Retail

Retailers may need to alter European supply chains: Fitch

19 Jan '21

3 min read

Pic: Shutterstock

Pan-European retailers may need to adapt their supply chains due to the Brexit trade deal, requiring extra investments and expenses, according to Fitch Ratings, which recently said supply disruptions caused by the implementation of new measures will likely lead to loss of revenue for retailers, in some cases temporarily, and some margin compression due to incremental costs.

Supplies to Northern Ireland are subject to a special protocol, which requires additional certifications and administrative procedures.

The Brexit deal keeps trade in goods between the European Union (EU) and the United Kingdom tariff-free, which is a much better outcome for retailers than a no-deal World Trade Organisation (WTO) scenario with tariffs on all trade.

However, any re-exports from UK warehouses of goods produced in third countries are subject to tariffs in the EU. Furthermore, new border checks slow down logistics. Many stores operated by UK retailers in the EU have been experiencing supply shortages since the new deal came into force at the beginning of the year. The most-affected product groups are those with a short shelf life, such as ready meals and some fresh fruit and vegetables.

Some Pan-European retail companies may need to make adjustments to their supply chains to avoid additional tariffs and accelerate the movement of goods, Fitch said in a press release. These may include broadening transportation modes, increasing warehouse capacity in the EU, if not already done so ahead of the Brexit deadline, and finding alternative suppliers.

Northern Ireland applies EU internal market and customs rules, meaning that shipments from mainland UK will soon become subject to new controls. The Northern Ireland protocol envisages a three-month grace period with simplified controls until March 31, so that retailers can adapt their supply chains to the new trading conditions.

Paperwork requirements have already increased and stores in the region have reported supply shortages in January. The heads of the largest UK retailers warned about a potential cliff edge at the end of the grace period when the full range of new rules is enacted. This could affect certain retailers, depending on their presence in both Northern Ireland and the Republic of Ireland, the ratings agency said.

Retailers could experience loss of revenue as a result of supply disruptions, which, however, Fitch expects to be temporary and to ease within several months. Retailers could also incur costs due to emergency measures to reduce supply shortages.

Supply chain adaptation and increased certification requirements could lead to additional expenses and investment needs, although Fitch-rated retailers, especially those operating in the food segment, could accommodate those within their current ratings.

The outlook for the European retail sector is stable, supported by Fitch’s expectations of stable performance in food and improving performance in some non-food segments from the second quarter of 2021, despite logistical and supply disruptions affecting operators with a significant presence in the UK.

Fitch expects revenue dynamics among the segments to begin to converge towards end-2021, assuming the coronavirus starts abating across Europe in the spring, which will contrast with wide lockdown-driven divergences at the height of the pandemic.

Fibre2Fashion News Desk (DS)

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