By now you might have caught the first two in our ‘No Deal series’ – a bank of articles that aims to make sense of the unfolding political change that the UK is subject to and its likely impact on the bike market. This, our third in the series, checks in with our largest distributor so far, Madison Sportline.
Interview with Dominic Langan, CEO, Madison
Firstly, I want to make it clear that I never voted to leave, but I am also not the EU’s number one fan. My stance on the EU has always been that it is better to try and find resolution to issues from within. Once we are out we will have no real say within the European Union and I am pretty certain we will irreparably damage the future of this country, the lives of many people, but especially the lower paid who will face even greater hardship than they do already.
I remain hopeful that either there is a revocation of Article 50, or we are able to negotiate a more amicable exit from the EU. I am incredibly concerned about the current politics of the UK and how extreme it has now become. The hateful language and attitudes, the division of the nation, the likely collapse of the Union is going to take a generation to recover from. I think it is fair to say that this is a less than ideal environment for businesses to operate.
Should ‘no deal’ materialise, what will be the consequence for most distributors importing from Europe?
Initially, I think we should all expect disruption at the ports, which could cause delay of product.
If the supply chain for food and medicines is badly disrupted, there could be civil unrest in towns and cities, which could lead to disruption and certainly put consumers off from going out. This will hit retail footfall.
The GB£ will lose further value against the USD and EUR and will result in price rises on all imported product. The market is already challenging and price increases when consumers are already cautious is less than ideal.
In March, HMRC published temporary rates “MFN” (Most Favoured Nation) which will be applied by the UK post Brexit. This will be for all imports no matter where they come from.
In most cases this is 0% so we may all see an upside on our imports from outside EU. However, the UK MFN rates are temporary – HMRC have said they will be reviewed after a few months and it is hard to imagine that they will give up on all that revenue unless they really do want to go for a low cost Singapore type economy.
The bigger challenge is for UK exporters into the EU. Madison and Sportline has a significant and rapidly growing retailer direct business into the Republic of Ireland for all our brands and the rest of the EU for our bike portfolio. Whilst prices would not necessarily be different to now, there would be a burden on the retailer of the import regulations and duty processing which will be detrimental to business. This doesn’t exist for EU member states due to the free movement of goods, but post Brexit, without a trade agreement, the UK becomes a third country and whilst importers can cope with these regulations, regular independent retail stores cannot and they will simply source elsewhere within the EU.
Have you taken any steps to hedge against such an outcome both for yours and your customer’s benefit?
As a business we always look to hedge currency, but it always runs out eventually and it is always a gamble to hedge too much or too little.
We have decent stock levels and where possible we are trying to bring as many deliveries forward as we can, just as we did before the first Brexit deadline at the end of March this year.
It is likely, given that a hard Brexit is now very much on the cards, that we will open a distribution facility and sales office in the Republic of Ireland. This is something I wanted to avoid as in my view this should be an unnecessary additional cost to the business and could see some roles transfer to Ireland. However, the EU market is too important for us to just sacrifice it because of Brexit. It is also important for me to meet the obligations of my many brand distribution contracts, which include us distributing to the Republic of Ireland.
Temporarily we will see a 0% tariff on bike imports – cue mad scramble to buy before a hike, or is it not as simple as that?
It is not quite as simple as that. Obviously, there is the stock that is already here where duty has been paid, unless the distributor has stock in bond, so they would have to take that into consideration. We also don’t know how long zero duty will last for and this also doesn’t apply to e-Bikes. However, knowing the UK market everyone will be out to cut each other’s throats so I suspect the margin will soon be given away due to the lowest common denominator.
Potentially it could open up different countries for the manufacture of bikes. China being the obvious option. Currently China is subject to EU anti-dumping duties which makes it prohibitive to import bikes from China. Thanks to the US trade war with China there is certainly plenty of bike manufacturing capacity now available out east, but it will all depend on other UK trade agreements and how quickly they come about. Again, as a bike exporter into the EU, the Chinese anti-dumping duties would still apply to bikes sold into the EU, so not so straightforward from a production point of view.
With the pound and USD’s value currently looking volatile what does this mean for forecasting and potentially stock levels down the line?
Forecasts for next year will be bearish. Who is confident enough to predict growth with the current state of affairs in the UK? I think you would be mad to be anything other than cautious right now. Things can and do change and we will obviously react as we think appropriate to the prevailing circumstances. Over the last couple of years we have done a lot to tighten up the business by reviewing our brand portfolio, investing in core infrastructure and initiatives to underwrite our future growth.
I suspect the market will be subdued for a while, post a hard Brexit and after the initial stock piling we will see imports reduce. It is quite conceivable to expect some smaller brands and smaller importers/brands to really struggle and they may end up failing.
Zero duties may help offset some the currency losses, but we don’t know for how long the MFN rates will last for, or how low the GB£ could drop. How much inflation can the cycle market take? Post the financial crisis in 2008 we saw significant inflation for cycle products due to the weak GB£. However, thanks to a strong market at that time, the impact was minimal.
This time consumer confidence is low, the cycle market is not booming and a hard Brexit has many people concerned about their futures. A weak currency and potentially disrupted imports of goods is going to force up the price of every day goods such as food and fuel which in turn will mean there is less money for other things and this may even trigger an increase in interest rates.
Over the last few years, we have seen a growth in bike manufacturing within the UK, but this is still on a very small scale at the higher end of the market and you cannot easily escape the fact that nearly all bike components are still imported. This is before the challenge of addressing the skills shortage and sufficient labour prepared to work in a bike factory.
Financial implications aside, what else is there to consider when it comes to safety standards and regulations in the bike market?
This is of the least concern to me. As a nation I am sure we are more than capable of setting and maintaining standards. With a decent and growing retailer direct export business into Europe, we will have to ensure our products continue to meet all the standards required in our export markets. This is something most brands are used to and whilst being in the EU made this a lot easier and simpler, it is not insurmountable to manage after Brexit.
The reality is none of us know what will happen post Brexit and of course, yes Brexit could deliver some fantastic opportunities for businesses and our industry. But, for me it’s just such a big, crazy gamble to take. Above all, it requires us to believe the UK politicians, civil servants, advisers and law makers are capable of understanding what businesses need and how to implement it. That will take some convincing for me.