Now that the final reverberations of ‘Marmitegate’ have come to a close it might be a good time to look beyond that one isolated encounter and take stock of the broader implications of Brexit.
Despite the fact that 90% of marketers’ attention remains locked on what we ancient practitioners used to call ‘the promotional P’ and what younger executives call content, search, affiliate, programmatic and about 800 other words, the pricing P has always been a more important and influential marketing variable. If you want proof of the significance of pricing just watch what happens over the next 12 months as currency fluctuations wreak havoc across British brand management.
Thanks to Brexit, UK marketers now face a prolonged and extraordinary period of marketing tension as the pound continues to fall against foreign currencies. The ramifications of a significantly weaker currency have far greater implications than a brief hiatus in Marmite supplies. In fact, you can make a coherent argument that a Brexit-battered pound will be the biggest marketing challenge for 2017 and beyond. That’s not because marketers are immediately affected by exchange rates but because the domino effects of a plunging pound will occupy marketers far more than they might initially anticipate.
For starters we are likely to see a significant rise in prices in the UK as the costs of manufacturing and supplier parts rise significantly in real terms. Hornby has been selling toy trains like The Flying Scotsman for decades but its current price of £160 is about to change. All Hornby trains, like most of the toys sold each year in the UK, are made in China. The week before Brexit Hornby were paying around £30 for each Flying Scotsmen sourced from China. A week later that price had risen by £6 a train and Hornby must now raise its prices globally to cover its suddenly increased costs of manufacturing.
The other, more immediate outcome of increasing supply costs is falling profits. Most companies operate with what economists called ‘sticky prices’. Rather than pass on supply increases to loyal customers many managers will initially absorb the costs within their own operating model (a move that grizzled marketers refer to as ‘taking it in the pants’). That prevents any immediate pricing tension but has the equally disruptive effect of drastically reducing gross margins. Discount carrier Ryanair has very little room to reduce prices further and has subsequently been absorbing much of the losses created by the fall in sterling. Annual profits at the airline will halve this year, all because of Brexit.
One way to get around that kind of profit squeeze is to revisit targeting and to place a stronger emphasis on overseas markets where a weaker pound makes British goods more affordable and foreign customers more accessible. At Centaur Media, the publishers of Marketing Week, we have just finished our Mini MBA in Marketing for 2016 with a largely domestic class. Thanks to a declining pound, however, we will set our targeting sights more on overseas students in 2017 as the price tag proves significantly better value for foreign marketers.
That new-found affordability means Brexit is not always bad news for British marketers. In the summer months after Brexit London was deluged with an unusually large number of foreign shoppers, even by the capital’s standards, and these visitors spent significantly more than normal. Spending by Japanese and Indonesian tourists this summer, for example, was almost double 2015 levels. Increases were particularly pronounced for luxury goods, with the UK becoming the cheapest market for luxury brands in the world according to analysts. Nick Hayek, the CEO of Swatch Group, was one of the few executives to celebrate “fantastic results” at UK boutiques after Brexit. Sales at his high-end brands like Omega and Breguet were up between 40% and 132% in the months following Brexit.
Hayek’s celebrations will be short lived. Many of these sales were almost certainly to consumers who made the most of the weak pound and bought Omegas and Breguets at relatively low prices in order to resell them back in Europe and Asia at a significant profit. This so-called ‘grey market’ or ‘parallel trade’ is a hallmark of currency fluctuations and enables sharp operators to make up to a 25% profit on watches that often retail in excess of £30,000. These deals, however, cannibalise boutiques in China and Europe and cause havoc for supply chains and ultimately mean only one thing: by Christmas the prices of fine Swiss watches will have jumped 20% or more in the UK thanks to Brexit.
It’s easy for marketers to think the shock of last June and Brexit is now a political matter. In reality, the ‘hard Brexit’ that we keep reading about will be hardest for marketers. Expect dwindling profits, rising prices, increasing inflation, greater emphasis on foreign customers and the growing realisation that business in Britain will never be the same again.