Brexit And Pricing: Bracing For The Affects In The UK Market

In this type of environment, pricing becomes an increasingly important lever to protect margins and maintain growth for manufacturing companies in the UK — and international businesses selling in the U.K. market . For the ill-prepared, there’s a bumpy ride ahead.

In the two months since voters in the United Kingdom made the decision to exit the European Union, commentary and opinion on its affects have swept across the globe. Through the initial flurry of intense speculation, heated commentary — and a short period of British political turbulence — much of the world press has turned its attention to the next spectacle.

While certain Brexit realities remain, the current conservative government in Westminster is committed to moving — more rapidly than initially expected — toward a split via Article 50. Economic uncertainty is an ongoing problem in both the U.K. and the broader EU markets. The pound sterling has shown some signs of stabilization in recent weeks but is still significantly below its pre-Brexit value, where it is likely to remain at least until separation is finally formalized. By any measure, it’s a process that could take years.

For U.K. businesses, the road ahead is a bit murky. What’s clear is that many were caught flat-footed when the “yes” vote pulled ahead at the polls. Just prior to the June vote, Simon-Kucher & Partners — a global management consulting firm that focuses on strategy, marketing, pricing and sales — conducted a survey of more than 100 senior business executives at its London pricing forum to gauge their preparedness for a Brexit victory. The vast majority — a full 76 percent of responding companies — claimed they did not have a detailed Brexit pricing plan in place. In addition, another 50 percent of executives felt their costs would go up in the event of a yes vote, and 88 percent indicated they would raise prices to cover some of the expected increases in costs.

It’s very likely the pound will remain depressed for the foreseeable future. It’s also equally reasonable to assume that costs will rise, especially for companies with far-flung supply chains. But the fact remains: The impact will spread far beyond Great Britain. Given the relative heft of the U.K. in the overall European and global economies, all companies doing business in the U.K. market will need to adjust to this new reality.

Virtually every industry has reason for concern, and there are any number of examples of the changes that lie ahead. For instance, one area that is likely to be highly volatile is the automotive industry, which has potential impacts for both European and American manufacturers.

According to the Wall Street Journal, almost 19 percent of all 2015 car sales in Europe were generated in the U.K. The U.K. is not a major car manufacturer, so most vehicles on the road are imported brands. Of the Big Three U.S. manufacturers, only General Motors has a full assembly plant in the U.K. Chrysler has none, and Ford only makes certain components. The major European brands tend to base almost all of their European manufacturing in their country of origin, with some operations in lower-wage European companies.

Under the current circumstances, demand for automobiles will likely become depressed across one-fifth of the European car market for the near future. Given that manufacturing is generally happening elsewhere, there will be few labor cost savings to gain from a deflated pound — and no real incentive to move production from lower-wage European countries given the uncertainty around the pound’s future performance.

The likely outcome will be a production shift toward cheaper, highly fuel efficient models for the U.K., as petrol is now more expensive for British drivers, which will result in lower revenue for manufacturers.

In this type of environment, pricing becomes an increasingly important lever to protect margins and maintain growth. Whether it’s automotive, auto parts or any other type of manufacturing, UK companies — and international businesses selling in the U.K. market — need to begin re-evaluating their pricing strategies and execution tactics to address what may be several years — and perhaps more — of weakened consumer purchasing power in Europe’s second-largest economy. For the ill-prepared, there’s a bumpy ride ahead.

Marc Chesover is Senior Vice President, Customer Acquisition, EMEA & APAC at PROS, Inc.

More in Supply Chain