Food and beverage

Brexit – implications for the food and beverage sector

Trefor Griffith Trefor Griffith

Just over seven months after the people of the UK voted to leave the EU there is still confusion and uncertainty around what this will actually mean.

Following Theresa May's speech and the supreme court case a clearer vision for the UK's new relationship with the EU is developing. The Bill to enable the triggering of Article 50 is before Parliament and government are confident that they will be able to inform Europe of our formal wish to leave the union by the end of March.

Regardless of the UK's ambitions, it is important to remember that we are about to enter a period of negotiation and it is impossible to predict the outcome with any certainty. That said, we can expect any new deal to have large implications, not only on the country but in particular on the food and beverage industry.

Whilst it is early days, we have already seen significant effects on the industry. There has been a huge movement in currencies driving up input prices as well as pressure on workforces given both the currency issue and potential restriction of movement in the future.

The weakening of sterling against the euro and dollar has put extra pressure on all parts of the supply chain and this situation will be compounded as the currency hedges in place by many companies expire. The currency shift has led to both ingredients, finished goods and packaging imported from abroad becoming more expensive. As widely forecast by many (including industry experts such as former Northern Foods Chairman Lord Haskins and ex-Sainsbury’s CEO Justin King), consumers can expect to see food price inflation for the first time since 2008, with predictions of a 5-8 percent increase over the coming six months.

Supply chain woes

With a rise in costs, it is inevitable that food manufacturers will seek to pass on those increased costs to the retailers, and ultimately the consumer. This was brought to the fore in October 2016 and the public dispute between Tesco and Unilever, and will only be a taster of more to come at all levels of the supply chain in an already cut-throat market.

The UK governments desire to leave the Single Market and potentially the customs union will also provide challenges to those firms with cross boarder supply chains.

Labour market feels the squeeze

Whilst formal Brexit negotiations may not start until the end of March 2017 and are likely to take two years or more to complete, the impact on the labour market is already being felt.

According to the FDF, food and drink manufacturing supports 3.9 million jobs across the £108 billion UK food chain and employs 400,000 people directly. Of these, almost a third (29%) are non-UK EU nationals. And in the agricultural sector, EU-workers account for 65% of the workforce, which does not even take account of seasonal workers. The proportion of EU workers in the food and drink sector is the highest of all sectors.

Whilst migrants from the European Economic Area (EEA) with five years of residence are in theory unaffected, some, particularly Eastern Europeans, are already leaving the UK – either going home or to other EU member states such as France and Germany. This may be partly for economic reasons, with the weakening of sterling making the repatriation of a British pay packet less attractive to an overseas worker. However, another reason also being cited is that they no longer feel welcome in the UK (with some reports of race crime having gone up 57% since Brexit). If EU nationals are unable to stay or chose to leave following the UK’s exit from the EU, the already existing skills shortage will be exacerbated across all levels of the sector, which in turn will lead to increased employment costs.

Exports on the rise

On the positive side, the weaker pound means that UK exports have become increasingly competitive in recent months. Just one in five food and drink companies are exporters, so there is significant opportunity to boost export volumes in the F&B sector[1]. In October, Defra published a new international Action Plan for Food and Drink that sets out how government and the industry (including the FDF) will work to create opportunities and increase capability for UK exporters over the next five years. This includes nine priority campaigns across 18 countries targeting additional exports worth £2.9 billion.

Increasing food and drink exports is of course not an overnight process: establishing or increasing export routes takes time, not all products are suitable for export and ultimately, UK manufacturers will still be impacted by the increased cost of importing raw materials into the UK prior to exporting the end product…Government support in conjunction with bodies like the FDF is welcomed in this area and as FDF have stated regularly, export growth is vitally important for the industry. It is great to see that companies are not sitting on their laurels: food and non-alcoholic drink exports soared 12.1% to £3.4 billion in the third quarter of 2016, with trade to non-EU markets growing at twice the rate of countries in Europe.

In conjunction with targeting increased export volumes, there is an opportunity for F&B companies to reduce the volume of both imported finished products and ingredients… According to Defra, the UK is currently 76% self-sufficient (‘production to supply ratio’) in home grown food, and therefore relies on imports for the things which cannot be grown in the UK due to our climate, or where it is more economical to import the product [ie chickens can be produced here, but the feed comes from overseas and we favour breast meat so would end up exporting the rest of the birds back overseas again]. In monetary terms, this equates to £35 billion of food and non-alcoholic drinks imported into the UK (FDF/ HMRC data: 2015), of which circa 70% originates from the EU.

If the cost of imported products is going up, it is in theory logical to import less and find alternative home-grown ingredients and produced goods, an opportunity that Premier Foods CEO and new president-elect of the FDF Gavin Darby strongly believes in. Whilst import substitution clearly would not be a route without complication, including the need to reformulate products, its benefits would be significant: swerving currency depreciation and increased costs, boosting the local economy, honouring the demand for local produce with less air miles, greater traceability etc. Chocolate and cheese are two of the leading export products... UK cheese exports reached an all-time high in 2015, with a 11% rise in volumes in the year to date (reaching a value of £356 million). If other countries, including France, are recognising the quality of our Colston Bassett Stilton and Stinking Bishop, then it seems the right time for the UK consumer to focus on more local and competitive products.

As we have reviewed, it is a time of immense uncertainty and challenge for the F&B sector... But it is a sector that is defensive and resilient, and it is such an environment that can create a platform for opportunity, innovation and change…

References

  1. UK food and drink: international action plan 2016 to 2020

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