Trade between the UK and the EU has plummeted since January 1st 2021 – but that’s just half the story. Many of the sales that have been made have incurred a loss. The cost of doing business has risen an estimated 30% – and in many cases the VAT, customs and delivery costs have been presented directly to the end customer. Repeat business has fallen off a cliff and companies have been forced to destroy stock in Europe rather than incur the cost of repatriating it into the UK supply chain.
As a result, many UK businesses have simply pulled out of Europe; but clearly the EU remains a key market and demand is still strong. So what are the options for reinvigorating trade? How can companies achieve a cost effective business model that not only supports growth throughout Europe but provides the foundation for further international expansion?
As growing numbers of UK businesses explore the option of setting up EU distribution hubs, James Hyde, CEO of James and James Fulfilment leverages his experience providing outsourced fulfilment to growing eCommerce brands across the UK and Europe, and explains the key factors that businesses need to consider in order to trade successfully with Europe.
Cost of Trade
Trade between the UK and the EU fell by almost a quarter in the first three months of the year as Brexit and the Covid-19 crisis disrupted businesses. One of the biggest issues for UK businesses has been the unexpected costs hitting the end customer – costs that have had a dramatic impact on repeat sales.
No business wants to slap the customer with an unexpected fee on the doorstep; but from duty to customs clearance fees and VAT, as well as the carrier’s €10 admin costs, it all adds up. For small value goods, the additional cost to the end customer is untenable. While customers have generally been paying the extra cost, rather than refusing to accept goods, they have not come back. Given the level of investment required to acquire new customers, one-off sales are rarely profitable. Not only have sales to the EU declined but very few sales have delivered any bottom line benefit. Add in the cost of returning unsold goods into the UK supply chain – or opting to destroy them if the cost is too high – and it is little wonder that many UK businesses have simply pulled out of Europe.
Yet EU demand for UK goods has not vanished overnight; and the Brexit deal promised zero tariff. So what’s going wrong and what can companies do to tap into this market?
Companies’ inability to present customers with an accurate price up front is a problem – and that is due to both VAT and harmonised code confusion. Managing EU VAT de minimis has been a challenge – with companies requiring a dedicated VAT number in each EU trading country, as well as the ability to account for different VAT rates and thresholds. While this problem should be reduced in July when the Import One Stop Shop (IOSS) is introduced, the thresholds are being removed, which will mean more goods are subject to VAT.
Lack of clarity surrounding harmonised commodity codes also continues – and if a product’s paperwork does not include the correct description and/or commodity code, customs fees will be imposed, creating an unexpected bill for the end customer.
The good news is that once a company has ensured it has the correct Harmonised Codes, registered for its IOSS VAT number and worked closely with carriers to understand the additional costs, an accurate price can be presented to the customer at the point of sale. However, while this will overcome the negative customer experience associated with additional fees, the total cost of sale is still higher than before Brexit, leaving UK businesses at a disadvantage when compared with EU competition.
Setting up in Europe
If UK companies are to meet the sustained demand from EU customers at a price point that remains both competitive and profitable, the best option is to set up in Europe. By shipping products either direct from source – typically the Far East – into a European distribution centre or exporting in bulk from the UK, businesses can overcome many of the Brexit induced barriers and costs.
In fact, there are a number of advantages. Goods can be shipped around Europe without any of the delays or costs associated with cross-border trade – which means no customs forms or added costs and, critically, no nasty shocks for the customer. Plus, businesses can gain the added benefit of faster delivery: goods can be delivered up to three days sooner if shipped from a EU base than the UK, giving the business a further advantage. And it costs less: some companies expect to cut costs by £100,000 a year on shipping alone.
Companies, therefore, are looking to maximise the market by setting up locations in the key markets of France, Germany and the Netherlands. However, competition for warehouse space is fierce as companies internationally look to access the growing eCommerce opportunities across Europe. If a UK business does not present a big enough opportunity to capture attention, it is likely to be left by the wayside – along with its EU expansion plans.
Flexible Fulfilment to Maximise the Opportunity
Outsourced fulfilment provides not only a foothold within the EU but also a number of commercial advantages. Working with a provider that has the weight to secure distribution centre space, negotiate discounts with the carriers and create relationships with local tax and legal advisers, gives companies immediate access to the EU market.
Furthermore, the company can provide the expertise to support businesses with questions surrounding harmonised codes as well as fast track compliance with the new IOSS. And, with real-time access to the fulfilment process through cloud based software, companies can make changes in real-time to enhance the customer experience – from reprioritising picking activity to changing the shipping plans.
There are many advantages of fulfilling EU eCommerce business from a European location, so it begs the question why UK businesses haven’t adopted this model before Brexit. Stock management has been the biggest concern, with companies worried about how to ensure effective utilisation with goods split across two different distribution centres.
Good fulfilment business intelligence can give companies the information needed to better manage this complexity. From rate of sales by SKU (stock keeping units), to margin erosion and returns data – including reasons for return – companies can use rapid insight into the entire fulfilment process to intelligently manage inventory throughout the supply chain and maximise sales opportunities in both the UK and Europe.
Post Brexit trade with the EU will never be as simple as it was before; but by relocating to a European Distribution Centre, UK eCommerce businesses can gain low cost access to this key market. Companies have mothballed EU business for long enough. But competition is tough and demand is high – which is why even companies with the fulfilment skills and set up in the UK are leveraging outsourced fulfilment providers in Europe to get a foothold in the market and a business model to support growth.