With the countdown to Brexit underway, a growing number of retailers which are buying and/or selling goods in Europe are considering setting up an offshore distribution hub.
Allowing retail businesses to continue taking advantage of single market rules whilst avoiding costly tariffs and delays, these offshore facilities could eliminate the need for cross-border trading by allowing businesses to store inventory within the EU.
With an ongoing lack of clarity surrounding post-Brexit trading conditions, many retailers are understandably adopting a ‘wait and see’ approach. However, it is essential that they plan ahead and do the groundwork necessary to ensure they can move quickly when the time comes.
Choosing a location
Located in mainland Europe, offering easy access to the neighbouring countries of France and Belgium, and boasting an enviable logistics infrastructure, Holland is an attractive option for businesses looking to establish an offshore distribution base. Despite having hallmarked its goods in the UK for over 100 years, iconic jewellery brand Tiffany & Co recently announced that it will be moving its hallmarking operation to Amsterdam to avoid being caught up in potential trade disputes. The base will also be used as the retailer’s new distribution hub for stores across Europe.
Among the main benefits Amsterdam has to offer are its streamlined customs and goods-handling systems. Once goods are received and taxed at one of the country’s two main ports they can be freely transported directly to customers located in many areas of the EU. In previous years, concentrations of well-skilled labour in cities such as London have made the UK a significant draw for foreign retail businesses. However, the ports of Amsterdam and Rotterdam also provide employers with a good source of recruits.
While Ireland’s close proximity to the UK and English-speaking population makes it a popular choice with technology firms when considering where to locate an EU distribution hub, retailers should bear in mind that once goods are imported they would still need to be shipped to their final destination.
When setting up an offshore hub company, retailers have two main options; establish the offshore company as a group subsidiary of the existing UK business, or alternatively create a separately owned company. The former option is most commonly chosen as it tends to be more tax efficient and can be easier to transfer resources between companies. However, it is important to consider both options, to assess which method best aligns with the retailer’s overall strategy. Organisations may also wish to consider areas such as whether to establish a local oversea bank (mandatory in certain countries); and insurance, particularly relevant where employees may be working abroad.
Businesses can also help to secure some short-term financial certainty by giving thought to their pricing model, and whether they are a net importer or exporter for each of their various markets. With the value of sterling down in recent months and the Euro gradually strengthening, it may be worth locking the current exchange rate into any bank agreement for a fixed period of time. While there is still a great deal of speculation surrounding the Brexit negotiations, this approach could protect the business from the effects of any unexpected exchange rate volatility.
Wait it out
The Prime Minister’s recent proposal of a two-year transition period will extend the period of Brexit uncertainty and is likely to have received a mixed reception from domestic retailers. Earlier this year, cosmetics retailer Lush threatened to focus its planned expansion outside of the UK as a result of the Government’s lack of clarity over Brexit. The retailer cited the restricted movement of people and goods once the UK leaves the EU and the additional costs posed by import duties as reasons for its proposed relocation. With the majority of UK-based businesses understandably wary of investing significant sums of money in setting up overseas stores or distribution hubs, some retailers are adopting a step-by-step approach. As well as trialling an online-only model, pop-up shops allow retail businesses to experiment in markets overseas, without the need to set up a new company.
It certainly makes sense for businesses to ‘wait it out’ and delay taking action until more information on the UK’s trading position is available. However, by giving thought to their operational footprint and distribution strategy now, they can gain the flexibility needed to react quickly and take advantage of post-Brexit opportunities when the time comes.