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The UK grocery industry could lose up to £4.5bn of revenue in the three months after Brexit if retailers and manufacturers are not prepared by 29 March.
The UK grocery industry could lose up to £4.5bn of revenue in the three months after Brexit if retailers and manufacturers are not prepared by 29 March.

No-deal Brexit could cost grocery sector billions in first three-months

INTERNATIONAL NEWS

NamNews - Feb 18th, 13:03

The UK grocery industry could lose up to £4.5bn of revenue in the three months after Brexit if retailers and manufacturers are not prepared by 29 March, according to analysis by operational improvement specialist Newton which is offering five steps that might help lessen the impact. 

The figure is based on an estimated 20% additional gaps on supermarket shelves due to supply issues caused by a no-deal Brexit. Newton’s research suggested that when this happens, 50% of people will buy an alternative product but 50% won’t buy anything at all.

As a result, the industry – which is currently worth £178bn annually – could face losses of up to 10% – or £4.5bn – in the second quarter of 2019 if steps aren’t taken to mitigate the fallout.

Paul Harvey, Partner at Newton, commented: “At this stage, it’s a case of mitigating the impact of a no-deal Brexit and adopting a ‘peak mindset’ to safeguard businesses against short-term losses and longer-term reputational damage. Those that haven’t prepared may face immediate issues around stock availability, food wastage and disruption in the supply chain and challenges that will impact labour availability and customer experience.”

Newton is recommending that retailers and manufacturers take steps to mitigate the projected financial fallout:

1. Focusing on produce availability and wastage
Retailers must prepare for increased wastage due to the lower shelf life of products that have been delayed on route to the UK, as the government predicts the entrance of 40,000 trucks a week will be hindered. One method to mitigate this is to relax standards – where safe to do so – so that stores can better manage waste, such as reviewing best before recommendations.

Alternatively, retailers can lower prices on older produce and ensure forecasting and logistics systems are set up to cope with a shorter shelf life. For example, reducing expected life from seven days down to three or four. It is critical that they have conversations with suppliers regarding the storage of products. Certain chilled products are also suitable to be frozen and stock built, including some meat, ready meals and bakery items.

2. Evaluating your supply chain and collaborating
Collaboration and transparency between suppliers and retailers is essential at all times, but none more so than when navigating Brexit. It is important that suppliers self-assess where issues are likely to arise, ensuring plans can be put in place to minimise disruption to supplies. Retailers expect this and relationships could be severely strained if problems do occur that could have been anticipated. Both sides being open during this period will lead to stronger relationships that will last well beyond the immediate pressure.

Retailers and manufacturers will then be able to fully understand their objectives and evaluate what is required to fulfil them. This means working out how much product they require, how fast the items will sell and when they need to receive stock to meet demand. In a scenario where there is no obvious mitigation, the onus is on manufacturers to maintain transparency and forecast realistic delivery expectations to retailers to avoid unexpected shortfall and a possible breakdown of relationships along the supply chain.

3. Sensible stockpiling
Firstly, retailers need to be clear on their objective for stockpiling. For example, the act of building stock could be to mitigate the anticipated four-week delay in getting goods imported post-Brexit or to protect margin for as long as possible when prices rise. Once the objective is clear, retailers will be able to have the necessary conversations with their suppliers.

There will be a temptation to flood stores with stock, but it is always better to hold it in separate distribution centres. Retailers will typically pay 15-25% of the cost of the stock per year if products are kept in store. This approach also means they face additional labour costs as stock constantly needs to be moved around. Availability is affected as stock can get lost in the backroom and staff struggle to replenish shelves and manage their stockfile.

Brexit also presents an opportunity for evaluating ranging strategy. It’s essential that retailers maintain a range of price points and can service the majority of customer needs. However, given the inevitable supply issues with some products, a robust understanding of substitutability and shopping habits will enable this to be achieved with fewer product variants. Knowing which are the ‘basket busters’, which must be kept in stock at all costs, and which products customers will readily switch between, will enable a more flexible approach based on availability in the supply chain.

4. Mitigating labour availability
EU workers could leave the UK as soon as Brexit is announced, while agency staff availability may also dry up. The third phase of testing has opened to EU residents in the UK, who will be able to register for the new post-Brexit ‘settled status’, and retailers and manufacturers should support employees to complete the process. Retailers must proactively work with their employees, acknowledging the difficult position many will be in and making it very clear that they want them to stay. While the government has scrapped the original £65 charged for settled status application, there may well be other costs for which employers can offer support to further demonstrate their commitment to existing staff.

5. Improving a store’s visual appeal
We expect that the average on-shelf availability in fresh categories will drop from 90-95% to closer to 70-75% in the event of a no deal Brexit, which will present a visual challenge for stores. To mitigate any negative impact on customers, retailers can use techniques such as taking out shelving layers, using mirrored backboards or moving to a more creative ‘market place’ display that requires less stock.

There is a correlation between rate of sale and the space given to each product. Space could be reallocated based on availability to manage customer expectations and buying behaviour. Examining the data by store will mean retailers can create big, bold displays of products with abundant supply to encourage an increased rate of sale, whilst managing down the displays for less available products and reducing the impact of short supply. They must avoid a ‘gut-feel’ scattergun approach, really understand their objectives and take note of the insights.

KamCity 

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