Brexit and the Food Industry

Threat or Opportunity

The outcome of the Brexit vote on 23rd June 2016 was a surprise to many captains of industry, quite apart from the population at large. Whilst many of us have complained over the years about the increasing political control given to, or taken by, Brussels, few thought we would ever actually get around to leaving the EU, after more than 40 years of membership.

Weaknesses of the EU & Euro

Cracks in the EU infrastructure have been obvious for a long time, but it seems that many of us were prepared to live with the weaknesses so long as the benefits continued.

One of Margaret Thatcher’s greatest fears, which she frequently expressed, was the risk of the increased free trading union becoming a federalist state. At that time, such risks seemed far into the future but didn’t seem a priority concern as long as we were net beneficiaries.

In the post-Thatcher years, however, the pendulum has swung the other way and we have long since become net contributors to the EU budget. With poorer nations becoming members of the wider European Union, it was obvious that the richer nations such as Germany and the UK would inevitably become net contributors.

With the talk of Turkey and its 77 million population also becoming part of the EU, it seems reasonable to suggest that the richer nations would in future become even greater net contributors.

With hindsight, one of the UK’s best decisions must have been to keep out of the Euro (though it was a very close run thing at the time) and to leave our currency floating against the Euro has at least given us some control, not afforded the Euro states.

‘Trade Barriers’ Already Exist

Much has been made of the potential risk of trade barriers now being imposed upon the UK in its future attempts to trade with Europe. But the EU has never been a level playing field and certainly is not at present. One simple example of this is the minimum wage, which in the UK is now £7.20 per hour, similar to Germany at current exchange rates, but far higher than many of the other European countries such as Poland, Czech Republic, Bulgaria, etc. See table below.

Average minimum wage across EU countries (2016)

*No minimum wage legislation in place

As so much of the UK food and drink industry depends upon own label products, supplied to supermarkets by co-packers, these co-packers could exist anywhere within the EU to enjoy the same ‘barrier free’ trade with the UK and other EU countries. With such huge disparity between the minimum wage of different EU states however, how can this possibly be seen as a level playing field? If this large difference in labour rates is not a barrier to trade, which works against the higher labour rate economies, then what is?

Attracted by Higher Labour Rates

Second only to unemployment, the potential for individuals to earn a much higher hourly rate for their labour in the more wealthy EU member states must be one of the greatest motivators in the migration of the workforce from the lower labour rate states. In this respect, the differential has worked in favour of the UK manufacturing sector with a willing labour pool heading for the ‘promised’ land. It is hardly possible to imagine the current UK food and drink manufacturing industry existing without this huge influx of labour, ready to turn their hands to almost any task, and largely tasks that British people don’t want to do.

During the last few weeks, we have carried out a telephone survey amongst our customers, and potential customers, to sound out their own feelings about Brexit and the way in which they believe it will affect their businesses. The results, as you might expect, are quite mixed, the largest proportion of respondents have said it’s really just too early to comment.

Points of View

However, there are some interesting exceptions and anomalies. For example, the CEO of Diageo, the largest alcoholic drinks manufacturer in the world, commented last week that he didn’t really think it would make a big difference to them in the long run. In the short term, the value of their shares has increased, but this could be due to the increased export sales helped by the fall in value of the pound.

Almost the next day, the Scottish Whisky Association expressed their concern about Brexit as they believed that some trade deals agreed between the EU and non-EU countries for either low or zero tariffs, would now not be tariff free to the UK, following Brexit.

Much of this is speculation of course, and almost everyone has a different opinion, largely because it is too early to say what the long term effects will be.

The short term effects are already being felt by some UK co-packers in particular, who are dependent upon imported raw materials, and either don’t export or export very little. This means that they have to absorb increased raw material costs, or find some way to pass these increased costs on to their supermarket customers. Gaining increased prices from supermarkets is obviously not going to be easy, especially in the current competitive climate where the big four are not only battling each other for market share, but are also trying to minimise the effects of the discounters who have been increasingly eating into their traditional markets. Many might say, ‘In that case, what’s changed?’

Increase Prices to Cover Higher Costs?

One danger for co-packers, asking supermarkets for an increase, is that this might bring about a response that the supermarket could source their finished products in Poland or some other lower waged EU country and would therefore not need the UK co-packer at all.

In this respect, it could be argued that the issues facing UK food and drink manufacturers are the same as they were before Brexit, in that they face rising raw material costs and rising labour costs with little opportunity to increase prices to their customers, the supermarkets.
This leaves them with little alternative than to sharpen their focus inwardly, to further reduce production costs, whilst maintaining their high quality standards.

The greatest strength for UK co-packers in Food & Drink is firstly their ongoing investments to consistently supply safe, high quality products and secondly, their investments in continuous improvement to reduce manufacturing costs. These trends must continue, and even step up a gear or two, to ensure that unit manufacturing costs continue to reduce, whilst sustaining high quality standards.

Some Risks to the Manufacturer

The biggest risks to the UK food & drink own label manufacturers is that the low wage EU States start exporting larger quantities of quality food and drink to the UK at more competitive prices or that the low wage economies do increase labour rates to UK levels, which would automatically reduce the incentives for many EU nationals to come here, thereby turning off the tap of this readily available labour pool.

It is unlikely that either of these threats will happen overnight unless the respective EU and British governments impose tit for tat trade restrictions through import tariffs which will, in the end, satisfy nobody’s interests.

The best protection for UK food and drink manufacturers, Brexit or not, has to be to continue the manufacture of high quality products, whilst sharpening their inward focus to minimise risks (more right first time) and reduce unit production costs.

The biggest risk for UK manufacturers is that some of the lower wage economies from the EU and beyond may also raise their game along UK lines and, because of the significantly lower labour rates, offer more attractive proposals to the UK supermarkets. UK manufacturers cannot afford to forget that almost any food and drink own label products made in the UK can be obtained from anywhere in Europe within a few hours. Cost effective inward investment therefore offers the greatest protection/opportunity for UK food and drink manufacturers determined to sustain and improve market share.

Roy Green, Harford Control, August 2016.