What can online sellers expect when Brexit shakes the eCommerce world?
This topic is the talking point at the moment: Britain may be on the brink of leaving the most powerful institution on the European continent. The long-pursued splendid isolation policy may come to light again.
- What will happen in the world of eCommerce if the British people vote to leave the European Union on 23 June?
- Will the UK have to jump off the trade train?
- How will Brexit affect online sellers and their sales figures?
Britain is about to decide whether to stay in or leave the European Union
Britain is one of the strongest economies and the Brexit will surely impact both the EU and the UK. What is Brexit? It is a short term for Britain exiting the European Union.
Brexit supporters are of the opinion that the EU’s size and bureaucracy have diminished Britain’s influence. They believe the Brexit would strengthen the sense of national identity that has suffered enormously in the last years. This has happened due to immigration and the EU citizens’ right to live and work in other member states.
On the other side of the spectrum are Pro-European Brits wanting the UK to stay in the Union. They claim that leaving the EU will be detrimental to the UK economy. Take for instance the recent fall in the pound’s value caused by the uncertain future of Britain.
According to the International Monetary Fund warning …
a Brexit will create major challenges for both the United Kingdom and the rest of Europe.
If Great Britain decides to leave the EU, there will be a two-year exit negotiation period. The main focus will be put on the UK’s future relationship with the Union, e.g. with regard to trade. Multinational companies could start to withdraw their headquarters from Great Britain.
Here’s the deal…
The UK economy and its growth could be affected for as many as the next 15 years.
The UK relies on Europe for international eCommerce
With regard to the impact Brexit would have on eCommerce, CEO Philip Rooke, says:
As a British man running an international eCommerce company, I sit here in Berlin thinking a Brexit would be crazy! The EU is a huge market on the UK’s doorstep and although the British appreciate the trading opportunities, the size of the market doesn’t get enough recognition. The EU is now Britain’s largest trading partner, with over 51% of British exports of goods currently destined for its European partners. For e-retailers that is only a bit of translation and a few clicks away.
The community of online multichannel sellers, Volo, has released a warning about the risks related to Britain exiting the EU. As European markets make up more than 50% of the export market for online businesses, UK online sellers would risk quite a lot.
According to the Volo Online Retail Export Index, exports make up 20% of the UK’s online retail economy. Top marketplaces for UK eCommerce businesses that look to sell abroad are France and Germany. These two countries make up 40% of the demand for exports from UK online businesses. The importance of Italy and Spain is also increasing.
Belgium, Sweden and Ireland, in turn, are the most valuable European export destinations when it comes to the highest average value per parcel shipped there from Britain.
According to research carried out by FedEx, European markets are a key destination for 96% of British SMEs who export. The average British SME exports £553,000 worth of goods to countries in Europe and imports £535,000. This creates an average net surplus of £18,000.
The bottom line: the Eurozone is absolutely vital to UK eCommerce.
How will the Brexit affect eCommerce and online-based industries?
The eCommerce sector has played a very important role in boosting the British economy. The UK is one of the top marketplaces and is one of the world leaders. A Brexit would definitely impact eCommerce, not only in the UK.
According to eMarketer, the UK’s global share of eCommerce sales will rise to 19.3% by 2019. Western European markets currently represent over 50% of UK eCommerce exports. However, numbers may be less optimistic if the Brexit becomes reality.
Take fashion as an example. Fashion retailers are more exposed to risk during economic fluctuations, the reason being…
- the possible adoption of tariffs
- non-tariff barriers
- expected increase in costs, resulting from depreciation of British pound.
UK eCommerce is without doubt dependent on EU markets. For UK fashion e-tailers, a big part of site traffic comes from there, in particular France, Germany, Italy and Spain. If the British vote yes for the Brexit, the UK can expect a reduced income caused by the increases in trade costs with the EU.
Fashion eCommerce websites in the UK have already seen an average 1% reduction of online visitors after the Brexit discussion became more intense. It’s not the outcome of the Brexit as such, but a general mood and the reaction to the Brexit news.
The cost of Brexit
According to Should We Stay or Should We Go? by the Centre for Economic Performance (CEP) / London School of Economics (LSE), lower trade with the EU can reduce the UK GDP by between 1.1% and 3.1%. The effects of less skilled immigration, lower FDI (foreign direct investment) and the dynamic outcomes of reduced trade would have a big impact too.
The reasons why trade costs may increase after Brexit:
- Higher tariff barriers between the UK and the EU.
- Higher non-tariff barriers to trade (the outcome of border controls, different regulations and the like) between the UK and the EU.
- Exclusion from future steps the EU takes towards stronger integration and lower non-tariff barriers.
The Digital Single Market
The Digital Single Market is estimated to add £375 billion per year to the EU economy. It addresses various concepts related to online trading, such as digital borders, VAT harmonisation, copyright and intellectual property, geoblocking and data roaming. Efforts are being made to make legislation easier for businesses to carry out digital trade in the EU.
The UK has been at the forefront of the discussion about what a digital single market should be like. For the maximum benefit, the UK, the main eCommerce player in Europe, would probably be better off having a voice in shaping the Digital Single Market. In other words, it may be better off remaining in the EU.
The impact of Brexit on distribution and packaging
As people do more of their shopping online, the number of picking and packing jobs has increased. However, the fact is that there aren’t enough UK-born citizens on the job market willing to do what they call menial work.
Here’s the catch …
There’s already a shortage of fulfilment and warehouse staff. If European migrant workers, especially those from Eastern Europe, were prevented from working in the UK, there may be a manpower crisis.
The UK would be forced to increase wages to encourage applicants from the new labour stock. This would be good news for British workers, but the increased cost of labour is likely to affect the supply chain. The need for tough decisions could arise, e,g. increasing automation, or even offshoring this side of the business overseas.
The post-Brexit eCommerce world
The UK leaves the EU. What are the potential losses?
According to MotionPoint and CEP/LSE, for an online seller with a modest 5 million annual sessions and a £50 AOV (average order value), a 1.8% reduction from a solid 3% on-site conversion rate could make a £135,000 difference compared with its base value. Sites with far greater traffic and higher AOV are likely to lose much more.
If higher exportation tariffs are one of the results of the Brexit, this can have a negative impact on competitiveness and demand.
It gets worse …
The cost of a weaker pound will impact retailers, which will have an effect on consumers.
Another negative factor relates to increased rules and regulations, e.g. the total amount you can buy without having to pay an additional cost to import the article. Extra costs can effectively reduce the amount Europeans buy from UK online sellers.
The truth is that in a post-Brexit world European consumers are likely to spend less on UK eCommerce sites.
Finally, the wait and see approach can result in uncertainty and the loss of trust in the power of the British economy. This and other similar factors can seriously bruise Britain’s eCommerce.
UK retailers may have to face lower sales figures and higher uncertainty levels.
Brexit and eCommerce: in a nutshell
According to CEP/LSE, if the UK decided to leave the EU, it may cost the UK economy much more than the potential gains from lower contributions to the EU can amount to.
If the rapidly developing online retail sector in the UK is to thrive, export needs to be a critical part of it. Leaving the EU can make it more costly and less hassle-free. A digital single market may not be endangered, but the UK may not be such a big part of it.
Cross border trade will surely be affected. The UK could be at a competitive disadvantage against the top marketplaces in the US or Europe.
The decision to leave would be politically irreversible. Perhaps Bremain would be a safer option.
Other Sources & Further Reading
United Kingdom: top online market and eCommerce success story