Brexit: another challenge for Amazon?
The UK’s decision to leave the EU will have a significant impact on the British retail sector. How should Amazon respond?
The UK is Amazon’s third largest market with $9.5bn sales in 2016, and £6.4bn invested since 2010 . It has established a clear competitive advantage over virtually all retail chains in the UK by offering a large range of products, at record delivery times and affordable prices. But the UK’s decision to leave the EU will impose new challenges for Amazon to address. Brexit will bring about changes to British tariffs and customs regime, FX rates, and immigration policy, impacting economic outlook and consumer spending. This will likely lead to more complex and costly supply chain management for Amazon, with the additional complexity that the outcome of Brexit negotiations is still highly uncertain today. Between “hard” and “soft” exits, the trading position of the UK with respect to the EU and rest of the world could take on very different forms . But despite this uncertainty, Amazon must consider the potential impacts on its supply chain and begin its remediation strategy.
Amazon’s sourcing and procurement could be the first impacted: if the UK leaves the EU single market, it will likely see standard WTO tariffs (2% to 13%) applied to imports and exports , and further depreciation of the GBP will make imports less attractive. Amazon currently imports a large percentage of its goods sold, so these changes would directly impact its COGS and ability to offer affordable products to UK customers. It is unclear what steps Amazon has already taken to address these potential future costs increases, but there are multiple actions possible. Amazon should first assess the impact of new tariffs and FX movements under different scenario on its profitability. It should begin discussions with its major suppliers about potentially sharing the increased costs . Finally, for certain product categories, such as fresh food, Amazon could begin looking for alternate local suppliers , although it is still unclear how the price of domestic production will be affected. All of the above would likely have an adverse impact through increased costs, but a “hard” Brexit could also yield new trade deals between the UK and non-EU countries, which could provide new products on Amazon and beneficial commercial opportunities .
A change in British customs regime could also impact Amazon’s logistics and distribution network. Under the current single market regime, Amazon can transport goods between the UK and EU effortlessly, serving customers in the UK from European centres and vice versa. With any restriction of movement of goods, Amazon might have to rethink some of its logistics and product flows, as for example, transiting products destined for the UK from the EU would now incur unnecessary additional costs. In addition, new customs regulation may create timing delays in the supply chain if UK ports become bottleneck from new import declaration requirements , limiting Amazon’s ability to deliver goods as rapidly and reliably as before. Perhaps to anticipate this medium-term strain on logistics, Amazon has announced the opening of a new distribution centre in south England . Amazon should look to further rationalise its fulfilment centres in the UK and EU to ensure smooth operations and continued fast delivery to both markets , weighing the benefits of savings on tariffs with the costs of holding additional inventory and operating warehouses.
Brexit will impact the human resources of Amazon’s supply chain. Changes in immigration and labour laws could increase the cost of labour and lead to shortage of labour, both low-skilled (currently made up of largely immigrant workers) and high-skilled (if the UK has trouble attracting talented foreign workers) . This would affect Amazon’s ability to recruit for their warehouses and distribution network, as well as for their headquarters. In February, Amazon announced their decision to hire 5,000 additional employees, software developers, engineers, and technicians, and to start apprenticeship programs in engineering, warehousing and logistics . This indicates Amazon believes in the UK growth potential, but is also a defensive move for the company to secure employees ahead of potential changes to immigration policy. To the extent that it can bear these additional resources today, Amazon should continue to hire in the UK, and more importantly strive to increase employee retention ahead of the final Brexit outcome in March 2019.
In conclusion, the potential changes to the UK’s tariffs and customs regime, FX rates, and immigration policy caused by Brexit will likely have adverse effects on Amazon’s sourcing, logistics, distribution and human resources in the UK. Although it is risky for Amazon to take drastic actions in today’s uncertain environment, it is important for the company to analyse the potential impacts different scenario might have, and anticipate solutions whenever possible. However, could we also consider how much Amazon could benefit from these changes, as the other British retail chains struggle with even less flexible supply chains?
 “2016 Annual Report,” Amazon, April 12, 2017, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual , accessed November 2017.
 “Supply Chain: Your Brexit Competitive Advantage”, PWC, February 2017, https://www.pwc.com/gx/en/issues/assets/brexit-supply-chain-paper.pdf , accessed November 2017.
 “Is Your Supply Chain Ready for Brexit?”, Bain & Company, February 2017, http://www.bain.com/publications/articles/is-your-supply-chain-ready-for-brexit.aspx , accessed November 2017.
 “Amazon Bets Big on Post-Brexit Britain”, Investopedia, August 2016, https://www.investopedia.com/news/amazon-bets-big-postbrexit-britain-amzn/?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186 , accessed November 2017.
 “How Can Brexit Impact Amazon?”, Forbes, June 2016, https://www.forbes.com/sites/greatspeculations/2016/06/30/how-can-brexit-impact-amazon/#7626f3d94c4a , accessed November 2017.
 “Brexit fails to deter Amazon as it announces plans to expands UK workforce by 5,000”, Independent, http://www.independent.co.uk/news/business/news/brexit-amazon-uk-workforce-expansion-a7585276.html#gallery , accessed November 2017.
Student comments on Brexit: another challenge for Amazon?
I can see how Brexit can create massive strains on Amazon’s UK plans, but perhaps this situation can create a competitive advantage for the company?
