Since the beginning of this year, trade between the UK and the EU has plummeted – but that’s just half the story.

Many of the sales that have been made between the UK and the EU have incurred a loss. It is estimated that the cost of doing business has increased by 30% – and in many cases the VAT, customs and delivery costs have been passed on directly to the end customer. Repeat business has fallen off a cliff and companies have been forced to write off stock in Europe due to the prohibitive 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 – and large – market and demand remains high. So what are the options for reinvigorating trade? How can fashion retailers achieve a cost-effective business model that not only supports growth throughout Europe but provides the foundation for further international expansion?

There are a number of key factors that retailers need to consider in order to trade successfully with Europe.

Unexpected costs

Trade between the UK and the EU fell by almost a quarter in the first three months of the year as Brexit and Covid-19  caused havoc for businesses. One of the biggest issues for UK exporters has been the unexpected costs hitting the end customer – costs that have had a dramatic impact on repeat sales.

No retailer wants to land the customer with an unexpected fee on the doorstep; but from duty to customs clearance fees and VAT, as well as the carrier’s EUR10 (US$12) admin costs, it all adds up. For small value apparel or fashion items, 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 retailers have simply pulled out of Europe.

Yet EU demand for UK fashion 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?

Clarity and transparency

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 with the introduction of the Import One Stop Shop (IOSS), 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 retailer 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. While this will overcome the negative customer experience associated with additional fees, the unfortunate consequence is that total cost of sale remains higher than before Brexit, leaving UK retailers at a disadvantage when compared with EU competition.

New locations

If UK fashion retailers are to meet the sustained demand from EU customers at a competitive and profitable price point, the best option is to establish a local presence. 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, retailers can gain the added benefit of faster delivery: goods can be delivered up to three days sooner if shipped from an EU base than the UK, giving the business a further advantage. And it costs less: some companies expect to cut costs by GBP100,000 a year on shipping alone.

Many fashion and apparel retailers, therefore, are looking to maximise the market by setting up new 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 e-commerce opportunities across the Continent. If a UK retailer 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.

Outsourced fulfilment

Outsourced, flexible fulfilment can offer a long-term, viable solution for fashion retailers – large and small. It 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 retailers immediate access to the EU market.

Furthermore, retailers gain third-party expertise to support them 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, they have the agility to 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 e-commerce business from a European location, so it begs the question why so few UK businesses have adopted this model before Brexit. Stock management has undoubtedly been the biggest concern, with retailers 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, to margin erosion and returns data – including reasons for return – fashion retailers can use rapid insight into the entire fulfilment process to intelligently manage their inventory throughout the supply chain and maximise sales opportunities in both the UK and Europe.

Gaining a foothold

Post-Brexit trade with the EU will never be as simple as it was before; but by relocating to a European distribution centre, UK e-commerce retailers, especially fashion and apparel businesses, can gain low-cost access to this key market. We have mothballed EU business for long enough. But competition is tough and demand is high – which is why even those retailers 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.

It’s time to get back into Europe.

About the author: James Hyde is co-founder and CEO of James and James Fulfilment. James Hyde is an engineering graduate from the University of Cambridge. After a spell as an angel investor’s apprentice, he spotted the chance to modernise e-commerce fulfillment. With friend and fellow Cambridge graduate, James Strachan, he founded James and James Fulfilment in 2010. The company provides outsourced fulfillment services to independent retailers, founded on its own unique technology and processes.

By Just Style