While the dust was settling on the startling vote that the British people cast against remaining in the European Union on June 23, several decision-makers in the sporting goods sector responded to our invitation to outline the effects that it may have on their businesses.
In general, they admitted that it is still too early to have a clear picture on its future consequences. They indicated that Brexit will have no immediate, tangible effects in the sector, except for a likely drop in the consumption rate in the U.K. The Economist Intelligence Unit has predicted a contraction of 3 percent in 2017, but the drop apparetly has started already. Overall spending on clothing, footwear and accessories declined by 0.1 percent in the first five months of this year, and store traffic fell marketdly after the vote..
A survey conducted by GfK showed that consumer confidence fell at the fastest pace in 22 years after the vote, although Amazon said earlier this week that it had not seen any decline in its sales in the U.K. after June 23. The big online retailer added that it was still committed to creating 1,000 more jobs at its U.K. operations, boosting its staff in the country to 15,500 people by the end of this year.
In the medium term, the effects of Brexit may well be by and large negative, with some exceptions, and partly dependent on future action on the regulatory and foreign trade fronts. The inflationary effect of a lower value for the pound sterling will probably start to be felt most strongly in the second half of this year. Inflation would then drive consumption further down. A persistently low pound will affect sales and margins for any company that sells substantial amounts of products in the country.
Anyhow, there will be a long period of uncertainty that will slow down investments and economic growth in the U.K., with some consequences also for the rest of Europe. The uncertainty will probably last at least 24 months as the U.K. will have two years to negotiate the terms of its divorce from the EU, once its future new government notifies the European Council. In the interim, a lot of plans and decisions will be postponed, which is not good for business.
As indicated in the previous article in this issue, Sports Direct International is expecting to lose some money on its purchases, which are made for the most part in U.S. dollars, as the British pound hit a 31-year low against the dollar in the aftermath of the vote, falling below the $1.30 level. SDI's purchases are not fully hedged against foreign currency swings. The implication is that the low-cost retailer will have to raise its prices at some point to continue to deliver good profits.
SDI admitted that its online retail sales in the Eurozone will also be affected. If the pound depreciates by 10 percent against the euro, it will have to take a loss of £65 million (€76m-$84m) over the four-year period covered by its forward contracts.
We could not determine who has been hedging and to what extent. Anyhow, SDI's main rival, JD Sports Fashion, indicated to us that it is not raising prices in the U.K. in the short term. “It is too early to speculate on the long-term impacts of Brexit, but we remain committed to our international strategy and will update our shareholders in September,” said the management in response to our inquiries. Both SDI and JD saw their stock market price go down in the immediate aftermath of the Brexit vote, but then they recovered partially.
Online sales of luxury goods have plummeted after the vote, but we think that the British people will continue to buy sporting goods in order to remain fit, although they may want to take fewer ski vacations in the Alps because of the currency situation. “The U.K. is one of our most important markets in Europe, and Adidas has a strong position there,” said Herbert Hainer, chief executive of the Adidas Group. “We expect the demand for sporting goods as well as the trend towards leading a fit and healthy lifestyle to continue,” he added.
Andy Rubin, chairman of Pentland Brands, offered the following statement: “While we are disappointed that the majority of our nation voted to leave the EU, we will wait to see what it really means and will stay positive and focus on what we can control: great people, great brands, great products, great marketing support.”
The chief executive of a French sporting goods company said that Britain's pullout from the EU may have legal and fiscal consequences for its operations in the country, which are not clear yet. Some international companies may be tempted to shift their European hub from the U.K. to a country in the EU like Ireland, although some government officials have indicated that Britain may lower the current corporate tax rate of 20 percent to help keep them in.
There is hope that, on the regulatory front, the U.K. will agree on common guidelines with the rest of Europe on controversial issues like cross-border online retailing, where British companies play an important role, or intellectual property protection and product safety standards.
Motoi Oyama, president of Asics Corp., felt that emotional factors weighed heavily in the referendum. We believe that cultural factors and a proper lack of education and information about the advantages of the European market played a strong role in the vote, along with a general discontent with politicians. Interestingly, there was a big spike in Google searches about “what is the EU” after the polls closed across the U.K. Many Britons used Google to find out how and where to emigrate.
The referendum itself was highly divisive as people who regarded themselves as friends found themselves suddenly at odds because of their differences of opinion on the subject. Expatriates living in the U.K. felt particularly bitter about this.
Some observers have expressed concern about a domino effect on the rest of Europe, with other countries and regions organizing a similar referendum or demanding a renegotiation of their status within the EU.
Bank and housing stocks were hit hardest by the Leave vote because of the impact that the vote will have on investments by businesses and consumers. Foreign banks were also affected because London remains an important international financial hub, and any crisis in the U.K. and its trade with the rest of the world will affect the rest of Europe and businesses all over the world. Some public company stocks may migrate from London to the stock exchanges of Frankfurt and Paris.
Some supporters of the Remain option hope that the U.K. will elect in the end to join Norway and other countries as a member of the European Economic Area, which would still give them access to the single European market, with the ability to do business all over the EU, without participating in the political decisions made in Brussels. In this case, however, the U.K. would have to agree to put no restrictions on the movement of labor from the EU.