Barriers to entry/grow are quite significant for Amazon’s competitive set given Amazon’s investment in the UK market, which includes doubling both the capacity for R&D and the total number of full-time employees . Given Amazon’s brand name/reputation for customer-centricity coupled with overall market conditions, I would imagine that sourcing talent may not be as much of an issue as the costs associated with doing so. Additionally, in this tough economy with heavily impacted FX rates, British consumers will become more price sensitive. Amazon is a leader in delivering low-cost goods, especially in a market where competitors will also have to face the same complications across their value chain.
I do agree that this will be expensive for Amazon, which will be reflected in rising costs for sourcing/procurement, distribution and labor. I wonder if Amazon will be able to shift these costs across their entire portfolio such that the British end-user can continue to pay similar prices. Perhaps they consider limiting the number of SKUs per category to focus on the margin-rich items going forward.
 “Why Amazon Isn’t Fazed by Brexit”, Reuters, July 2017, http://fortune.com/2017/07/25/amazon-uk-jobs-brexit/
Very interesting and well written article! I agree with you that Brexit will likely create adverse/costly effects for Amazon. At a minimum, there will be problems to address. I agree with Melissa that it will probably be a competitive advantage for Amazon in the long run. Brexit won’t single out Amazon. If costly problems arise, they will arise for all of retail. Because of Amazon’s size, reputation, and the fact that they are one of the best supply chain management companies in the world, they are better positioned to react and adapt compared to their competitors. At the end of the day, I see Amazon gaining even more market share from Brexit.
I really enjoyed this article!
The labor aspect of all of this I find particularly interesting. Despite any efforts Amazon may make to recruit and train staff early, I imagine that the reduced ability of EU citizens to work in the UK would catch up to them. In particular, I’d expect a short term challenge in maintaining similar levels of lower-skilled workers, comprised today largely of immigrant workers as you mention who may flock to the higher wages in the UK vs. other EU countries.
However, it also made me think of the relationship of this to the other changes happening in supply chains, namely with digitization. As Amazon increases its reliance on various robotics strategies (e.g., with the acquisition of Kiva Systems ) to automate the supply chain, they will reduce the reliance on labor, making this less of a concern in the longer-term.
Thank you for the essay!
In a context where most of the players will lose, it is interesting to think about the perspective of a company that might have a competitive advantage. However, even If it turns out to be better than its competitors, is that really something that Amazon should celebrate? I fear that since companies rely on global supply chains so much today, the impacts of Brexit in all business will be so huge that it might not be that beneficial to be “the best among all of the suffering”.
Bearing that in mind, I feel that Amazon should absolutely evaluate the impacts on their business in different scenarios and plan ahead to generate initiatives that will minimize damages.
While I agree that Brexit may impact the human resources aspect of Amazon’s supply chain, Amazon may be able to mitigate this risk by continuing to increase the level of automation and digitalization employed in its warehouses and distribution network.
Amazon has already begun to explore ways in which it can use self-driving technology to automate its logistics strategy (for example, by using self-driving forklifts, trucks and other vehicles in its warehouses and distribution networks) . Additionally, Amazon piloted a successful “Prime Air drone delivery” in the UK in 2016 .
By continuing to invest in and experiment with such automation technologies, Amazon may be able to reduce the human resources required to support its distribution network.
 Jonathan Camhi and Stephanie Pandolph, “Amazon looks to further logistics automation”, Business Insider, April 26, 2017, http://www.businessinsider.com/amazon-looks-to-further-logistics-automation-2017-4?r=UK&IR=T, accessed November 2017.
 Alex Hern, “Amazon claims first successful Prime Air drone delivery”, The Guardian, December 14, 2016, https://www.theguardian.com/technology/2016/dec/14/amazon-claims-first-successful-prime-air-drone-delivery, accessed November 2017.
Interesting angle to a current event! In addition to preparing for different scenarios and mitigating risks, I wonder if Amazon could also take a more proactive approach in making its voice heard with the government as the details of Brexit are being ironed out. Along with powerful retailer lobbies in the UK , I could see Amazon using its economic power to get a seat at the table to influence the government’s negotiation objectives and strategies. Furthermore, reports suggest that UK’s Department for International Trade value marketplaces as a low-risk way for retailers and manufacturers to test, develop and expand into new markets (including internationally), and may be receptive to their input in finalizing trade policies in a post-Brexit world .
Found on: http://www.webretailer.com/lean-commerce/marketplaces-trump-brexit/
Very interesting article. I really liked your take in the end looking at the silver lining that Brexit brings for Amazon with other companies struggling moreso. They also have the advantage of being very nimble and are definitely confident about adapting to the changes that will come with Brexit .
One of my main concerns is that the change in labor laws are going to extend beyond EU since every trade agreement with other countries is going to vary. Do you think there are ways in which they can come up with a competitive advantage when it comes to that? One of the possible solutions I thought of was more active engagement with UK Government, which can be facilitated by their commitment to generate additional 5000 full time jobs.
 Reuters, 2017, “Why Amazon Isn’t Fazed by Brexit”, Fortune.
Currently Amazon is growing at fast pace in Europe. Nevertheless, the UK and Germany entities, Amazon’s most developed markets in Europe, are still serving European markets where Amazon is not present. As the UK prepares for Brexit, there is an additional incentive for Amazon to expedite expansion towards other European markets. Developing these markets will reduce the need to ship from the UK to other European countries, thus avoiding export tariffs. Still, import taxes for products sourced from mainland Europe will be unavoidable assuming that free trade will no longer possible, and will impact Amazon’s operations and cost structure in the UK. But is this something specific to Amazon? No. All online and offline retail businesses in the UK will have to address this issue. Amazon’s scale and potential for negotiating power may even allow them to strike a favorable deal with the UK government, thus gaining an additional advantage (next to economies of scale) against smaller UK retail players.