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By: Euromonitor Research

    In view of the vote on 18th September on whether Scotland should become an independent state or not, there has been a lot of debate on the state of the Scottish economy and whether Scotland will fare better or worse outside the union. But, with a Scottish retailing market that Euromonitor International estimates at £28.5 billion in 2013, what is it likely to be the impact of the possible independence on this industry? Will an independent Scotland be good or bad for large retailers currently operating across the UK? As the details of how independence would be implemented still need to be negotiated and defined – for instance, it is not clear which currency an independent Scotland would adopt – it is currently not possible to state precisely the likely impact that Scottish independence would have on the retailing industry.

    Grocery retailers expect increased costs

    Having said that, large retailers have already warned of the negative impact that independence might bring to Scottish consumers, in particular as it is likely that higher operational costs, due to the cost of operating in two distinct jurisdictions, would lead to higher prices.

    Big grocery retailers, including Tesco, Asda and Sainsburys, have extensively commented that it is very likely that independence would force them to review prices charged in their Scottish operations. This is because there would be extra costs involved in operating in an independent country, with different regulatory regimes and smaller economies of scale.

    Tesco has cited the example of Ireland – the retailer operates in both Northern Ireland and the Republic of Ireland – where different laws, currencies and tax regimes in the two geographies have affected the structure of operations, with separate teams present in each country. All of this has resulted in price differences. For example, according to Euromonitor International’s store check data, in Tesco stores, one litre of full-fat fresh/pasteurised milk costs US$0.87 in Northern Ireland, compared to US$0.97 in the Republic of Ireland.

    Existing structure might mitigate cost increases

    However, it is unlikely that large retailers with cross-border operations would incur significant additional costs. Companies would need to set up specific legal entities to operate in Scotland, a process that most large retailers are already familiar with, given their international operations. Moreover, they would need to have Scottish headquarters, but, again, given that most large retailers operating in Scotland already have regional Scottish offices in place, they will simply need to use their existing structures for this purpose, without any significant additional costs.

    In terms of logistics, there are unlikely to be any further costs, as there is already a well-developed logistics structure in place between Scotland and the rest of the UK. There might however be additional marketing costs as the differences between Scotland and the rest of the UK are likely to widen in the case of independence, but this might also have a positive impact on the efficacy of campaigns, given that they would be more targeted.

    Undeniably, the implementation of these measures in the event of independence would bring additional costs, although they are unlikely to be as severe as retailers are implying they would be. For example, referring to the case of Tesco in Ireland, the difference in the case of Scotland is that UK retailers already have well-established operations north of the border, and it is unlikely that the cost of operations would increase dramatically. Moreover, with the expansion of discounters, including Lidl, it is unlikely that higher operational costs would be passed onto consumers, given that mid-range supermarkets will increasingly have to compete on price against discounters.

    Long-term impact dependent on, as yet, undefined factors

    The additional costs incurred by retailers if Scotland gains independence might be transferred, at least initially, to the final price paid by Scottish consumers. However, this is likely to only be a short-term problem, adopted to allow companies to amortise higher operational costs. After this transitional period, the impact on price is expected to lessen, with prices determined by other, at present, unknown factors, such as the corporate tax or the VAT rate that a Scottish government would charge.

    Most businesses prefer the status quo

    Businesses do not like uncertainty, and that is why the majority of large retailers operating in the UK have talked about potential price increases if Scotland gains independence in a bid to preserve the status quo. However, at this point in time, it is impossible to determine whether there would actually be additional costs involved for businesses operating in Scotland: Morrisons commented that it could actually be the opposite if the Scottish government creates a more business-friendly environment, with lower corporate taxes and more regulations, along the lines of the Irish model, in a bid to attract FDI to the country.

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