Brexit: the implications

27 Jun 2016

Following the UK’s decision to leave the EU – so-called ‘Brexit’ – various commentators have offered their thoughts on what it might mean for the food and beverage industry.

Brexit: the implications

Following the UK’s decision to leave the EU – so-called ‘Brexit’ – various commentators have offered their thoughts on what it might mean for the food and beverage industry.

In a post entitled “The Brexit Vote is in: What Next for the UK?” on the company’s website, Euromonitor analyst Sarah Boumfery said as follows:

“The UK population has voted to leave the European Union (EU), and attention will increasingly focus on the direct impact on business, and the practicalities surrounding exit negotiations. Unfortunately, one key word will continue to overshadow the UK economy: uncertainty. This uncertainty will not be a short-term challenge; exit negotiations are likely to last at least two years. “Unknown unknowns” are a major challenge. Added to which, with voters split almost 50-50 in the run up to the referendum, and passions running high, huge divisions have come to the fore, not least within the ruling Conservative party.

Economists were almost overwhelmingly united in their opinions about a vote to leave the EU – it would damage the UK economy. The extent of the damage has been harder to agree on. Despite heightened fears in the immediate aftermath, our macro model shows just a 2.0% fall in GDP growth over 5 years stemming from a Brexit.

Quantifying the impact of a Brexit is highly speculative, due to the many political variables involved. For example, our scenario does not include any political spill-overs towards other EU members that may wish to leave following the UK‘s precedent nor the potential of a second Scottish referendum. The length of political negotiations between the UK and the EU after the vote is also uncertain.

+ Our assumptions show real GDP growth declining by a cumulative 2.0% over 5 years, with the biggest impact being felt in 2017;

+ Real GDP growth would not return to baseline rates of growth until 2023;

+ By 2021 unemployment would top 6.0%, against 5.7% if the UK were to remain in the EU. Even 10 years on from the referendum unemployment would remain higher than if the UK remained in the EU;

+ Inflation would spike at 2.7% in 2018 compared to 2.0% in the baseline scenario, before returning to within the Bank of England’s target of 2.0% by 2020.

The uncertainty surrounding the exit strategy will lead to delays in investment decisions and will likely weaken the currency, putting further pressure on the current account.

The impact on the consumer goods industry will be nuanced, depending on exposure to EU markets for inputs and sales, and the outcome of the exit negotiations. Although consumer spending is likely to be dampened, spending might not be the main challenge for the consumer goods industry. The foremost issues could be operational and strategic – for instance to absorb or to pass on price increases? Relocate or re-focus resources, or not?

Looking at specific categories with the UK consumer goods sector, according to our Industry Forecast Model:

+ In forecast volume growth terms, in a Brexit scenario, confectionery, ready meals and sweet and savoury snacks are expected to be the most-affected packaged food sectors in the UK. Within this, volume sales of chilled lunch kits, gum and chocolate are most influenced;

+ The impact of Brexit will be stronger on soft drinks than on packaged foods. Overall the sector should see cumulative growth of 1.4 percentage points less in a Brexit scenario between 2015 and 2020. This corresponds with “lost” sales of 475 million litres over this period;

+ The impact of Brexit on the hot drink sector is likely to be broad-based but not deep. In volume terms in a Brexit scenario we expect period growth of the sector to be 9.8% to 2020, compared to 10.5% without Brexit.”

Ian Wright, Director General at the Food and Drink Federation, the voice of the UK's food and drink sector, issued the following statement:

"In March we released the results of a poll of our members which showed 70% support for britain to remain in the EU. It's inevitable in the light of those results that the majority of FDF members will regard this as a disappointing result for the food and drink industry.”

"Now FDF will work on behalf of our members and all those across our industry to find a way through this very challenging period that we face. We'll focus on working with the Government to understand what this means for trading, market access and regulation to secure the best outcome for British food and drink manufacturing business and their customers."

David Thomson, CE of the Scottish Food and Drink Federation, said:

"In March we released the results of a poll of our members across the UK which showed 70% support for Britain to remain in the EU. It's inevitable in the light of those results - and the fact that Scotland voted so decisively for 'remain' - that the majority of SFDF members will regard this as a disappointing result for the food and drink industry.”

"In Scotland it also raises the chances of there being a further referendum on independence. This risks more uncertainty for the businesses in both Scotland and the rest of the UK. SFDF will work to help the industry find a way through this very challenging period that we face.

"We'll focus on working with the UK and Scottish Governments to understand what this means for trading, market access and regulation to secure the best outcome for Scottish and British food and drink manufacturing businesses and their consumers."

Commenting on the announcement of the EU referendum result, Dr Judith Bryans, Chief Executive of Dairy UK, said:

"The UK dairy industry is adaptable, resilient and determined, with the skills and innovation to rise to the many challenges we encounter. Dairy UK did not take a side in this debate because we knew that regardless of the result, we would continue to operate in a global dairy market place and demonstrate our unwavering commitment to give the public nothing but the best of UK dairy.”

"Dairy UK will continue to liaise with the UK Government, devolved administrations and all relevant organisations to promote the interests of the UK dairy sector and help to steer our industry in the right direction.”

"We have an outstanding UK industry producing world-class products and our people have the ambition and the determination to succeed."