If you follow cycle biz news as I do you may think that the BREXIT propaganda is still in full swing.Be it currency devaluation or full blown zombie apocalypse with the economy crashing and most of us losing jobs, it seems the future of cycle sales is not great.
In this article I will spell out the key risks of choosing the EU exit door and more importantly – how small bike retailers can prepare for them and actually turn the bad situation into a strength.
Short term implications (now to 1 year)
FX impact
The biggest and most immediate impact in the short term is caused by the significant (12%) devaluation of the pound compared to the dollar. Forget the headlines – 30 year lows, doom and gloom etc. What matters is the percentage here. As most of UK sold bikes and accessories are imports from the Far East and purchased in USD this means that your inventory cost will jump by 12% very soon. While some of the big importers may have FX hedging in place to alleviate the immediate pain it is not likely they will pass it on to small retailers.
Now how many of you can afford 12% reduction in your margin for goods sold? Judging from our clients not many.
So what can you do?
The obvious answer is hike prices to compensate for that. If all your competitors did it at the same time as you, perhaps your market share will not suffer. Hack, with fixed costs remaining stable the increased turnover may even result in profit increase.
As usual the devil is in the detail and timing will be critical in order to avoid losing share to your competitors. Keep a tight grip on your purchase costs – analyse it at least monthly and monitor competitors prices.
Another way to turn the situation to your advantage is to actually brief your sales people that bike prices are expected to increase significantly in the next few months to a year due to BREXIT. Their sales job becomes much more easier when they are armed with the knowledge that they are helping their customers save money by choosing to buy now rather than later.
Finally we still have some bikes manufactured here in UK which will make them resilient to FX impact. Perhaps it is time you start stocking Bromptons and Raleighs?
Mid-term implications (1 to 3 years)
Recession
Remember 2008? Bike sales dipped 12% in a single year and still have not recovered to pre crisis level. Even if you are not much of a believer of economic forecasts (most of us are not judging by the outcome of BREXIT) it seems very likely we will be entering a recession mid-term and might take a while to get growing again. If you are looking for clues check how big business is already preparing – the car industry has revised down sales forecasts by 17% for 2016. A few large bike retailers are already tightening belts by restructuring and repaying some of their debt.
The saving grace here is that the bicycle retail industry tends to be more resilient to recessions than most. That said if you are selling high end carbon framed missiles you may see the floor under your feet disappearing. Look carefully at your sales and market segment and consider its resilience. Retailers focusing on commuter and especially electric bikes may see actual rise in sales. More to that later.
The immigrants have gone home
Imagine that Theresa May somehow magically made all immigrants (EU or not) disappear overnight. How many bike shops in our major towns will be open for business next day? Employees leaving back for their home countries of their own volition or otherwise can present serious problem for bike shops. Expect your personnel costs and turnover to rise which can hurt both bottom line and customer experience.
Hard to find a silver bullet for this one so I will stick with my usual recommendation – your skill in hiring good people determines the outcome for your business to a large extend. If you find that you already have a high staff turnover and people call sick a bit too often you may not be doing something right. Seek to improve your hiring skills and HR policy sooner rather than later.
Long term (4years +)
Cheap Chinese bikes
As the saying goes in the long term we are all dead. But we are likely to see Boris Johnson riding a cheap Chinese bike before that.
Currently all Chinese imports are hefted with 48.5% import duty. This is valid till June 2018 but will likely be renewed again by the European Commission in order to protect the EU bicycle manufacturing industry from the Chinese economic miracle. But with UK bike production being so small (circa 70,000 units a year) and the main producer Brompton not competing directly with Chinese imports it is very much on the cards that Britain outside the EU will drop or reduce the import charges.
I have mixed feeling about this. On one hand lower purchase costs may increase profit margins. But this will likely benefit large retailers focusing on the lower end of the market. As an independent retailer with limited space and cash to be tied up in stock you should be staying away from that end of the market. So overall this may increase the price differential between the low end and the mid end of the market and drive the most price sensitive customers towards the big chains.
How to prepare?
The above analysis is quite gloomy and the only solution may seem to vote Labour and hope there will be a nice council flat waiting for you when the times comes.
Keep in mind that our role as accountants and business advisors is to have you prepared for the worse so you can take full advantage of the best of times.
I have prepared a hack sheet of concrete steps you should take now to position your business to be profitable in the coming turbulence. If you want a copy emailed to you please drop me an email at n.atanasov@shubraka.co.uk – it is free.
