Why Brexit costs will challenge commercial and pricing strategies

The UK leaving the single market and EU Customs Union means many businesses are likely facing the largest shift in their cost base in a generation – the cost of doing business is set to increase. Costs will include direct costs related to Brexit (e.g., tariffs), the burden of complying with new regulations and knock-on costs (e.g., across the supply chain). Whilst a deal would reduce some costs, additional ‘red tape’ and costs of regulatory processes are inherent. What steps can be taken to reduce these costs? How will businesses’ commercial and pricing strategies need to respond to subsequent cost pressures? 

Reducing the cost of increased tariffs

Tariff mitigations are actions businesses moving goods cross border can take to reduce the cost of tariffs. Mitigations will vary by sector and manufacturing footprint. Examples could include changes in supply chains, changes in the sourcing of ingredients, chemicals or processes. Taking mitigations generally offers competitive advantage. However, some of these actions can also entail increased costs as supply chains are re-orientated, local production capacities ramped up or the origin of products changed in order to satisfy the new requirements. 

Where to absorb increased costs?

If mitigation measures are not possible or the downside of taking them exceeds their benefits, businesses will need to quantify the increased costs and decide whether they will be absorbed by the business, its suppliers, customers and consumers – or a combination.

Work with the tools available 

For the majority, executing changes of this magnitude (both in terms of scale and time) is simply unprecedented. With so many unknowns, working with ‘perfect’ data will be impossible. Businesses must therefore:

• Utilise what is available to them, including access to several different types of publicly available data (e.g., benchmarking data, import schedules and tariff duty classifications) to build a composite picture of their current environment. 
• Factor that the current data does fully consider their competitors’ mitigation actions nor their future pricing strategy. 
• When engaging with suppliers and customers, consider not only their pricing margins but also any ongoing promotional initiatives as well as their trade terms as a possible avenue to offset the impact of increased tariffs
• Contractual review for critical relationships is a key element of the development of a new pricing strategy. 

Commercial teams cannot afford to work in a silo 

Businesses must equip their commercial teams with the necessary tools to be ready to rapidly execute the actions that a new pricing strategy entails. Relevant teams from their legal, supply chain and procurement teams must be included to ensure that all possible Brexit-related price increases across the enterprise have been considered. 

Crucial to the success of implementing any new pricing strategy are the IT enterprise resource planning (ERP) systems underpinning many pricing operations. The complexity of these systems is not well understood as part of business as usual (e.g., implementing a VAT increase). Businesses could be faced with making simultaneous changes to every single scannable barcode (or stock keeping unit) in the business. The likelihood of error or partial implementation is high. 

The material risk of a poorly executed pricing strategy

Even considering the depreciation in sterling, many businesses are facing decisions around the largest price changes in a generation. The stakes are high. Failure to execute a new pricing strategy that is aligned with long-term goals and takes into account the extensive Brexit-related impacts on their operating model will pose a material risk for businesses, particularly those who are part of longer value chains or whose competitiveness will be impacted in a fundamentally different way.

For many businesses, it is now impossible to be fully prepared. However, there are some key steps every business can carry out in the short term to be better prepared. 

What businesses can do to prepare

• Identify and engage with priority customers, considering possible increases in costs and border delays. Understand the impact of changes in costs across end-to-end value chain.
• Carry out modelling to determine: 
• The impact of the total tariff exposure on the P&L
• The extent to which these increased costs can either be absorbed or passed through to customers in different pricing scenarios
• The extent to which any planned promotions and or trade terms can be changed to offset the increased costs
• Consider any changes that are needed to payment deadlines throughout the supply chain, both for suppliers and customers.
• Review and amend invoicing requirements.
• Consider trade-offs between the value of products, origin requirements, and the increased cost of warehousing and logistics.
• Review transfer pricing and intellectual property rights arrangements, particularly where supply chains and contracts may be moved due to changes in the legal or regulatory environments.
• Consider the potential benefits and authorisation requirements for the use of customs easements such as inward processing relief.

Support EY can offer 

• Providing Brexit Hypercare to address immediate issues in the run up to and after 31 December. 
• Evaluating potential cost mitigation approaches, including providing experienced input on customs simplifications and reliefs.
• Carrying out modelling exercises to advise on the extent to which cost absorption or pass through is likely to be feasible.
• Providing sector-specific input on likely competitor strategies and aid with quantifying competitor exposure.
• Advising commercial teams on the execution of new commercial pricing strategies.
• Carrying out wider value-chain analyses to identify potential exposures and cumulative effects throughout the supply chain.

For further information, please contact this article’s authors or your usual EY contact.