How is cross-border e-commerce and distribution adapting to Brexit?

Online retailers and parcel carriers are starting to see the impacts of Brexit, with the ending of VAT exemption on low-value goods, increased paperwork requirements, and rules of origin issues.

Brexit means competitive challenges for UK e-commerce retailers selling to the EU and vice versa. Tariffs and taxes will mean higher prices for cross-border e-commerce transactions. UK sellers will find it more difficult to compete with EU sellers on the continent and vice versa.

UK imports from the EU are now liable for VAT. The low-value VAT threshold has been removed for goods coming into the UK (as of January 2021). The EU will follow suit in July 2021, as part of the phased approach.

Rules of origin regulations mean that goods that do not originate from the FTA member countries (UK or EU), are not covered by the free-trade deal and thus, additional tariffs will be payable. A British retailer importing goods into the UK and then distributing them to the EU could now face tariffs for re-exporting, depending on where the goods or components were manufactured.

What is the scale of the impact?

• In 2019, UK retail businesses received £2.8 billion worth of website orders from EU-based customers (Source: ONS).
• Around one-fifth of UK retailers sell to buyers in the EU (Source: ONS).
• In 2019, 21% of retail businesses (with more than 10 employees) received online orders from EU-buyers. (Source: ONS). However, the proportions are higher for the largest retailers.
• Around 45% of the total international parcel traffic received by Post Offices in Great Britain goes to EU destinations (Source: Post Office). These parcels will now need customs declaration forms to be completed (except for parcels sent from Northern Ireland).
• Data from IMRG and Global-e reveals UK cross-border e-commerce sales rose by 57% in 2020.
• The UK is Europe’s largest online retail market, followed by Germany and France. Mintel estimate that online retail sales in Germany and France will total c.£172 billion (€201 billion) by 2025, compared with £102 billion (€119 billion) in 2019 (Source: Mintel).
• Online retail in Spain and Italy is expanding rapidly, Mintel estimate online sales in these markets to be £26 billion (€30 billion) in 2020, compared with just £8 billion (€9 billion) just five years ago and they are forecast to grow to around £39 billion (€46 billion) by 2025.

The pandemic has driven an acceleration in the shift to online retail and emphasises the importance of cross-border e-commerce for both UK and EU-based retailers. Online retail demand; from both EU and non-EU shoppers; is growing.

Germany and France are the two largest EU retail markets and are both major trade partners for the UK. Their online retail spend is rising and as these markets expand, there is a growing opportunity for UK retailers. The rapid growth of EU online retail markets such as Spain and Italy offers potential for cross-border online retailers. Whether they are viable for UK-based sellers will depend upon the costs of accessing these markets.

How will Brexit impact online shopping habits?

• According to ONS, 25% of UK online shoppers purchased from EU sellers in 2020 (in the past three months).
• In 2020, it is estimated that half of UK online shoppers made a cross-border (both EU and non-EU) e-commerce purchase, that is 22.8 million people. However, this number is expected to drop in 2021, with 21.1 million shoppers forecast, a decrease of -7.3% (Source: eMarketer).
• The proportion of UK internet shoppers purchasing from foreign retailers is expected to decline this year, from 50% in 2020 to 46% in 2021 (Source: eMarketer).

A 2020 survey by parcel carrier firm Whisl found that high delivery cost was the most common reason why consumers don't buy from abroad, followed by the cost and complexity of returns. Customers in both the UK and EU have complained due to unexpected duty and tax bills. Retailers are also being hit by tariffs on customer returns.

The potential for border delays and uncertainty around taxes and returns procedures may discourage some purchasers, but this is likely to be a short-term effect, as both buyers and sellers become accustomed to the new procedures, and sellers incorporate additional costs into their business models.

