British and European businesses have been stockpiling up as a hedge against Brexit. But with the no-deal deadline pushed back, what effect is this prolonged inventory inflation having on working capital? And what will the new normal look like once Brexit is resolved?
Retailers, wholesalers and manufacturers had all been stockpiling goods as a hedge against potential no-deal Brexit chaos at the end of March. In January, the CBI’s survey of distributive trades showed retail businesses raised the ratio of their stocks to expected sales to be the highest level since February 2008.
Not surprisingly, and according to the Office for National Statistics, the UK economy grew 0.2% month-on-month in February, enhanced possibly by manufacturers providing goods for clients stockpiling.
The March IHS Markit/CIPS UK Manufacturing PMI survey explained the situation in more details. The Stocks of Purchases Index hit 66.2, “far exceeding the prior survey records seen in the previous two months,” said its report, with around 80% of inventory growth motivated by pre-Brexit stockpiling.
The Institute of Government estimates UK companies spend around £50bn a year just on medicine and non-perishable food from the EU. One month’s supply – less than the six weeks, which is what the government itself suggested be stockpiled – runs to more than £4bn in newly tied-up capital.
The delay to Brexit has potentially made this situation worse. Stocks of raw materials and often part finished goods are now sitting on company balance sheets – and in their warehouses – for an extra six months leaving managers with a dilemma. Phil Shaw, chief economist at Investec explained it further:
“The first question any business needs to ask is whether its contingency plans can remain in place through to 31 October. If you’ve been stockpiling through the winter, do you unwind those stocks to ease working capital pressures, then build up again after the summer? Or do you keep stock levels high?”
“There is still a considerable risk of a no-deal Brexit in the autumn – right before the peak sales period in the run-up to Christmas. If it was a good idea to boost inventories ahead of March, the rationale is even more compelling for October.”
For seasonal sectors such as retail, doing this through the leaner summer months when rents and wages still need to be paid is particularly challenging.
Ultimately, a resolution of the extended Brexit impasse is the only way to answer the working capital question adequately. And even with a withdrawal agreement – which would trigger a transition period through to 31 December 2020 – there will still be a point at which supply chains, stocking strategy and working capital demands shift permanently from the status quo ante.
At Griffin James, the thought that crosses our minds is how much will the revenue tied up in these stockpiles affect liquidity and potential insolvency? Will it be the uncertainty of Brexit, rather than Brexit itself push companies into liquidation?
And still with no concrete agreement to leave the EU in place, only time will tell.