LONDON // It was not supposed to be like this; almost three weeks into the new year and the UK economy seems to be in rude health, despite that vote in June to leave the European Union.
The FTSE 100 index of leading companies – which includes Britain’s biggest highstreet names, such as Marks & Spencer, Vodafone, HSBC, Barclays, Sainsbury’s, BT and Sky – has closed higher on 12 successive days this month, although it did slide on Tuesday following the UK prime minister Theresa May’s announcement Britain would leave the EU single market.
Britain’s biggest shops say they enjoyed a fantastic Christmas. Manufacturing output was on the increase in the final months of 2016 and even Mark Carney, the Bank of England governor who warned explicitly about Brexit, backtracked and said that the risks surrounding leaving the European Union had receded.
A flurry of surveys published at the beginning of the year also revealed that businesses are feeling unexpectedly confident. According to Deloitte, Britain’s corporate finance chiefs are more optimistic about the future than at any point over the past 18 months.
Separately, a survey of the tech sector found that almost half (49 per cent) of the 2,800 people questioned were now optimistic about the year ahead. Back in June this figure was just 8 per cent.
Most experts feel that optimism will not be dented by Mrs May saying that the country would leave the single market, a club it has been a part of for more than four decades.
“In business, what you achieve in a negotiation – not what you bid for – is what really matters. The Brexit process is no different,” Adam Marshall, the director general for British Chambers of Commerce, told the BBC after Mrs May’s speech on Tuesday outlining her government’s strategy for Brexit.
“The simple fact is that businesses all across the UK are carrying on. Directly-affected companies are being pragmatic, and are preparing for a range of possible outcomes. Away from Westminster, many businesses are ignoring the Brexit ‘noise’ completely, and say there needs to be a far bigger focus on getting the basics right here at home,” Mr Marshall said.
Some were more concerned. Carolyn Fairbairn, the director-general of the Confederation of British Industry, said ruling out membership of the single market “reduced options for maintaining a barrier-free trading relationship between the UK and the EU”. She said UK businesses wanted to make a success of Brexit but “will be concerned about falling back on damaging World Trade Organisation rules”.
The tech sector, meanwhile, is confident it will remain a driving force.
“The year just past was one of shocks and surprises but the economy overall has held up remarkably well. For the tech sector, however, the power to transform lives has not disappeared because the country voted to leave Europe,” says the BGF Ventures partner and investor in tech start-ups Simon Calver.
Small business confidence has also returned to levels not seen since before June’s referendum, according to the Federation of Small Business. Small exporters, in particular, are enjoying a boost as the weak pound makes their goods more competitive overseas.
One small business that has dramatically changed its business model to tap into this demand from overseas customers is Love Taste.
Started by a former Saatchi and Saatchi advertising executive in London’s Borough Market – a “foodie” haven – the Love Taste company makes frozen smoothies for companies such as the online retailer Ocado, the sandwich chain Pret a Manger and Virgin Active gyms.
Brexit immediately hit it for six because its raw materials – pineapples, mangos and passion fruit from around the world – suddenly leapt in price, due to the pound’s weakness.
But, as Love Taste’s founder Richard Canterbury points out, the firm has adapted. Since June’s vote it has ramped up boosted its exports with considerable success. It has won a contract to supply Lulu supermarkets in the UAE and wider region – a potentially lucrative new market – and landed a deal to supply Woolworths, the largest retailer in Australia with 700 stores.
“I voted ‘Remain’ and to most people’s surprise it didn’t go according to plan. But we are a small, nimble business and realised quickly that there was an opportunity to export more,” Mr Canterbury says. “The Middle East is a perfect market for us. It’s sunny all year around, smoothies are becoming more popular and [many] people don’t drink alcohol. We have now employed an export manager to sell to the Middle East,” he says.
The company aims to target other supermarket groups besides Lulu, as well as look for ways to supply the hotels, restaurants and gyms in the region – its core market in the UK.
