Something will have to give

The co-owner of Scope Bathrooms in Glasgow, Derek Miller, looks at the present and potential impact of Brexit

With the first quarter of 2017 now behind us, it is perhaps a good time to reflect on where business is going and whether trading patterns are set for the remainder of the year.

Politically and economically, the world appears chaotic. The past 12 months have delivered a Brexit vote as well as ‘The Donald’ and the country’s liberals are throwing themselves onto funeral pyres, unable to cope with a world that has rejected their preferred international consensus.

Ordinarily, such instability would bring turbulence to the economic stage and be bad news for business. Are we witnessing a crisis of confidence? Are our revenues taking a tumble, due to nervous consumers hiding their money under the floorboards?

In short, the answer is ‘no’. From my perspective, business remains about as buoyant as last year. Sales figures are robust and, more importantly, are consistent and avoiding the peak-and-trough pattern that has characterised previous economic cycles.

It’s worth pointing out at this point that Scope Bathrooms, the business that I have co-owned for many years, specialises in the contract bathroom market. Although we have a retail arm, our primary focus is supplying large quantities of bathrooms to the quality residential and hotel sectors.

This, undoubtedly, provides a different perspective from the majority of kbbreview subscribers, who work solely in the retail sector. The main difference is that the contract bathroom sector is far more susceptible to economic turbulence. If the economy slows, and house builders stop building houses, as happened in 2008, our turnover can fall off the end of a cliff. On the other side of the fence, when the going is good, our businesses can take massive leaps forward.

The same is true of manufacturers. Those brands that are specified by architects will grow or fall disproportionately more than brands that have a 100% retail focus.

From 2008 to 2012, the contract sector was utterly woeful in terms of performance and profitability. However, since then, it has marched forward aggressively pushing its players to the limits of their capability. House building remains strong across the country, in spite of Brexit, although I’m told that the London and South-East residential sector has slowed down at the top-end of the market.

The initial risk of Brexit, namely a potential run on the banks, didn’t materialise, thanks to swift and diligent action by the Government and Bank of England. However, we’re now entering a new phase that is surely more unpredictable. Not only are Scotland and Northern Ireland (both Remain-voting countries) facing constitutional crises in the next year or so, but we haven’t as yet actually left the EU.

Article 50 will usher in two years of difficult negotiations between the UK and Europe. The Brexiteer notion of ‘they need our business as much as we need theirs’ may seem obvious to mere mortals such as I, but will not ring true for European politicians severely angered by the UK’s decision to leave.

If truth be told, no one has a clue about what happens next – and that’s when things get interesting.

January’s price increases – due, entirely, to the falling value of the pound post-referendum – are hitting the contract sector hard. It has been all but impossible for operators to pass on the increases in full to clients, so margins, that had yet to recover from the recession, have been put under further pressure. The only way to deal with reduced margin is by making cost cutbacks or by acting to increase revenue. In the current climate, increasing volume has been relatively straightforward. However, as we enter the second half of 2017, can we be confident that this will continue?

Unless things improve significantly for the pound sterling, there is the undoubted potential that Q4 of 2017 will herald a second raft of manufacturer price increases. My understanding is that the collapsing pound hit UK operating arms of our most famous brands to the tune of around 15 to 20%. One doesn’t have to be a Philadelphia lawyer to work out that their 7.5 to 10% January increases did not fully cover the losses. If the signing of Article 50 hits the pound further, then I’m sure that we’ll see further increases at the five to 10% level around autumn time.

Retailers will deal with this by simply adjusting their showroom price points, but the contract sector is less flexible. At that point, something will have to give, as no one will take the increases lying down. In all likelihood, we will enter an era of the dreaded ‘value engineering’, which will have a profound impact on our major brands and operators.

So, although we can be grateful that things have been pretty buoyant for some time, it would be unwise, in this volatile world, to assume that this will always be a given.

On the plus side, we’ve all been through it before, so the second, or third, time around should be
a breeze…

If only I believed that!

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