Retail Pricing in a post-Brexit world

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Author: Simon Backhouse, GRIN Labs

 

Since the Brexit, the price of luxury items has plummeted in the UK. Luxury goods now cost less to buy in Britain than anywhere else in the world.1

Sales volume of watches and jewelry has increased by 16% since the Brexit vote, and Burberry alone has experienced a 30% surge in sales in the UK.2

 

As always, depending on the trading dynamics of a retailer’s business, retail pricing presents both a challenge and opportunity. Can the impact of this pricing be the light at the end of the tunnel? Or is it a high speed train heading straight for us?

 

The weaker Pound could result in higher costs for retailers who import goods from outside the UK, but the effects of that will likely be delayed for at least the next few months. Many retailers will have hedged their currency liabilities through Autumn/Winter 2016, resulting in stable costs until early Spring /Summer 2017. At this point, retailers will start to feel the pressure on UK margins as the cost base increases. That is, unless they pass these cost increases onto their domestic customers in the form of higher prices. This is a risky strategy which could impact trade if the increase is noticeable or within particularly sensitive and competitive retail segments.

 

The Brexit and the pricing problems that have resulted from it present an opportunity for retailers and brands to leverage their consumer’s perception of value, not just for their UK shopper, but for their global shoppers, as well. For many UK retailers, over 50% of sales originate from international territories. The upside here is an increased perception of value for the money (read: cheaper prices) in the eyes of international customers. Because of this kind of international perception, LVMH has increased its prices by 10 percent without seeing any adverse effects.3

 

A detailed understanding of pricing is key in these turbulent times. Smart retailers will devise a local pricing strategy for each of their key markets, allowing them to understand the potential impact of these currency movements. Retailers should take this opportunity to identify their closest competitors by market, and where their own brand prices should sit against these competitors. Working through the complexities of fabrication, fit, and style is not easy, but the insight this provides will inform pricing decisions and identify risks or opportunities to currency exposure.

Brexit affect on Retail Prices

With such uncertain times upon us, it’s important for retailers to determine who those competitors are and where their own prices need to be. The results of these efforts will inform a pricing strategy that is clear for the entire business to understand and execute. In its simplest form, the strategy should highlight the ideal full price trading position( e.g 10% cheaper than competitor ‘A’ and 30% more expensive than competitor ‘B’). This can be tough for large, complex businesses that require detailed comp shops by department and /or category. The results of this full price trading position investigation will result in an ideal site conversion rate for key international territories which retailers can then action and manage accordingly.

 

International customers will expect to see cheaper prices with a weaker pound, but it’s important to try and steady the ebbs and flows of foreign exchange. If the pound bounces back, retailers could be facing a deadly problem where they are suddenly looking much more expensive. As such, they will likely see that hit trade and growth run-rates adversely. If a retailer’s pricing strategy is well informed and their proposition is competitive, then they have a good chance at being a truly local retailer, minimizing their exposure to those turbulent swings in trade.

 

This is a concerning time for many global retailers based in the UK. We face much uncertainty in the complex space that is global trading, and the ongoing debate around Britain’s financial stability post-Brexit will continue for some months. It could take a few years to see and understand the full impact as we navigate our way through market reactions, changes in political leadership, and a full understanding of the complete terms of the Brexit.

 

The best retailers must become familiar with the risks and opportunities facing them in order to shape and control their trading destiny – or at least to steady the ship in these troubled waters.

 

For more information on Brexit and its affect on Online Retail, please consult our Brexit and Online Retail Report.

 

 

1 - “Louis Vuitton Handbags ‘Cheapest in London’ After Brexit Vote.” BBC.com. October 13, 2016.
2 - (2) Banks, Andrew et. al. of the Office for National Statistics (UK). “Economic Review: September 2016.” Ons.gov.uk. September 8, 2016.
3 - Bergin, Tom. “Foreign Firms say UK Profits Hit by Brexit Vote, Weak Sterling.” Reuters.com. October 18, 2016.

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