In the last two years, the challenging task of trading overseas has, for many businesses, become even more demanding with Britain’s impending exit from the European Union. UK businesses that depend on international supply chains have had to deal with economic uncertainty, potential upheaval with the UK’s global trading relationships, and ongoing currency volatility.
With last month marking the one-year countdown to Brexit, at Western Union Business we spoke to over 1,000 key decision makers at UK businesses to gauge how they have been affected in the 21 months since the leave vote.
Often reports on the effects of Brexit are focused on the impact for exporters, but it is importers, in many cases, who stand to be deeply affected. Importing remains vital for UK businesses and the wider economy, with 2017 imports exceeding exports by £498bn, according to HMRC. Some 81% of the respondents to our survey said they import with 13% of those being import only. It is therefore crucial to understand the challenges being faced by importing businesses.
What challenges are businesses facing?
According to the report, while regulation was named by nearly half (45%) of businesses as one of the biggest barriers to importing, currency volatility trailed close behind with 44%, followed by a weak GBP (40%). This is a particular issue for industries such as construction, retail and financial services, where currency volatility was cited as the most common barrier.
In many cases, it looks as if this is, in part, having an impact on businesses’ operations and profits. The data revealed that two-fifths (41%) of businesses revealed they experienced an increase (an average of 21%) in import costs over the past 18 months, as a direct result of Sterling depreciation post-EU Referendum.
Meanwhile, over one in five businesses saw their profits take a hit – with an average profit fall of 12%. Those in the financial, insurance and real estate sector were the most affected, with an average profit loss of 18%, followed by the travel, tourism and transport industry, where profits fell by 16% on average.
Dealing with the Brexit impact
Many of the businesses we surveyed took measures to avoid taking a hit on their bottom line, following the depreciation in Sterling post-EU Referendum. This included a number of management changes – such as re-negotiating contracts and pricing (68%) and sourcing from geographies with more favorable exchange rates (57%). One in three businesses passed on higher import costs to their customers through price increases, putting them at risk of becoming less competitive than their international counterparts. While most financial services businesses (75%) absorbed the losses, those in the sector that did pass on the cost to customers raised their prices by 32% – substantially higher than the average price increase of 17% across all sectors. Businesses in the construction (19%) and communications, IT (18%) sectors were also above average.
When asked how Brexit has changed their approach to currency volatility and protecting costs, almost a fifth (17%) of businesses said they now try to settle foreign currency invoices in Sterling more often. This puts them at risk of discouraging international buyers or paying over the odds as suppliers factor this risk into their quotes.
Despite the increased currency volatility and evidence of many businesses taking a direct hit, more than a fifth (22%) of UK businesses have not used any FX products (such as FX Forward and Options Contracts) in the last 12 months, rising to over a third (35%) of those in professional services and around a quarter for both manufacturing (26%) and retail, wholesale and food companies (25%).
With currency rates changing daily, a strategy that incorporates regular reviews and professional products is key to mitigating risk. When asked “where do you see key Sterling exchange rates heading over the next 12 months”, there was a 40% divergence in future GBP/USD forecasts among the 386 business decision makers in the UK who submitted their 12 month predictions, highlighting the risks of leaving their FX strategy and forecasting down to guesswork.
Preparing for the turbulent journey ahead
As Brexit and trade negotiations continue, we can expect further complexity and challenges for British importers in the months ahead. Whether it’s now or in the future, currency fluctuations will always be a concern for businesses trading internationally. For smaller companies in particular, incremental exchange rate shifts can make a huge dent on their bottom line and often completely unprecedented events can spark a major currency swing. But sitting tight and hoping for the best case scenario is a sure-fire way for a business to come unstuck.
Over the next weeks and months, businesses should build a number of tactics into their overarching risk strategies. This includes auditing contracts to ensure they’re still robust and develop ping stronger relationships with suppliers to aid tougher conversations and negotiations as well as examining whether there are better suppliers available outside of Europe.
Forecasting and benchmarking predictions against peers and seeking advice on currency strategy product offerings is also good practice for any business operating overseas. No one can predict the future, but by mitigating against risk, based on insight and forward planning, businesses can avoid having to take drastic measures, such as dropping profits, as much as possible.
The FX Barometer is based on a survey of 1,100 business decision makers responsible for managing international payments, and was carried out on behalf of Western Union Business Solutions by independent research specialists in February 2018.