Ecommerce retailers may choose to focus on their domestic business. Some UK sellers have stopped selling into the EU (and vice versa), due to the additional VAT costs, complex rules of origin, and the need to adjust their online platforms and payment systems. John Lewis, Fortnum & Mason, and Kate Spade, New York are among retailers to have suspended deliveries to the EU. While some suspensions in service may be temporary, some retailers will decide that the additional costs associated with selling to the EU make it financially unviable. The additional costs will be felt most acutely by smaller retailers or retailers with a low volume of sales to the EU.

What are the implications for logistics and cross-border distribution?

Supply chain networks are adapting to the new, post-Brexit landscape. The loss of access to the single market may mean that UK online retailers or distribution companies may need to look at establishing facilities within the EU. The same is true of EU-based retailers selling to UK customers.

Higher costs associated with moving goods between the UK and EU means increased incentive to hold goods closer to the customer. Retailers and distribution companies may also need to factor in border delays and increase their inventory holdings.

The new VAT and customs regulations mean that UK retailers need to make some choices in terms of clearing goods and paying VAT and any tariffs when selling to EU customers. UK sellers can clear the goods into the EU at the point of sale or they may choose to hold cleared goods within the EU. The first option would mean more paperwork, higher shipping costs, and the potential for longer delivery times. The second option means they will require warehouse space in the EU to use as an EU fulfilment centre. The same is true of EU retailers selling to the UK.

How are online sellers and distribution companies adapting?

Supply chain restructuring: The complex origin of goods regulations mean that some products sold by UK retailers into the EU do not meet the requirements to be treated as “of UK origin” and thus tariffs apply. UK retail brands are making enquiries about reshoring their manufacturing operations; making products in the UK to shorten and simplify their supply chains.

E-commerce fashion retailer ASOS expects that the new country of origin regulations could result in tariff costs of around £15m for the 2021 financial year. Although most of its European sales go via their Euro Hub warehouse in Berlin, some still enter Britain first. However, Brexit preparations, including establishing a European distribution centre and supply chain restructuring have allowed them to reduce the impact in terms of tariffs and avoid any cost implications or disruptions for European customer orders.

Increased demand for cross-border logistics partners: While the largest retailers may be able to establish distribution centres in the EU, smaller retailers may not have the required scale to implement this strategy and will need to rely on 3PLs to handle international B2C distribution. Most online retailers have contractual arrangements with parcel carriers.

According to a study commissioned by the Royal Mail, 62% of UK SME online retailers are aiming to increase international sales revenues. This is likely to mean rising demand for 3PL and courier services.

International distribution and logistics companies have been increasing their footprint in the UK market. In 2020, distribution companies accounted for 44% of take-up in units over 100,000 sq ft; more than any other occupier type. This compares to 35% in 2019 and just 25% in 2018.

German logistics firm DB Schenker, which temporarily suspended deliveries into the UK due to Brexit delays in January, is expanding its presence in the UK to accommodate new customer growth. In January 2021, it took an additional 153,064 sq ft unit at Centurion Park in Tamworth, West Midlands, where it already occupies 140,000 sq ft. Belgian logistics company Weerts Group took 870,000 sq ft at Suffolk Park, Bury St Edmunds in Q4 2020. Weerts plans to use this facility to help their customers minimise administrative and logistical implications of Brexit.

For both, UK retailers selling to EU buyers and vice versa, we expect to see increasing demand for cross-border logistics partners, who can provide fast border clearance and delivery along with a seamless returns process. Higher volumes of cross-border deliveries will mean a need to drive higher throughput and increase efficiencies in their networks. Bringing customs in-house is one way to reduce costs and improve time efficiencies.

Customs warehousing: The use of customs warehouses (or bonded warehouses), enables retailers or 3PLs to store and consolidate orders imported from outside of the EU, without payment of import duty or VAT, before the goods are either issued from stock or re-exported. A bonded warehouse can allow businesses to maintain their cash flow and benefit from a speedier customs clearance service. Marks & Spencer Group Plc, Ted Baker, and Harvey Nichols & Co., are among companies that have recently applied to HM Revenue & Customs for a license to operate a customs warehouse. Superdry have also announced their intention to use bonded warehouses.