MNCs have a problem in the UK. On the one hand, the UK is a critical market in nearly every firm’s global portfolio, with the market representing 10% of the EMEA market and 3% of the global market. On the other hand, the UK economy will slow to 1.4% YOY in 2018 from 2.3% in 2015 – the slowest UK growth has been since 1992 (excluding the 2008/9 financial crisis). What should firms do? MNCs should understand and familiarize with the new normal of broad-based subdued growth in such an important market and adapt their business as required to these long-term changes.
It’s not just Brexit
It’s important to recognize that Brexit only amplified UK structural and cyclical weaknesses, coming into sight in mid-2015. The UK economy eased into recession between 2008-2009 during the financial crisis, but was a little affected from the 2012-2013 European debt crisis; the economy was fast recovering after 2010, and growth peaked in 2014. However, since then, nominal wage growth and productivity have failed to gain steam, leading to a slowdown. Ultimately, the June 2016 Brexit vote accelerated this cyclical slowdown. The acute depreciation of the pound to the euro and the US dollar drove consumer and producer prices up, weakening business performance across sectors.
The outlook doesn’t look much brighter for 2018 either, even prior to Brexit playing out . Despite some recent improvements in inflation and unemployment, real wage growth will contract further in 2018, driving lower demand for B2C and B2B products. MNCs will experience weaker consumer and business purchasing power compared to 2017, and more purchases out of savings. Additionally, costs will continue to rise compared to 2017 across sectors and segments. Namely, inflation will remain elevated averaging 2.5% YOY in 2018, and imported materials will be costly, sustaining higher production costs. Moreover, a higher oil price amid global political tensions, still rising rent prices, and costlier credit from gradual interest rate hikes all ensure higher MNCs’ and consumers’ costs.
What MNCs should do
How MNCs respond to those higher costs and lower demand pressures will be critical in 2018, determining how they perform against the competition . Price increases aren’t the only way forward, and understanding the market from within and the drivers of costs and demand will increase the predictability of your business performance.
- Firstly, companies should look to make renewed attempts to consolidate costs to improve their value equation, some decreasing packaging, substituting production inputs, and/or exploring mergers & acquisitions. Inevitably, the higher cost environment will lead into defaults of smaller companies primarily. In this environment, regular monitoring of existing distributor relationships or – if necessary – distributor transitions will optimize MNCs’ channel performance.
- Secondly, for those companies unable to cut costs, new product launches and seeking different channels will expand their existing offering, rejuvenating their business model and revenues. Market intelligence, customer insight, and customer segmentation pre-work will certainly prove helpful ahead of new investments to ensure a return.
- Thirdly, on the back of slowing demand, MNCs should consider lowering their production capacity and/or localizing production as much as possible to create a cost buffer. Others, especially in the B2C sphere, should consider providing credit lines to their customers and partners to support their cash flow.
Brexit is the cherry on the top, nevertheless a big one and one which will determine the UK’s long-term economic trajectory. Despite a transitional deal ensuring business as usual until December 2020, MNCs that understand their Brexit exposure and proactively take actions toward minimizing it will safeguard their businesses for the long-term. The best prepared companies we work with already understand the Brexit impact on their business, and have been making adjustments to major business functions to minimize their exposure.
If you are an FSG client, you can see the 2018 UK view for your specific industry (consumer, retail, healthcare, banking, industrials, construction) in our UK Market Spotlight report. For Brexit planning, listen to the podcast on FrontierView, review our Brexit: Scenarios & Impact on MNCs scenario report here, and don’t miss our latest Harvard Business Review post: How Multinationals Should Be Planning for Brexit: A six-step process.
Not a client? you can listen to the Brexit podcast, and purchase the Brexit: Scenarios & Impact on MNCs from our online store. If you wish to purchase a single copy of the UK market spotlight report, please contact us.