The below short essay is my take on the Brexit mess facing our country. I write this is someone who trades heavily with the EU. Firstly, I’ll briefly outline the specific threats posed by Brexit to our business before moving onto some on to the steps we are taking to mitigate that threat. Whilst the specifics below are unique to our business, an analysis like the one given below will be applicable to any UK business that deals with the EU. Similarly, the remedies we are taking are broadly applicable to any business.
Our Safety Shower business has been successfully built up over the last 5 years in partnership with German manufacturer FSP Tech. We, The Safety Shower People, act as their sole distributor in the UK and we have worked hard to build up a considerable business for them. It’s a relationship that has worked very well and has been mutually beneficial for both organisations.
The date of Brexit date looms closer, then further, then closer again and then, well, who knows what will happen? We still don’t fully understand what the implications will be for this segment of our business portfolio, but it is likely to have the greatest impact in this area for the following reasons.
The product comes exclusively from the EU
Currently there are no trade barriers to overcome and so we move from a situation with completely frictionless trade to one with some friction. Precisely what the coefficient of friction will be in the post Brexit world remains to be seen but there will, undoubtably, be some. In other words, things will get tougher with an increase in the cost of business. In contrast, other areas of our business import product from outside the EU already. As such, the impact of Brexit will be less as there are already tariffs and customs barriers to overcome.
The gross profit is low
The Safety Shower business has, of all our products, the lowest gross profit (GP). This is offset by the fact that there is a much higher average sales value in this product range. The overall net profit remains in line with the rest of our product line as there is less administrative and operational overhead associated with the shower range of products. But, the fact remains that GP is quite low so any changes in cost of sales will disproportionately affect this product range. Tariffs and a weak pound will impact the bottom line on this product line more than our others.
To illustrate this, and without wish to give away my exact margins, consider the following example. Assuming that the selling prices remains the same, a product with a 20% gross margin that experiences a 5% increase in costs would reduce margins to 16% i.e. what we brought at £80 and sold at £100 we now buy at £84 and sell at £100. By contrast a product with a 50% gross margin experiencing the same increase in costs would only see a 5% decrease in revenue i.e. what we brought at £50 and sold at £100 we now buy at £52.5 and sell at £100.
The lower administrative burden associated with the low gross margin product is irrelevant as this will still need to be deducted. As such, in this example, we can see the low margin product is far more sensitive to small changes in base costs. This is the situation we are in with our safety shower business when compared to, say, our spray nozzle business. The pricing structure is just more sensitive to disturbances like Brexit.
Premium product
The FSP range is a premium product. The all stainless-steel design of the very well-built showers means we are priced at the higher end of the market. Our target audience is buyers who want a high-quality product and who don’t mind paying the extra for this product. Those buyers that really want the very best product will mostly be willing to pay a bit extra if we are forced to put prices up due to Brexit related costs. But there is whole segment of customers who are not quite so sold on the high-quality features of the FSP product; it can be a tough selling the benefits of our product when these customers are comparing them to cheaper alternatives. Any increases in prices will, undoubtably, have a negative effect on sales volumes to these customers.
This problem will, of course, be compounded when British businesses feel the pinch from Brexit and budgets are slashed. In tough trading conditions, where money is tight, it is often tempting to scrimp and save on inferior products to save a few bob. Premium products tend to suffer in such conditions.
Delays
Often the provision of safety showers is vital if a plant is going to be up and running. There is nothing “optional” about having showers on site. So, potential customs delays could be a problem. This, however, is a relatively minor concern given that most showers are manufactured to order and so customers are used to lead times of several weeks. A few days extra clearing customs will, in most cases, not be significant. However, the key phrase here is “in most cases”. In some cases, delays will cause problems and that uncertainty is most unwelcome.
The good news
The good news is that we have a genuinely good partnership with our manufacturer. We have built up the UK sales of the FSP products over the last five years and no one wants that to go away. Having a strong relationship in business built around mutual goals is always useful in tough times. So, the good news is that we have a partner that wants to help us navigate the stormy waters of Brexit however choppy they may become.
We also have a diverse range of products that will be less sensitive to turbulent trading conditions than our shower business. This means we are in a very good position to weather the storm. Indeed, at the end of all this, we might very well see that some of our shower competitors who do not have such a diverse product portfolio do not survive. Difficult trading conditions often mean that only the stronger, more stable companies like ours make it through. I don’t really see that as “good news” per se because we are talking about job losses and businesses failing which, even though they are my competition, is not really good news. But, suffice to say, we are perhaps better able to weather whatever tempests Brexit chaos throws our way than most.
What are we doing to prepare?
Dialogue with suppliers
This is perhaps the most important preparatory measure any business can take. We have a close relationship with principle supplier FSP Tech. It’s a genuine partnership built over many years of mutually profitable business and neither party wants to see that disrupted. As such, we have been in constant dialogue with FSP regarding measures that will need to be taken to mitigate any Brexit related nonsense. This communication means we will be able to adapt and anticipate the myriad of administrative and bureaucratic hassles that could occur after we leave the EU.
Build up stock
We are building up our stock of core products including some larger tank showers that are normally made to order. This will be done prior to the 31st of October so we will avoid any tariffs and delays. If Brexit itself is delayed then we simply have some extra stock, which is not a bad thing anyway. The plan is to have higher than normal, pre-Brexit, stock levels so we can manage urgent orders and thus combat any customs delays that might occur in the future.
Prudence on spending
A certain degree of additional prudence on spending will be implemented. This is to guard against any shock reductions in revenues resulting from Brexit uncertainty. Whilst we don’t think business is going to be that badly affected over the long term there may very well be some short-term dips in sales. As such, we will be cautious on our discretionary spending over the coming year. If it turns out there are no reductions in sales, then the result will simply be we have more cash at the end of the year.
Just common sense?
The three strategies above might seem like basic common sense. That is because they are, but often common sense often gets lost amongst the hysteria. The whole Brexit fiasco in politics has left most in the business community extremely frustrated, we have been pulling our collective hair out over the last three years just wanting some clarity either way. We still don’t really know what is going to happen and we feel out of control.
In such situations cool heads are required and that means getting back to common sense. So, in uncertain times we communicate with our partners, we take measures to ensure continuity of supply and we make sure we have some resources in reserve “just in case”. This is good business practice for any uncertain environment and Brexit is no different. A lot of the language in parliament has become so hyperbolic with prophesies of doom and destruction contrasted with the naïve utopian vision of the Brexiteers.
My overall take on it is that Brexit will be bad for British business and it will be a right royal pain in the arse but its not the end of the world. With some common-sense a well-run business will be able to cope. Getting caught up in the extremist rhetoric coming from both camps may cause one to panic and that is precisely the wrong thing to do. As business people we should leave the hyperbole, extremism and childish antics to the politicians. They, after all, seem to excel at all three and I don’t see how anyone in industry could hope to compete and “out strop” the children that seem to be running the country. As the adults in the room we need to ignore the temper tantrums of our elected representative and stay calm and carry on. Hopefully, with this attitude, British business can help rescue the country from the mess our politicians have created.
Written by: Ivan Zytynski
