, new technologies and rising costs of doing business.

Lisa Hooker, consumer markets leader at PwC, continued:

There’s been no let-up in the changing ways that people shop and the cost pressures affecting high street operators. As consumers continue to change the way they shop and spend their leisure time, the reality is that we may need fewer high streets in the future.

Yet, these figures are only for the first half of 2019. Similar closure figures are currently forecasted for the latter half of the year, as well. Analysts at the Guardian assert:

Retail chains have been hit by a mix of low consumer confidence, which has cut spending, and rising costs from business rates, an increase in the legal minimum wage, and higher cost prices as a result of the decline in the value of the pound since the EU referendum.

Perhaps, retailers can gain some solace from Accenture’s recent research. As reported by Bloomberg:

A survey of 1,500 consumers released Wednesday showed that 87% of U.K. shoppers plan to spend the same or more than they did during last year’s holiday season. The findings counter concerns flagged by retailers from Next Plc to Marks & Spencer Group Plc regarding unseasonable weather, drawn out uncertainty over Brexit and a generally precarious environment for consumers.

And that brings us full circle back to the issue of foreign exchange impacts on holiday shopping prices. As noted, the 20% cost rise has either been absorbed or passed along in higher prices. The general consensus of those that have cut costs and absorbed the “FX shock” is summed up by Patrick Dudley-Williams, founder of tie and clothing company Reef Knots: “It’s no longer sustainable to absorb cost increases. We are getting to a stage where we are going to have to raise prices.” Expect higher prices.

Price increases will also occur in other areas, as well:

The Bank of England estimates that a 5% reduction in the value of the pound increases consumer prices by about 0.9% in the long term. Some of the biggest increases will be seen in energy bills and imported goods such as laptops, TVs and toys. Fuel, priced in dollars, could go up as the pound weakens against US currency.

The Accenture study also suggests that greater spending may occur later than just in late November. 50% of shoppers plan to wait until the week before Christmas, and 42% plan to do their buying in the days that follow the holidays. Black Friday may have only been a highlight of good things to come.

Helen Dickinson, the chief executive for the British Retail Consortium, concluded:

Shoppers appeared ready to take advantage of the great bargains available, both online and on the high street. Electronics and clothes both benefited from big discounts, with the recent cold snap adding further urgency to purchases of winter-wear. Furthermore, as the spectre of a no-deal Brexit has been pushed back to after Christmas, consumers were more prepared to open their wallets to a little extra festive spending.

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Brexit and weak Pound have raised holiday costs, but do shoppers care?

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