Brexit: Time to unwind

In our last blog, I wrote about business leaders waiting for certainty on the Brexit process – well certainty is still elusive.

On 10 April the EU27 agreed to grant a further extension to the Article 50 deadline - to 31 October. But, the UK can withdraw earlier once the Withdrawal Agreement is ratified by both the UK and EU.

The extension is contingent on the UK taking part in the European Parliamentary elections starting 23 May; otherwise the extension ends on 31 May. The Prime Minister is hoping to avoid the UK having to take part in the elections, so talks continue between the Government and the opposition, in the hope of gaining cross-party support for the Withdrawal Agreement.

What does this mean for business?

A no-deal exit on 12 April was averted and many businesses are relieved. But there is still no certainty. Instead there are potentially two new dates for business to plan towards - 31 May and 31 October - and a third possible date, in the event cross-party talks are successful and the Withdrawal Agreement is agreed.

Events that were impossible under the previous timeline are now viable, including a change in Conservative Party leadership and/or a general election – although probably not a second referendum, which needs at least 24 weeks. Business therefore needs to continue its close monitoring on Brexit’s twists and turns.

This new window of time does allow businesses to re-consider their Brexit strategies, including refining contingency plans. If your business only had time to implement tactical measures, there may now be time for strategic action - applying for AEO status, reviewing and reinforcing legal and contractual positions, restructuring with the protection of existing European Directives, undertaking a detailed supply chain and logistics mapping exercise.

One of the more pressing issues for businesses to manage right now, however, is stockpiles.

When and how should businesses unwind their stockpile?

Those that stockpiled inventory in preparation for a no deal, are now faced with having to decide what to do with it. ‘Brexit’ stock is taking up space in warehouses, tying up working capital and impacting cash flows.

UK stockpiling across all industries is reported to be at record high levels. This is starkly illustrated by this IHS Markit graph:

UK business short term lending from banks and financial markets also increased by £9.2bn during January (source: Bank of England), so working capital management, including interest costs and stock, is critical for some. For those without a distribution and warehousing model, we often saw extended credit terms offered as producers incentivised retailers to stock up on their product. These terms will be expiring soon, placing extra pressure on cash flow at the retail end of the chain.

I asked Ian Washington, who leads Deloitte’s Supply Chain Advisory team in the UK, what business can do now to unwind excess ‘Brexit’ inventory or warehouse space:

“Business holding perishable or fast moving goods need to decide whether to reduce their stockpiled inventory. It is important that businesses manage any adverse financial impact of rapidly reducing inventory to normal trading levels. They could amend their future orders to manage the run down of stocks, or pool excess inventory across their network. Financial modelling can be used to help determine discount decision points. Maintaining good communications between operations and the sales-force is key as stock positions are managed in real time.”

“Many took on additional warehouse capacity to store their stockpiled inventory. A survey of the UK Warehousing Association’s members found 75% were full to capacity and storage costs increased by 25% in the months of November to January. Businesses with short term leases will need to decide whether they retain this extra capacity in anticipation of potential future requirements to stockpile or whether they should release it. What if they can’t acquire the space again if needed? Whereas businesses with a long term lease face a different challenge. How can they optimise the asset, is there an opportunity to generate additional revenue streams by releasing some of the additional warehouse capacity, especially where it is under-utilised?

“Interestingly, in our latest Deloitte CFO survey, 52% of CFOs surveyed stated that increasing cash flow will be a strong priority over the next 12 months. Stock unwinding is an opportunity to bolster cash flow and working capital.”

In summary

Address your ‘Brexit Stock’ and warehousing capacity and adjust it to more normal trading levels given the extension – expiring credit terms added to rising stock holding costs could put additional pressure on cashflow at a time when most CFOs are looking to prioritise it. Optimal stock positions need to take into account all stakeholders though, including government, regulators or key customers who may require specific stock holding levels. Overall, maintain an agile strategy - having to stockpile again at some point in the future remains a possibility.

All Brexit ‘leads’ must of course stay abreast of political indicators like potential Conservative leadership challenges or a general election, as these may result in a ‘pivoting’ of the UK’s position, which business will need to be prepared for.

Some businesses have already moved into a review phase this week - now is a good time for organisations to apply lessons learnt and insights gained from their Brexit planning process. Capitalise on the detailed understanding of the organisation and internal processes developed through Brexit planning, and use this window to consider new options which may not have been available under the previous time line. To paraphrase Donald Tusk: “don’t waste this time”.