Why outsourcing fulfilment could be your ticket to success in the EU
Trade between the U.K. and the EU has plummeted since January 1, 2021 – but that’s just half the story. Many of the sales that have been made have incurred a loss. The cost of trading for franchised businesses has risen an estimated 30 per cent – and in many cases the VAT, customs and delivery costs have been presented directly to the end customer. Repeat business has fallen off a cliff and some companies have even been forced to destroy stock in Europe rather than incur the cost of repatriating it into the U.K. supply chain.
As a result, many U.K. businesses have simply pulled out of Europe; but clearly the EU remains a key market and demand is still strong. So what are the options for reinvigorating trade? How can these firms achieve a cost-effective business model that not only supports growth throughout Europe but provides the foundation for further international expansion?
“If U.K. franchised businesses are to meet the sustained demand from EU customers at a price point that remains both competitive and profitable, the best option is to set up a secondary presence in Europe”
Cost of trade
Trade between the U.K. and the EU fell by almost a quarter in the first three months of the year as Brexit and the COVID-19 crisis disrupted businesses. One of the biggest issues for U.K. businesses, including franchises, has been the unexpected costs hitting the end customer – costs that have had a dramatic impact on repeat sales.
No business wants to slap the customer with an unexpected fee on the doorstep; but from duty to customs clearance fees and VAT, as well as the carrier’s €10-plus admin costs, it all adds up.
For small value goods, 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 to repurchase. 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 U.K. supply chain – or opting to destroy them if the cost is too high – and it is little wonder that many U.K. businesses have simply pulled out of Europe.
If the customer isn’t willing to pay these charges, then it falls on either the franchisor or the franchisee to pick them up. No doubt there will be many contentious decisions on this front, with the size and power of the franchisor and their franchise, having a significant influence on how easily the franchisor can force these costs onto their franchisees, but again, this could make franchises untenable (or at least a lot less appealing) to operate.
Yet EU demand for U.K. goods 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?
Companies’ inability to present customers with an accurate price upfront 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 have been reduced in July when the Import One Stop Shop (IOSS) was introduced, the reality is it’s still far from straightforward. And while franchisors will, for the most part, have done their research and provided guidance to franchisees, there is still a lack of clarity surrounding harmonized commodity codes and tariffs which are unfortunately not implemented consistently from country to country, or even from courier to courier. 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.
Setting up in Europe
If U.K. franchised businesses are to meet the sustained demand from EU customers at a price point that remains both competitive and profitable, the best option is to set up a secondary presence in Europe.
By shipping products either direct from source – typically the Far East – into a European distribution centre or exporting in bulk from the U.K., franchisors and franchisees 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, franchised businesses can gain the added benefit of faster delivery: goods can be delivered up to three days sooner if shipped from a EU base than the U.K., giving the business a further advantage.
Companies, therefore, are looking to maximise the market by setting up 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 eCommerce opportunities across Europe.
Differing employment laws and local regulations also add complexity. If a U.K. business 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.
Flexible fulfilment to maximize opportunity
Outsourced fulfilment 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 franchised businesses immediate access to the EU market.
Furthermore, the fulfilment company can provide the expertise to support businesses 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, franchised firms can make changes in real-time to enhance the customer experience – from reprioritizing picking activity, to changing the shipping plans.
There are many advantages of fulfilling EU eCommerce business from a European location, so it begs the question why similar U.K. businesses haven’t adopted this model before Brexit. Stock management has been the biggest concern, with franchisors and franchisees worried about how to ensure effective utilization with goods split across different distribution centres.
Good fulfilment business intelligence can give companies the information needed to better manage all this complexity. From rate of sales by SKU (stock-keeping units), to margin erosion and returns data – including reasons for return – these businesses can use rapid insight into the entire fulfilment process to intelligently manage inventory throughout the supply chain and maximise sales opportunities in both the U.K. and Europe.
Post-Brexit trade with the EU will never be as simple as it was before; but by relocating to a European Distribution Centre, U.K. franchised businesses can gain low-cost access to this key market.
Companies have mothballed EU business for long enough. But competition is tough and demand is high – which is why even companies with the fulfilment skills and set up in the U.K. 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.
James Hyde is the founder of James and James Fulfilment