UHY Hacker Young | Chartered Accountants

Brexit part two – how will businesses within the jewellery sector be affected?

2 August 2016

A trip to Birmingham’s Jewellery Quarter; the excitement of choosing a diamond ring – the feeling of trying on a wedding ring for the first time. It’s such a pivotal, personal moment in a person’s life and, of course, it’s also a vital moment for the jewellery business to capture a customer. The last thing any couple or business in this case needs is uncertainty over what the future holds.

In our second instalment of what Brexit means for businesses within the Birmingham region, we look at how the post-referendum climate is affecting the jewellery sector.

How will businesses within the jewellery sector be affected?

The UK’s jewellery industry was, anecdotally, in a real dilemma before the referendum. At an industry dinner the evening before the vote, 38% appeared ready to vote to leave the EU, with 43% wanting to remain.  However, a surprisingly high 19% were undecided – perhaps reflecting the precariousness of the choice and the lack of surety as to what forces might affect the industry after the vote.

Now, following Brexit, jewellery businesses have plenty to ponder when planning for short and long-term. The picture isn’t clear yet by any means, but you should begin to consider the following three factors:

  • Uncertainty and volatility
  • Precious metal prices
  • Currency concerns

Uncertainty: bad news for almost everyone.

Just like with the property market covered in our first post in the series – in the short term, it’s uncertainty that can cause real damage.

Uncertainty affects the retail jewellery business in two key ways:

  • If you’re running a business it helps to be able to plan and have some idea what your costs are going to be. When there’s volatility in the market, it becomes harder to strategise and make longer-term decisions to help grow the business and maximise profits; and
  • As every retail business knows, the UK public can be deeply affected by uncertainty; reducing their spend on luxuries if trouble ahead is sensed. Although this is less likely to affect chain and discount jewellers, it could disproportionately affect boutique and designer-maker jewellery businesses.

The experts predicted a recession if the UK left the EU and, if one materialises, it will almost undoubtedly be bad news for retail jewellery sales. However, it seems that the British public was not worried by this warning, so perhaps they will retain their confidence and continue to spend with British jewellery businesses.

Precious metal prices are climbing – and could increase further

The spiralling cost of gold in the wake of Britain voting to leave the European Union is undoubtedly a reaction by investors to the unexpectedness of the result. Other classic ‘safe haven’ assets (bonds, defensive shares, the Swiss franc) saw similar climbs in value. However, for the time being, the price looks to have stabilised, albeit at a much higher level than before the referendum.

This means British jewellery businesses are facing approximately 18% higher wholesale prices for one of their key supplies. If fluctuating, the gold price will definitely affect anyone trying to establish a business. However, even when stable it will mean higher prices passed to the retail customer – so we’re dependent on demand remaining strong. This is, of course, complicated by sterling’s fall against the dollar. Which brings us to our final point…

Currency concerns mean advantages for overseas firms

Gems and precious metals are undoubtedly a global business; which is why the reference price is traditionally in US Dollars. This means that any business earning its revenues primarily in sterling will be disadvantaged by the GBP’s record fall against the dollar after the Brexit result became known. It also gives firms that trade primarily in dollars a mirror-image advantage over UK-only firms – this can’t be viewed separately from the other two factors above. When currencies move sharply against each other it is both a symptom and a cause of uncertainty, and movements are reflected directly in the gold price.

What steps should British jewellers take in order to protect themselves?

One theme that runs through all Brexit-related matters is uncertainty, and choosing the best way to react to the new reality is to take, for example, this comment from the UK country manager of Denmark (EU)-based jewellery business Christina:

“[It is] still too early to predict the Brexit effects. […] As a company we keep a watchful eye and open mind on the British economy but believe when the Brexit smoke clears the British market will remain strong and attractive”.

It may well be possible to take this approach – to wait and see and bet on the longevity of the British jewellery industry that has survived rising gold prices and currency turmoil many times before. However, perhaps it would be better still to model some of the more likely effects and decide on some hedges and preventative actions you may be able to take to safeguard your profits and cash flows going forward.

Interestingly, the following day after the Brexit vote, I received a large number of calls mostly from my clients in the jewellery industry. They all wanted to know how the referendum result would effect their business and my suggestions on next step options. If you are a jewellery business owner and would like information on the most suitable way to protect your current financial position, and would like to speak to an accountant that is familiar with the concerns that you may have, please contact our specialist Glenn Thomas at: glenn.thomas@uhybirmingham.co.uk.