The clock ticks away, leaving little time for decisions. With the United Kingdom on the brink of taking off from the European Union, online sellers both large and small have become the witnesses of a new age. The looming threat of Brexit has dragged online retailers into confusion, so much so that in some cases, they could even decide to reconsider even having their business in the UK at all. Gaining insight from those who are directly affected by this event could shed light on an uncertain future in the wake of Brexit’s multifaceted impact on the CEE region.
What does Brexit mean for e-commerce in CEE?
This is a million-dollar question, not only for Central and Eastern Europe, but for all e-commerce businesses operating within the UK. Major economists have tried to figure out possible scenario outcomes, sharing lists of options and numbers that are now available on the internet, to provide guidelines and concrete alternatives so that we can begin evaluating where to start working.
Research demonstrates that over the last decades, CEE countries operating in the UK have increased their numbers exponentially in terms of trade openness.
What is the trade openness index?
This index can be obtained by adding imports and exports in goods and services and dividing this total by GDP (or monetary value coming from all the finished goods and services produced in-house)
The total trade openness index for the CEE countries reached 136.4% and increased by 45% since the year 2000.
Looking at trade openness index for single countries in the CEE market:
- The Slovak Republic reached 180%
- Estonia 167%
- Lithuania 163%
- Romania 82%
- Poland 78%
Some of these countries have developed their largest export market in the UK to support their internal economy. Poland’s trade surplus with the UK produces a value of 8 billion Euros a year. A few other examples include Hungary and the Czech Republic – both countries have developed a decent demand for vehicles in Britain, respectively 0.2% and 0.3% of their GDP.
Jakub Seidler, ING’s chief economist in the Czech Republic, reveals one of the potential outcomes for the Czech economy:
“The exposure of the Czech economy to the United Kingdom is significant in our most important segment, which is manufacturing. Motor vehicle or car exports to the UK represent about 7 percent of total Czech car exports, and the UK was the second-biggest export destination after Germany… If British demand disappears after Brexit, it would mean that 2 percent of total Czech employment would be at risk in some way, and mostly from the industry and car sector.”
How have e-retailers in CEE prepared to face potential Brexit scenarios?
Online retailers located in CEE with business in the UK seem to have differing opinions on the severity of the global event and have built their thoughts on contrasting theories. While some of them have been struggling to define a completely new potential marketing strategy, some others may have decided to pursue a far less risky path by quitting their current business in the UK to focus on non- or low-risk trades in Europe.
ROIVENUE™ has successfully provided marketing solutions to numerous companies over the last few years, becoming one of the top 15 major vendors offering multi-touch marketing attribution software and services worldwide in 2018. Their CMO Emil Jimenez, agreed on sharing ROIVENUE’s experiences with standing by clients whose actual marketing strategies are going to be directly affected by Brexit.
What does Brexit mean for online sellers?
Brexit has major implications for online sellers, because they will lose around 700 million potential customers overnight. Shipping goods from the UK to the EU under the current rules is very simple, yet once Brexit goes into effect, UK e-retailers will have to contend with longer shipping times and added tariffs. This, of course, gets passed along to the end consumer, so they will most likely end up choosing a local EU e-retailer instead. UK companies are starting to get around this by opening subsidiaries in the EU and managing the e-shops as separate entities.
Case study 1: ROIVENUE
What are the major concerns that ROIVENUE’s CEE clients are currently facing in terms of Brexit?
Companies like Notino and Pandora spend hundreds of thousands in advertising and selling goods to the UK market, and it will get even more expensive once Brexit takes place. What we are seeing is a shift in attention to closer economies like Germany, Scandinavia, and CEE countries such as Poland and Hungary. Many of our clients are already operating in these markets, and what we suspect is that they will re-assign budgets according to the markets where they will be able to get the highest ROI. UK e-retailers might not be so lucky because many of them have been heavily focusing on only the UK market. The instability in the UK market and the uncertainty surrounding Brexit have caused trepidation throughout all industries, and we are feeling it also in e-commerce.
