Financial Academy

Brexit-related stockpiling is driving up the cost of short-term space in UK warehouses, as companies across the country guard against a no-deal outcome that could cause gridlock at ports and chaos in cross-border trade.

Many businesses, especially smaller ones, have been reluctant to commit resources to costly contingency plans that might prove unnecessary. That is starting to change, with companies of all sizes and in all sectors laying plans to hoard raw materials, components, packaging and finished goods.

Companies now face even more acute uncertainty after the delay of a crucial parliamentary vote on Brexit, with the clock ticking ahead of the UK’s scheduled departure on March 29.

“We have seen a massive spike in calls in the two weeks to a month,” said Charlie Pool, the founder of Stowga — an online platform that serves as a kind of Airbnb for warehouses, matching businesses in need of extra space with suppliers who have spare capacity.

The extra demand had already driven up prices from an average of £1.85 per pallet per week in September to about £2 now, he said. Even so, most companies were still holding off booking once they had checked there was still space available.

Several listed companies — ranging from Airbus and Rolls-Royce to the food group Nestlé and retailers such as Topps Tiles — have said they are building bigger buffers against disruption and are urging their suppliers to take similar steps.

The Bank of England has warned that most UK companies have not yet made any change to their business plan in preparation for Brexit and are not ready to cope with the fallout of a no-deal exit. But when it comes to stockpiling, there are limits to what companies can achieve — and a heavy associated cost.

“Our extended supply chain could survive four weeks — possibly eight,” said Rowan Crozier, chief executive of Brandauer, which makes stamped metal components at its West Midlands factory. He sees Brexit as just an “additional dynamic” in his planning, but is building stocks of incoming materials by 10 per cent and laying plans to use alternative ports or to fly materials in if needed.

Why there is a big gap between output and orders

These contingency measures are now starting to show up in economic data.

In its quarterly survey of members, the EEF manufacturers’ organisation found an unusually big gap between reported output and new orders, suggesting companies were stepping up production to build inventories, not because of new business.

“As we sit here right now, business investment is being held back. The real investment that is going on would appear to be in stock building, short-term contingency planning,” Mark Carney, the Bank of England governor, told a parliamentary committee last week.

The BoE’s agents found that advance booking of warehousing space was now “the highest it has been in some time”, so much so that some companies were taking leases “on chilled storage even for non-perishable goods, in order to secure the space”. It added that many suppliers were planning to build inventories up to twice their usual level, enough to withstand two to four weeks of disruption.

However, hoarding will only go so far to mitigate the risks.

Drugmakers are building stocks beyond the level mandated by government, but as Pinder Sahota, general manager at Novo Nordisk, noted last week: “if all patients requested an extra prescription from their doctors . . . four weeks of stock would be wiped out.” Carmakers rely on a constant cross-border flow of trucks to feed just-in-time manufacturing processes, and say they would need unfeasibly vast stockpiles to maintain production if trade routes were blocked for any significant length of time.

Space and cash limit preparations

There are two big constraints that apply to all sectors: space and cash.

Temperature controlled warehouses are scarce. Some supermarket chains may have room for manoeuvre — Mr Pool said that Asda had previously listed 18 warehouses on Stowga that it had now reoccupied.

But Ian Wright, head of the Food and Drink Federation, said last week that for those without in-house capacity, chilled and frozen storage space was now in effect booked out.

There is still vacant space in standard warehouses, despite pressures caused by the growth of ecommerce. But these are usually let on long-term leases of at least five years. Companies do not want to make such a commitment as a hedge against temporary disruption.

“At the moment they are stockpiling into the most flexible space,” said one landlord, who had received inquiries from companies not yet willing to commit. For now, he said, businesses were likely to turn to third-party logistics providers such as DHL for short-term warehousing. “Once that runs out or the situation becomes permanent, we can see them signing five-year leases.”

Real estate analysts agreed there had been no rush yet for long-term tenancies, although Kevin Mofid, head of commercial research at Savills, said Brexit was probably one reason for a sharp rise this year in speculative developments of warehouses with no identified tenant.

For listed multinationals, stockpiling is an unwanted expense.

“At the end of the day you are tieing up cash,” said Duncan Brock, a group director at the Chartered Institute for Procurement and Supply. “You’ll end up with obsolescence. You’ll pile up stuff and end up with stuff you can’t use.”

For small businesses cash flow can be an existential issue. “At any one time, we have £200,000 tied up in transport,” said Peter Davies, co-founder of OSSL, a steel group whose products include horseshoes for much of Europe’s equine population. “With a 10-day delay, you’ve got £1m floating around. That is cash we may not have . . . That’s our biggest fear.”