Brexit threat triggers last-minute dash for warehouse space

British businesses are racing to secure extra storage space as the risk that the country leaves the single market at the end of the year without a trade deal threatens their supply chains.

Marks & Spencer Group Plc, Rowse Honey and Harvey Nichols & Co., are among companies that have recently applied to HM Revenue & Customs for a license to import and export without paying tariffs, or converted existing space into a so-called bonded or customs warehouse.

Without a trade deal, British companies reliant on business with the European Union face the prospect of tariffs on goods shipments and additional paperwork that could create delays at border entry ports. By storing imports in a bonded facility, firms can delay paying customs charges until the goods are sold. They may avoid duties completely if an imported product, such as a car part, is processed and then exported from the U.K., perhaps in a finished vehicle.

“The reality has been that companies have been waiting too long because they’ve bought into the belief that a deal will mean that things just carry on as before,” Clive Brady, chairman of the Bonded Warehousekeepers Association, said in an interview. “It’s only now, with just days to go before the end of the transition period that companies are scrambling to get things done.”

Those wanting to set up a customs warehouse need to obtain licenses through HMRC and must provide the tax authority with a bond that will be used to pay for duties in case the terms of the facility are violated. It takes about eight weeks to process an application, which explains the recent rush, says Brady. A spokesman for HMRC declined to comment.

Harvey Nichols, the luxury department store, has taken the precautionary measure of converting some of its existing warehousing capacity to bonded space to ensure it is prepared for any disruption, a spokeswoman said. The system for tracking goods subject to duties is mostly monitored electronically, which allows a warehouse to hold both bonded and non-bonded stock.

HMRC has not disclosed details on demand for bonded warehouse space. Wider general market data shows the pandemic driving a pickup in demand for storage, with lockdowns to contain the spread of Covid-19 forcing Britons to do more of their shopping online.

Increased e-commerce will create demand for an additional 30 million square feet of warehouse space this year, or about 1 square mile, according to Knight Frank. This flurry of interest in storage has pushed the vacancy rate for industrial warehouse space across the U.K. down to just 5.6%.

Marks & Spencer, which in more than 100 years of trading has never applied to HMRC for duty relief on inbound clothing and home goods, said last week it has established a customs warehouse to mitigate any potential customs costs.

The retailer receives supplies from all over the world, some of which are then moved to its stores on the continent and could attract duty from January. A spokesman said it had taken the decision not only because of Brexit but because it was a more efficient way of running a business with a large international arm.

Rowse Honey, owned by Valeo Foods Group Ltd., is the U.K.’s biggest seller of honey. It imports barrels of it from all over the world to be blended at its U.K. production facilities into its well-known squeezy bottles.

From January any EU sales may attract a duty. However the company has recently applied to HMRC for a customs facility, said people familiar with the matter who asked not to be named. A spokesman from Valeo declined to comment.

A supplier to Jaguar Land Rover is considering taking space in such a facility, according to a person familiar with the matter who asked not to be named discussing commercially sensitive information. A spokeswoman for Coventry, England-based JLR declined to comment.

U.K. and EU negotiators have set a Nov. 15 deadline for reaching a trade agreement, to give the bloc’s parliaments time to ratify a deal. The tight schedule is forcing many British companies to trigger contingency plans.

A duty-protected warehouse is far from the only solution to the risks facing some of Britain’s major industries. Some carmakers and suppliers are stockpiling parts in general warehouses in case of any short-term shortages.

Luxury-car maker Bentley, a U.K.-based unit of Germany’s Volkswagen AG, said in June it had doubled its warehousing capacity to help it manage any Brexit-related supply chain disruption. Last week Chief Executive Officer Adrian Hallmark told Bloomberg television it was ready.

“We have warehouses that maintain now five to 10 days of just-in-time stock, whereas in the past, we ran at two days,” he said. “If we have any disturbance because of ports and traffic, we’ve got 10 days’ buffer to keep us running.”

About 60% of producers have directed “significant” spending toward stockpiling, the Society for Motor Manufacturers and Traders said Tuesday.

Similarly, large U.K. food and drink companies supplying the Republic of Ireland are building up stocks to help them withstand any supply shortages.

Stafford Lynch Ltd, an Irish distributor of large brands including Tetley Tea and Wilkinson Sword razors, says it is fielding such demand from major U.K. companies and brands wanting to stockpile products that it will have exhausted its own warehouse capacity by December. CEO Conor Whelan said space in Dublin will likely be at a premium until “greater clarity emerges” on Brexit.

Warehouse space let in Ireland rose 50% in the third quarter from the second, “undoubtedly boosted by Brexit,” said Garrett McClean, executive director of industrial and logistics at global property consultancy CBRE Group Inc.

“We all have Brexit fatigue but it is now very close on the horizon and for many businesses already struggling to cope with the pandemic, Brexit is adding to their supply chain challenges,” he said in an interview. “The timing of it all couldn’t be worse.”