Considering ROIVENUE’s professional experience with its international customers that perform cross-border e-commerce, what could be the impact of Brexit on companies’ ROI?
Cross border e-commerce will be heavily affected in many aspects. First with the added costs on the transportation of goods and the added time for delivery, but also the potential need for warehousing within the EU, setting up a subsidiary in the EU, and managing multiple IT and marketing infrastructures. Keep in mind that approximately 50% of products purchased online are returned. All of this will have major implications for the ROI of an e-commerce company. Unless they have marketing and business data analyzing tools, much like ROIVENUE™, the CMO and CEO won’t even know the true COGS or ROI until the CFO starts to wonder where all the money went.
Although Brexit’s impact still seems to be unpredictable, new strategies need to be put in place by online sellers to consider many possible future scenarios. From your long experience with online sellers, what potential strategies have been developed? And how are companies in CEE preparing their businesses for the upcoming changes?
We believe the short-term solution will be to run the UK market as a separate business unit. This will have its own inventory, local customer support, marketing, and governance. Usually marketing creative is something which can be used across markets; however, this will not be the case, because the UK will have a different inventory. Although this solution will be costly in the short term, we feel that in the long term it will be beneficial and force e-commerce companies to mature their marketing and business operations.
A thin line seems to be drawn along the edge between developing a new strategy to confront the unknown and opting for an undeniably more defensive approach.
Case study 2: Kytary.cz
Filip Černý, CMO of Kytary.cz , reveals a strategy that doesn’t leave any room for interpretation. Kytary.cz is an online retailer located in CEE, with direct business running to the UK. Since the announcement of Brexit, the company has assessed the potential impact of this event on their current business, causing them to end up reconsidering their real need of the British market.
What does Brexit mean for your cross-border e-commerce and its actual performance?
Fortunately, we don’t depend on British revenue and don’t care about Brexit too much. On the other hand, our business would be better without these changes.
From your internal perspective of the e-commerce market, how hard is it to be in the loop of what is really happening due to Brexit?
Yes, it’s really hard to be ready for rules that haven’t yet been fully defined. There are too many changes happening all the time, and we are really confused by the situation. We would do better to focus on other non-risk trades in Europe now.
Since Brexit was officially announced, e-commerce sellers have had to live with the reality that there’s more guesswork going on right now, rather than a business prediction with more certainty. How did Kytary.cz start preparing in light of multiple potential post-Brexit scenarios?
We are ready to lose our e-commerce platform in the UK right now. We haven’t been spending time with the prediction of many scenarios or building a new warehouse in Switzerland. Our business plan for Q2/2019 doesn’t contain revenue from UK trade. Therefore, we can only be surprised in a positive way. Sadly, the British are in such a confusing situation. I wish they will find the best possible solution. Fingers crossed.
Preparing for this kind of global event requires deep investigations and development on new strategic tactical models. Online retailers have found themselves in the middle of a fast-changing environment where the only way to put a real, new strategy in place was to rely more on guesswork than anything else. The numbers are in the spotlight and economic losses are an inevitable consequence for the market.
On the other hand, experience always provides a different perspective to hopefully diminish the damage.
Not sure what to do next?
ROIVENUE™’s experience suggests running things in the UK market as a separate business unit. Although this seems to be a costly short-term solution, the company sees potential benefits coming from this strategy in the long-term.
Another option on online retailers’ plates is to reassign budgets according to the markets where they will be able to get the highest ROI.
However, reassessing your business may also bring a different perspective to your attention:
Do you really need the British market after all?
This is the question that led Kytary.cz to move on to a completely new chapter.
Does it all need to be negative for CEE?
To be fair, not all the consequences have a negative impact on the market. In fact, it seems that a growing number of UK companies have decided to open new offices in Europe. Actual predictions reveal that potential financial firms are looking at CEE as a concrete option to start new offices. Other businesses instead may focus on other locations such as Frankfurt, Paris, and Amsterdam. In addition, a few UK companies now have hubs in Lithuania, and Poland is becoming more competitive because of its low operating costs.