Brexit: The economic implications of the UK referendum

Brexit: The economic implications of the UK referendum

The referendum held in the UK in 2016 surprised not only the world, but the UK, too. What will be the economic implications of this upcoming "Brexit"? And what does the future hold for the UK, the EU and the whole world? Find out more about it in this article.

By Eli Pelleg, C.O.O and Shir Fuchs, Consultant at Tefen

In June 2016, the UK held a referendum on whether or not it should withdraw from the EU. Despite the risks of the UK's weakening position as an economic leader in the world, 52% of the country's residents voted to leave, causing an end to its 43 years of EU membership. The referendum results will have numerous implications. On the economic side, economists are uncertain regarding this historical decision's impact. On the one hand, it might cause major economic chaos and shake the markets.

On the other hand, it is quite possible that in the long term the UK will recover and adjust to the new situation. Either way, in the short term it seems that most markets in general, and specifically the US market will experience some economic slowdown and it is hard to predict whether and when the UK demand for American services and products will go back to its impressive pre-Brexit numbers. Despite the inability to predict the severity of this historic move's outcome, it is crucial for exporters to prepare for different scenarios.

On the other hand, it is quite possible that in the long term the UK will recover and adjust to the new situation. Either way, in the short term it seems that most markets in general, and specifically the US market will experience some economic slowdown and it is hard to predict whether and when the UK demand for American services and products will go back to its impressive pre-Brexit numbers. Despite the inability to predict the severity of this historic move's outcome, it is crucial for exporters to prepare for different scenarios.

Exports from USA to the UK in 2015 totaled at $56 Billion, accounting for about 4% of US exports in 2015. More important than that, is the fact that the US economy is mostly driven by domestic spending. American citizens account for most of the US economic activity. As a result of the volatility that Brexit is already causing in the global markets, US citizens may choose to spend less and increase their savings. This is an indirect implication that US businesses should be thinking about.

On the European side of the pond, the uncertainty in the EU and its existential threat by countries that still debate whether they should or should not be members of the EU may result in the Euro's devaluation and to an economic downturn in the entire European market. Under this circumstance, the US market may get hit pretty hard. Accordingly, Brexit triggers a strong dollar (as the GBP is expected to drop), which makes US products and services more expensive, and may hurt US exporters, that will consequently sell less overseas.

As a result of the new global circumstances, and the uncertainty and inability to predict the impact, US exporters may experience a major decline in revenues, if they fail to act on the following levels: first, exporters should maximize their financial activity in their current markets. In the UK market specifically, exporters should formulate new strategic steps that will allow them to fit better into the new situation and mentality that Brexit is creating amongst UK consumers. Second, exporters should mitigate their economic dependency on the European market by shifting resources and penetrating new markets.

Formulating a new strategy is by itself a cardinal task, all the more so when companies are caught off guard by unpredictable macro events such as Brexit. The current market situation calls for action; Brexit indeed creates uncertainty and confusion, but when considering things from another point of view, companies can benefit from this challenge. For example, if the EU decides to stop free trade with the UK that should open markets for other countries, and the US could take a good share. There may also be great M&A opportunities, as smaller companies that are depended on the UK market may not recover so easily.

The UK has turned the tables and exporters that will stay the course will be the ones that see opportunity in the difficulty. The new market conditions will force companies to think fast and accurately, and to adjust to the new circumstances in a very short time. In order to maximize the new market's potentials and be ahead of competition, it is necessary to recognize and map out the most attractive market segments and their specific needs. Following this, it is crucial to create higher value for the consumer than the value offered by competitors.

As part of formulating the new strategy, exporters that serve mainly the UK market have to reconsider their operations in this market. Through a Commercial Excellence thinking process, exporters can examine their strengths and weaknesses and the new market situation, and accordingly improve or decide to focus on new markets that may have higher demand for their product or service. Below is an example of a Commercial Excellence model, which presents the major layers in a company's positioning:

Commercial Excellence Model

Together with matching the company to the current markets in which it is active, it is also worthwhile to consider penetrating new markets. Lately developing markets have started embracing the same changes that developed markets went through in the past, and they too are making the inevitable shift from traditional, unformal markets to modern and innovative markets.

This shift has a significant impact on companies that operate in these developing markets. Hence, exporters who will quickly answer these markets' needs will penetrate them, take a significant share and continue to grow. Companies that want to reach potential customers and gain competitive advantage, will have to adapt the right Go To Market strategy which will include cardinal factors such as market competition, market attractiveness, etc. The diagram below, presents examples for useful tools in a Go To Market strategy:

Go to Market Strategy


As mentioned above, when times get tough and the future spells bad news, planning the right strategy can be the difference between filing for Chapter 11 and future growth. One great example of a company that used an outstanding strategy plan to get out of the mud and become profitable is Soda Stream (NASDAQ:SODA), the world's leading manufacturer and distributor of sparkling water makers.


As customers became more health conscious, Soda Stream experienced a drop in soda drinks sales. This led the company to cut back on advertising spending, which further impacted Soda Stream's sales and revenues. Last year, Soda Stream's management realized that the company needed to diversify its product lines if it wanted to retain its customers.

The company took several strategic decisions which led to an impressive comeback and growth in revenues: first, the company transitioned from making home sodas to making carbonated water, which follows the healthy lifestyle of its clients. Second, the company collaborated with Skinnygirl to introduce naturally flavored drinks free from high fructose and artificial sweeteners. Third, as part of its new strategy, Soda Stream realized that human capital is the key for the company's success, and focused on hiring ambitious, experienced managers.

Soda Stream's success story can be a springboard for companies that expect to experience a slowdown after Brexit. Companies that expect to hit a post-Brexit wall, should start thinking of a preventive strategic plan and use the right strategic tools to help them confront the decline in revenues that they may experience in the coming post-Brexit time. As Winston Churchill once said "He who fails to plan, plans to fail".

Eli Pelleg

Partner, Chief Operating Officer

Multidisciplinary Performance Improvement Expert

Talk to Eli Pelleg

Fill the form for some quick advice

CONTACT US

Let's work together!