SMEs feel the squeeze from Brexit

Good afternoon. After last time’s marathon effort on the UK state aid regime after Brexit, I’ll keep the message from Brexitland a bit shorter — but alas not that much sweeter — this week.

I was struck by a report that the Oxford Economics consultancy did for the British Beauty Council on the UK cosmetics and personal care industry that showed how exports to the EU have declined since Brexit.

Since 2017, according to the beauty council’s analysis, personal care exports to the EU have fallen from £3.6bn in 2017 to £2.7bn in 2022 — a decline of about £850mn over the five-year period — whilst to the rest of the world they’ve held much steadier with only a £73mn fall.

Because Brexit is largely kept out of political headlines by both main parties, it remains the case that ongoing impacts of leaving the EU for business — and particularly small and medium-sized enterprises (SMEs) — are still not understood at an emotional level by the public in the wider Brexit conversation.

You might think that, over time, the effects fade away as business adjusts to the new regime, but they don’t, as the report attests. It will be three years in January since the UK-EU Trade and Cooperation Agreement came into force, and the barriers the deal erected remain unchanged.

As Oxford Economics drily summarised in the report:

“The trade barriers that arise from increased costs and complexity of trading with Europe since Brexit have created obstacles to growth of the personal care industry. As an industry with a high representation of SMEs, the personal care industry is likely greatly affected by the impacts of Brexit in increasing the costs and complexity of dealing with Europe.”

But unless you actually own a business, you don’t feel that pain. And yet it is real, as the leaders of the cosmetics industry told Kevin Hollinrake, the minister for enterprise, markets and small business, at an industry event last week.

The Oxford Economics report reminded me of an interview I’d done over a year ago with Sam Martin, the founder of Apothecary 87, a small business in Doncaster, that makes premium beard oils and male personal grooming products.

Martin started his business in 2012 to cash in on the ‘beard boom’ of the late noughties and was exporting to over 130 countries within his first year, with Europe (particularly Spain, Italy and Greece) a big part of those exports.

Since Brexit that’s pretty much all stopped. Martin told me that he’s basically retrenched to the UK and pivoted to the domestic market, opening a couple of stores. He’s doing fine, he says, and has just adapted to the reality of the UK’s new trading environment.

But what gets missed is the counterfactual. The one where Martin continued to grow his international business, expanding his exports into the EU, adding revenues but also resilience, since the more markets he can access, the more recession-proof he’ll be.

His exports have been largely killed because EU customers now need a licence to import cosmetics from the UK, which makes the cost of buying products from the UK non-viable for individuals and small salons.

Martin could get an EU representative for VAT and an EU distributor, but by the time he’s paid handling and processing costs and the distributor’s made their margin, he’d be selling the product at an 80 per cent discount against the recommended retail price. 

It’s also very hard for a small business like Apothecary 87, which employs 11 people, to find reliable distributors and marketing agents who can represent their brands in EU countries. Before Brexit, Apothecary’s products could be bought and shipped straight off the internet.

Martin is a positive, ‘can-do’ guy, as evidenced by his thriving business, so he doesn’t wallow in ‘what might have been’. But when I spoke to him again this week he was still smarting from the  impact Brexit has had on his business — which has lessons for the entire UK economy.

“It’s a tough one. If we’d kept doing what we were doing I think we’d be thriving. As a business we’re fine, we’ve tweaked our plan and we’re managing to grow locally and I’m excited — but my original vision for the company was more grand, more global and I’d love to get back to that, but we have to cut our cloth to the world as it is now.”

That’s one business, from one industry, but it speaks to a much broader story about how Brexit has muffled the exporting ambitions of UK small businesses.

As it happens, SMEs make up a very significant proportion of the UK cosmetics industry. Oxford Economics estimates that more than nine out of 10 (95 per cent) of personal care SMEs have fewer than 10 employees, so the hit to the industry has been particularly stark.

The impact on bigger businesses

But Brexit has also impacted larger businesses, like the London-based skincare brand Sarah Chapman, which employs 60 people. 

Its CEO, Simon Lee, explains how the business has battled both border bureaucracy (individual labels for each country) and labour shortages since a lot of the staff in their skincare clinic in Sloane Square were from eastern Europe.

Lee says the “breadth and depth of expansion” of the Sarah Chapman brand in Europe has definitely slowed (the business is now looking at setting up a new distribution network inside the EU) while struggling for skilled labour.

“The whole industry is fishing in a smaller pool for that kind of talent, so we’re paying higher wages for less experienced people,” he says.

Lee says that Hollinrake’s team at the Department of Business and Trade is helpful and solicitous, but the reality is that there are limited things any British minister can do to fix the problems caused by the TCA — and that will apply to Labour too for as long as it sticks to its current red lines.

In his speech, industry insiders say that Hollinrake pointed to the introduction of new border controls on imports from the EU to the UK next April as a potential medium-term lever for easing border frictions.

The hope is that when EU exporters start to feel the same pain as UK businesses, there will be fresh motivation in Brussels to get round the table and ease the frictions. 

Perhaps, but that rather misses the asymmetry of the problem. Around half of total UK trade is still with the EU, so the urgency is very much on this side of the Channel. 

Equally likely, a lot of EU exporters (like their UK counterparts since 2021) will give up bothering with exports to the UK, which will have an impact on UK companies reliant on supplies from the EU. I’ll be sure to let you know how that goes when the time comes.

Brexit in numbers

This week’s chart comes courtesy of YouGov. Earlier I noted the muted nature of the Brexit debate in wider politics, something that is perhaps reflected in the fact that “none of the above” is beating both Labour and Tories when it comes to who voters think would be best at handling Brexit. 

The sudden crossover in the latest poll is a result of a five-point increase among Remain voters saying “none”, which might potentially reflect growing disillusionment among Remain voters with Labour’s cautious approach to Brexit. 

Matthew Smith, the head of data journalism at YouGov, is rightly cautious about reading too much into one poll which he warns could just be a “random blip caused by sampling noise” that you occasionally get in polls — but it will be one to watch.

Rob Ford, politics professor at Manchester university, is also cautious, noting that there is stronger evidence of disaffection among Leavers than Remainers, and that it will require more polls like this to establish a trend.

“It could suggest both sides of the Brexit divide are becoming exasperated with the options on offer, which is not a stable equilibrium: Leavers losing faith in Tory Brexit vision, Remainers no longer on board with Labour’s cautious approach,” he said.

Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.

Source: Economy - ft.com