the times | Thursday November 11 2021 51

Business

It may be time for businesses to

dust off their no-deal Brexit plans

S

ince last spring, a new

industry has emerged to

serve consumers without the

time or inclination to stroll

to their corner shop. Apps

with zeitgeisty names like Zapp and

Weezy can now deliver us beer, ice

cream or washing-up liquid in a

quarter of an hour or less. The

services offer city dwellers instant

gratification — but investors in

rapid delivery services may have to

wait longer for their rewards.

Fearful of missing the next wave

in ecommerce, venture funds have

poured billions of dollars into the

sector this year. It is crowded,

though, and apps are racking up

prodigious losses in a land-grab

driven by discounts and promotions.

Competition is heating up even as

the pandemic fades out of view — in

developed economies, at least. On

Tuesday, DoorDash, a £55 billion

American operator, bought

Finland’s Wolt for about £6 billion.

Hours before, the privately owned

Gopuff unveiled an aggressive UK

expansion plan after acquiring Dija

and Fancy earlier in the year. They

will lock horns with Getir, of

Turkey, and the Berlin-based

Gorillas to sign up affluent but time-

pressed European customers.

As Europe’s most advanced

ecommerce market, Britain is a key

battleground and the old guard

won’t cede ground without a fight.

The Big Four supermarket chains

have launched copycat services and

Deliveroo and Uber Eats, which

look geriatric compared with their

new rivals, have responded in kind.

Even Greggs is getting in on the act.

But is anyone going to make

money from instant deliveries? Not

while the torrent of tantalising

offers continues to flow. At present,

there is a transfer of value from

venture capital funds to customers,

who are receiving a service for

significantly below cost.

It is inevitable that the weaker,

less amply funded players will get

squeezed and that the survivors will

glean economies of scale, by buying

direct from consumer goods makers.

Will this be enough to build a

sustainable business in an industry

with notoriously thin profit

margins? Rapid delivery services

work from “dark” stores, where

goods are stocked and orders are

packed before being dispatched on

bikes or mopeds. Customers pay a

modest premium to corner shop

prices, plus a delivery fee of a couple

of pounds. The main profit drivers

are basket size and the number of

orders that riders can deliver over a

shift. As most couriers earn an

hourly wage, there’s little slack in

the business model.

Giles Thorne, an analyst at

Jefferies, believes that the new

services can move the convenience

grocery market online while also

earning tasty returns. After a week

staking out a Getir dark store in

west London, he concluded that the

upstarts had an edge over

convenience stores. Their rents

alone are “two times cheaper” and a

leaner operating model can produce

a flywheel effect of cheaper prices

and higher order frequency. Thorne

predicted that dark stores would

earn underlying margins of between

10 per cent and 15 per cent.

Nazim Salur, the Getir founder,

told me in July that its Turkish

stores were solidly profitable and

that the app wasn’t solely for the

moneyed classes. People paid for

convenience and Getir’s delivery

charges were no more than the price

of a bus fare, he argued.

Nevertheless, instant deliveries

are far from a utility purchase. It’s

anyone’s guess whether demand will

hold up when the punchbowl of

special offers is withdrawn, or if and

when consumer confidence tumbles.

Gopuff and Getir, the longest-

established apps, believe that

knowledge and experience are

sturdy barriers to entry. The history

of ride-hailing suggests otherwise: it

was once thought to be a winner-

takes-most industry, but new rivals

keep appearing. Uber recently

reported the first underlying

quarterly profit in its 12-year history.

Investors in instant deliveries cannot

bank on a quick buck.

Simon Nixon

Simon Duke

the minister responsible for Brexit,

yesterday ruled out any imminent

triggering of Article 16, insisting,

contrary to what the EU says, that

some progress had been made.

Perhaps the EU’s threats have focused

the prime minister’s mind. Or perhaps

with his government mired in a sleaze

scandal of his making, Johnson

calculated that now was not the time

to expend further political capital by

starting a trade war. Nonetheless,

Frost reiterated his demands over the

ECJ and his preference for scrapping

the protocol altogether, suggesting

that a collapse in the negotiations is

only a matter of time.

If so, investors should brace for

impact. The immediate consequence

would be a further deterioration in

trade with the EU. Businesses again

would be forced to dust off their no-

deal Brexit contingency plans, leading

to further shifts in supply chains. A

trade war also would hit business

confidence, dashing hopes for a

revival in business investment. The

corollary of the chronic

underperformance of UK equities has

been the stagnation in business

spending since 2016 compared with

average growth of about 6 per cent in

the previous five years. Without a

revival, there is little chance of the

productivity gains needed to deliver

Johnson’s promised high-wage, high-

growth economy. Britain instead can

expect lower wages, lower growth and

higher taxes.

