Daily Times

In 365 days the U.K. will no longer be a member of the European Union.

But U.K. businesses are still unware of how much they will have to change to continue trading with the rest of Europe — making it harder to plan for the future.

Paul Clarke, chief technology officer at the online food retailer Ocado, told CNBC that he is concerned about future funding. The £3.59 billion ($ 5.09 billion) company has benefited from European money in the form of business funding to develop its operations.

“How will the UK government replace that?,” he wondered during a phone call with CNBC.

The U.K. has agreed in principle with the European Union (EU) on a transition period of 21 months — meaning that between March 29, 2019 and December 31, 2020, U.K. businesses will be able to continue trading on current terms, while making the necessary preparations for the total break-up moment.

But so far, it is impossible to prepare for the break-up moment given that negotiators haven’t decided on how the future relationship is going to be. The second largest U.K. grocer, Sainsbury’s, warned Tuesday it will need at least a year’s notice to prepare trading arrangements with other EU countries after Brexit.

Retailers are growing frustrated towards the lack of clarity regarding their future. So far, U.K. Prime Minister Theresa May has said that the U.K. will leave the EU’s single market – which allows the free movement of goods, services, money, and people – as well as the EU’s customs union — an area subject to the same custom duties.

But the EU is not willing to fabricate a new relationship with the U.K. and offered instead a trade agreement, similar to the one that the EU recently closed with Canada. This solution would likely represent higher costs for companies both in Europe and the U.K. trading with one another.

Depreciation in the pound has already pushed up costs

Sterling has fallen about 5 percent against the US dollar since the day the U.K. voted to leave the EU. The depreciation in the currency has increased pressures on retailers to ramp up prices as the costs of their raw materials have risen.

Daniel Rubin, founder and executive chairman of Dune, told CNBC over the phone that shoe retailers are not able to compensate for the added costs by raising shoe prices.

“It’s a mistake to push up prices because people don’t have more money,” he said.

Consumer prices have risen since the U.K. decided to leave the EU in June of 2016. The latest CPI numbers showed prices jumping 2.7 percent in February after a 3 percent increase in January. At the same time, wage increases have not managed to surpass inflation — squeezing consumers’ income.

Higher costs lead to fewer lease renewals

With companies facing higher costs, they are prioritizing investments on their online presence rather than on their physical stores.

Rubin told CNBC that his company’s strategy is investing in e-commerce and looking at expanding into other markets. “The most exciting growing area is international,” he said, mentioning the Middle East, India and Southeast Asia.

The shoe retailer has 38 stores across the U.K. and, though it is investing in improving its online presence, it is not planning to close any of them. However, Rubin noted that as leases come to an end, it’s unlikely that the firm will renew them.

Commercial property and real estate services adviser CBRE said that “the weak pound has attracted international real estate investors and tourists to the U.K. and boosted domestic exports, increasing demand for the office, prime retail, industrial and hotel sectors.” But with higher demand for office and prime retail spaces, rent prices could increase.

More costs on the horizon

Schuh sells over 80 brands, including Nike, Adidas and Converse. Without the current tariff-free benefit that U.K. firms have with other European countries, companies like Schuh that import goods could see their business impacted.

“My fear is that we get tariffs or cues in the border,” Colin Temple, managing director of Schuh, told CNBC over the phone earlier this month.

Higher costs to move goods across the border will mean lower margins for retailers, unless they raise prices for consumers.

“We might buy more stock,” Temple told CNBC about preparations for possible higher import costs post-2020.

“Once we know what’s happening, we can react,” he said.

Published in Daily Times, April 1^st2018.