Voice of the Industry

The impact of Brexit on cross-border ecommerce between the UK and EU

Thursday 13 May 2021 12:53 CET | Editor: Raluca Constantinescu | Voice of the industry

Frida Polyak, Research Analyst at Euromonitor International, elaborates on the challenges and opportunities that the post-Brexit context holds for retailers in the UK and the EU

The United Kingdom has one of the most developed ecommerce markets in Europe, reaching GBP 92 billion in 2020, according to Euromonitor International. The UK’s important role in cross-border sales with other EU members raises many questions with regard to Brexit and how the online sales of goods across countries and within the UK will be impacted. 

With the new Free Trade Agreement in effect since 1 January 2021, business operations in the UK have been distracted, and multiple UK-based retailers suspended their sales to EU countries and Northern Ireland. Although the impacts of the new trade deal on cross-country sales are not fully visible yet, this article discusses the challenges and opportunities that the post-Brexit context holds for retailers in the UK and the EU. 

Brexit and the Free Trade Agreement cause confusion and disruption in UK business operation 

The United Kingdom and the European Union secured a deal, Free Trade Agreement, just a week before the end of the transition period. As of 2021, the UK and EU member states exercise tariff- and quota-free trade yet imported goods face VAT charges after Brexit. 

As the British high street has been facing challenges in recent years, low consumer confidence due to the economic uncertainties around the outcome of Brexit and high costs of labour and rent have all contributed to the current struggle of the retail sector. During the various lockdowns, many retailers remained closed for months, and customers increasingly chose the online channel to purchase. 

The Free Trade Agreement taking effect at the beginning of 2021 not only imposed extra costs or caused delays in shipping times but disrupted the operation of UK businesses. As part of the agreement, Northern Ireland must follow EU regulations in order to avoid a physical border between Northern Ireland and the Republic of Ireland. To comply with the new regulation, the British retailer giant John Lewis and others, including online retailers like Zalando, temporarily suspended sales to Northern Ireland. Aligning with the new regulations has caused complications for businesses, which are likely to have fewer resources to adapt to the new rules, resulting in limited exports to the European Union. 

The domestic online market holds opportunities for small UK retailers 

Despite the above challenges, the new Brexit agreement is likely to encourage UK customers to purchase online more from domestic retailers and less from those located in EU markets. The trend is a continuation of what the COVID-19 pandemic has already established, however, the key drivers will be different. 

According to Euromonitor International’s Lifestyles Survey, being able to purchase products from abroad that are not available locally has been steadily losing importance amongst UK consumers in the past five years. However, the proportion of foreign ecommerce out of total ecommerce sales value in the UK declined for the very first time in 2020. The increasing demand for buying new product categories online, including groceries, is expected to drive domestic ecommerce in the long term. The pandemic also tapped into a new consumer segment mainly consisting of senior consumers, who for the first time started purchasing goods online. 

After Brexit, the expected longer shipping times and extra VAT costs will additionally discourage customers from cross-border online shopping. Moreover, ‘interchange’ fees on cross-border payments between the UK and EU are expected to hinder transactions. As the UK has full independence and is not required to follow EU laws, the cap on charges when paying online cross-border between the UK and EU countries will also be lifted, resulting in potential extra charges for UK customers when purchasing from EU sellers. Leading card operators Mastercard and Visa will quintuple their charges on cross-border payments from October 2021, which will not only apply to businesses but if they decide to delegate the fee, it could also impact the price paid by customers. A potential increase in EU product prices could become an additional daunting factor for cross-border online purchases. However, the demand for online shopping will continue to increase among the tech-savvy UK residents, therefore, small retailers and brands are expected to rise and strengthen their online presence on the local market. 

Leading retailers are establishing a new European distribution centre for ecommerce 

Due to popular British brands and a good variety of products offered, the United Kingdom has been a popular online market to purchase from for customers in the member states of the European Union. Therefore, Brexit and the new Free Trade Agreement impact the cross-border relationship from the other perspective too: purchasing online from UK retailers. The role of the UK as one of the most important source markets is likely to be overtaken. Although it will take time to determine which country would become a new centre, potential markets include Germany, which is the second-largest ecommerce market in value terms in Europe. It also has the advantage of the German language being widely spoken in multiple countries in the EU. The Netherlands also has great potential to become the centre of European ecommerce. The online retail giant Amazon recently announced an opening of a new distribution centre in Amsterdam, which could attract further players and brands with its multilingual culture and workforce. Establishing a new centre and entry point to the European Union is an opportunity for many big retailers to simplify the cross-border selling process and to serve EU countries without restrictions after Brexit. As a result, we expect to see retailer giants either moving their operations to mainland Europe or establishing additional distribution centres there. 

UK retailers to contribute to the development of domestic and EU ecommerce after Brexit 

Cross-border sales between the UK and EU have been disrupted by the Free Trade Agreement and will have long-term impacts on the operation retailers and the development of the ecommerce market. On one hand, focusing on domestic online sales is an opportunity for smaller and medium businesses to overcome the difficulties caused by Brexit. As domestic ecommerce in the UK is projected to grow by CAGR 6.9% between 2020 and 2025, the market still holds potential for smaller local brands. By investing in online experiences and personalisation, such players will be able to rise and compete more closely in the local market with bigger brands. On the other hand, leading UK retailers reworking their supply chain strategies and establishing new distribution centres in mainland Europe to continue to serve EU residents hold potential for the European ecommerce infrastructure. By attracting new players and brands, European ecommerce sees an opportunity and incentive to speed up its development, possibly reducing its gap with the UK market in terms of its digital infrastructure. 

Definitions note: Euromonitor International’s methodology only includes the sales of products between businesses and consumers (B2C) under ecommerce and cross-border ecommerce, excluding trades between businesses (B2B) or consumers (C2C), as well as all services. To be considered cross-border, the products need to be shipped from outside the country where the online order is delivered. 

About Frida Polyak 

Frida is a Research Analyst at Euromonitor International with a focus on Services and Payments industries. Based in London, Frida conducts research for the UK market across a range of industries, including consumer finance, and advises clients on market dynamics. Frida holds a Bachelor’s degree in Commerce and Marketing from Corvinus University of Budapest, and a Master’s degree in Sociology from the London School of Economics.

About Euromonitor 

Euromonitor International is the world’s leading provider for global business intelligence, market analysis and consumer insights. Our research solutions support decisions on how, where and when to grow your business. With offices around the world, analysts in over 100 countries, the latest data science techniques and market research on every key trend and driver, we help you make sense of global markets.

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Keywords: Brexit, cross-border ecommerce, retail, regulation, COVID-19, ecommerce
Categories: Payments & Commerce
Countries: Europe
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