Meanwhile, investors must contend

once again with something that they

thought had largely disappeared:

political risk. Johnson may hope that

a new confrontation with the EU will

enthuse Tory voters. But breaking his

central manifesto commitment could

cost the Conservatives the support of

those who wanted to get Brexit done

so that the government could focus

on domestic issues. Indeed, this,

combined with the Tories’ dwindling

poll lead as a result of sleaze scandals,

means the prospect of a hung

parliament is likely to weigh on

investor sentiment as the next

election draws closer, notes Samuel

Tombs, at Pantheon Macroeconomics.

One way or another, Brexit-driven

instability, including the prospect of

another Scottish independence

referendum, looks

likely to hang over

UK assets for much

of the rest of this

decade.

According to

JP Morgan, UK

equities are cheap.

That is a bold call.

What is certainly

true is that over the past six years the

British stock market has been by

some margin the worst performer of

any leading market. Since the self-

inflicted economic wound of the

Brexit referendum, UK equities have

lagged US stocks by a staggering

50 per cent and eurozone stocks by

24 per cent. What’s more, the UK

stock market is the only big market

yet to have regained its pre-pandemic

high. Pre-2016, UK stocks traded on a

par with the MSCI World index in

terms of forward price-earnings

ratios; now they trade at a 40 per cent

discount. On a price-to-book basis,

the UK also trades at a record

discount.

Yet the fact that stocks look cheap

now does not mean that they cannot

get cheaper. A large part of

JP Morgan’s bullish case for UK

equities is that the biggest driver of

that underperformance is now behind

Britain. In other words, Brexit got

done. Yet the risk is that the opposite

may be true. The British government

is threatening to blow up one part of

the Brexit settlement by repudiating

aspects of the Northern Ireland

protocol in the withdrawal agreement

if the European Union does not yield

to its demands for changes to the

rules governing trade between

Northern Ireland and Great Britain.

In response, the EU is threatening to

repudiate another part of the Brexit

settlement, the far more economically

significant EU-UK trade deal. In

other words, Brexit may be about to

be undone.

A trade war between Britain and

the EU would, of course, be

highly damaging. In its

economic and fiscal outlook

published ahead of last

month’s budget, the Office for

Budget Responsibility

estimated that the economy

would suffer long-term

scarring as a result of

Brexit equivalent to 4 per

cent of GDP, twice as big a

hit as that inflicted by the

pandemic. The OBR

expected much of this

damage to arise from what it predicts

will be a 15 per cent fall in trade

between the EU and UK. An analysis

by the Centre for European Reform

suggests Brexit so far has reduced UK

goods trade by 15.8 per cent compared

with what might have been expected

if Britain was still in the EU.

Yet this estimate was based on an

assumption that the trade and co-

operation agreement that came into

force on January 1 would be

maintained. If the British government

does decide to trigger Article 16 of the

Northern Irish protocol, that

assumption is almost certainly void.

The EU is still debating how it would

respond. It could take immediate

retaliatory action on British trade in

certain sectors. Or it could, as Simon

Coveney, the Irish deputy prime

minister, suggested at the weekend,

take the nuclear option of terminating

the TCA, a move that would not

come into force for a year. That would

set up a new cliff-edge in a rerun of

previous Brexit brinkmanship.

Either way, the economic

consequences are likely to be dire, not

least because there would be no clear

way out. The EU would regard the

triggering of Article 16 as

confirmation of British bad faith. It

complains it has offered numerous

practical solutions to specific

problems identified by the British, but

the UK has simply banked the

concessions and come back with fresh

demands. What’s more, it says the

British objections are no

longer practical but

ideological, including the

demand the European

Court of Justice be excised

from the protocol’s

governance arrangements.

Yet given that the

entire Brexit

compromise

hinged on

Northern

Ireland

remaining in

the single

market for

goods,

whose rules

are enforced by

the ECJ, this for

Brussels is non-

negotiable.

Of course,

Boris Johnson

may yet back

down. Lord Frost,

‘‘

’’

Simon Duke is Technology Business

Editor of The Times

Investors can’t bank on

a quick buck from the

rapid delivery services

Lord Frost’s demands

are likely to cause

negotiations to collapse

DoorDash share price

Source: Refinitiv

Q1

2021

Q2 Q3 Q4

100

120

140

160

180

200

220

$240