“We buy all of our fruit in euros or dollars and the fall in the pound has been about 20 to 30 per cent at worst point, so that would take 20 to 30 per cent of our margin away,” says Mr Canterbury.
“That would have put us into loss. But suddenly our products look relatively good value to overseas buyers,” Although the pound rallied strongly following Mrs May’s speech, it looks like international expansion will offset the higher costs that Love Taste is facing.
Indeed, Deutsche Bank predicts the currency could still weaken more than 10 per cent this year.
It also has another strategy: it wants to source more UK-grown fruit to put in its drinks for the home market. “Obviously it won’t be passion fruit or mango but we can grow very good berries here and we are looking at launching ‘hedgerow’ smoothie,” he says. Mr Canterbury has also reduced the packaging on his goods, to make them cheaper to transport and sell overseas.
“We reduced the case size by 20 per cent which is good environmentally and means we can store more on a pallet, cutting our distribution costs. We are looking at Dave Brailsford-type marginal gains,” he says, referring to the former British cycling team coach, who steered the team to Olympic success by making tiny improvements in everything from bike saddles to the team’s transport.
Another small UK business that has found success in the UAE is Nottingham-based Kitronik, which supplies electronic project kits and components to secondary schools and hobbyists. Products range from very simple lamp kits to weather stations and half of its sales go to schools. In the four months from June to November, Kitronik saw a significant leap in exports.
Schools in the UAE are excellent customers for Kitronik, says Tim Goodman, the business development director. “When exporting you usually have to adapt a product for new markets. In the [Arabian] Gulf, we don’t have to change a thing. They have some of the easiest schools that I have ever had to deal with. They understand that they need a product and do all the paperwork before they approach us.”
Schools Kitronik has supplied in the UAE include Rashid School for Boys in Dubai and Repton School, which is situated in both Abu Dhabi and Dubai. In the wider region, the UK firm’s products have been taken by Al Khor School in Doha, Qatar and The Kuwait National English School in Hawally, Kuwait.
In addition, Kitronik has worked with Jawraa, an ITC consulting company based in Riyadh looking to develop computing in Saudi Arabia.
This has all helped Kitronik to boost turnover by 55 per cent, leading to new jobs being created in Nottingham. In the four months following Brexit, Kitronik’s exports grew by 610 per cent compared with the same period last year. In financial terms, this represented £160,353 (Dh713,753) of exports in the period, up from £22,556 between June and the end of October in 2015.
The post-Brexit global reach of the company has more than doubled in this short time span. The company is now supplying its products to 36 countries, compared with 16 in 2015.
Mr Goodman says the company started exporting a few years ago because many countries copy the UK’s national curriculum for schools. Kitronik also struck a landmark partnership with BBC Micro, a charity set up to promote coding skills in students, which brought it to the attention of many educators.
“We really buy into the Micro:Bit foundation’s aims of reaching 100 million people. If you look at our sales overseas, it’s the Micro:Bit products [microcomputers associated peripherals] that are really selling well.”
Meanwhile, the weaker pound has benefited Kitronik’s sales. It has made the product cheaper for those who trade in dollars, which has been a boon for the business.
But the company’s costs are getting higher – because it also buys components in dollars – and while it is trying to hold off price increases until September, when it traditionally raises prices, it expects it will have to do so before then.
“We’re very confident about the future. Brexit is going to provide us with some tough times but we can’t look to the future with doom and gloom. We’re looking for new premises, expanding up to 25,000 sq ft, and I don’t see why we can’t continue growing,” Mr Goodman says.
A lot of the challenges Kitronik will face will be around its higher costs and the UK’s decision to leave not only the single market but the EU customs union, too – and that might result in tariffs being imposed by EU states on UK firms.
“It all depends how quickly the government moves and we can’t really react to that until it actually happens, whenever that will be. At least as a cash-rich business we can continue to invest and that is one of the main reasons we can face the future with confidence.”
Whether businesses are feeling so chipper a year from now remains to be seen.
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