How will Brexit impact the food and drink sector?
Tuesday 30th August 2016
It will be a number of months before we feel the true impact of Brexit, and this is particularly true in the food and drink sector, where new alliances and opportunities are forged amid a path of uncertainty.
Paradoxically, perhaps the one certainty emerging from the Brexit vote is that uncertainty will remain in the market for some time to come, although there are some avenues that may be exploited by those willing to take the chance.
The falling currency and economic slowdown is likely to create opportunities in food manufacturing. Capital investment will be cheaper for foreign investors and exports are on the rise. With uncertainty also comes the potential for depressed wages as a result of the anticipated economic slowdown, which may also mean a real terms reduction in the cost of labour, which may again may prove attractive for foreign investors.
Perhaps the key statistic is that 62 per cent of our agricultural exports go to Europe, so from a pragmatic perspective it is hard to imagine that trade deals will be detrimentally affected, at least in the short term.
However, it will be important for manufacturers and suppliers to think about how existing deals could be restructured, and one very real possibility is that a move away from the EU could actually create more red tape for businesses.
If we do not have access to the single market under the current arrangement, we may have to comply with regulations imposed by individual countries within the EU if the UK wants to trade with them. This could make the process far more burdensome and also far more costly for the food and drink sector. That means the UK must agree continued access to the single market in a trade deal before it leaves the EU – if it actually does, of course. The challenge will be for the UK to conclude a trade deal quickly – but hastiness must not give way to carelessness.
Building and fostering relationships
Building on existing relationships will be the key to forging a clearer path, although the fluctuating exchange rate may also help to create new deals and even revive old ones.
This has been witnessed with the long-awaited purchase of Poundland by Steinhoff, which finally looks likely to go ahead, thanks to Poundland’s recent low share price and profits and – notably – a weak pound caused by Brexit.
Although Poundland has been lagging slightly in comparison to other discounters – particularly its direct comparator, Poundworld – Steinhoff’s strategy in recent years has been to acquire and expand into areas of significant opportunity, and it clearly feels this is one arena where opportunity exists.
You only need to look at the continued success of Wilko and B&M to see that businesses positioning themselves correctly can thrive, and – if anything – the uncertainty created by Brexit could help to foster the migration to discount retailers, and create further opportunities for businesses like Poundland to capitalise.
Premier Foods is another business that has been the centre of buyout rumours for months, with its on-off deal for McCormick to purchase the Mr Kipling and Ambrosia owner.
Premier’s share price took a hit earlier this year after the deal fell through, mainly because McCormick refused to budge on price, but the environment created by Brexit and subsequent currency fluctuations could yet see McCormick, or other potential purchasers, re-enter the fray.
As with all deals in the wake of the referendum decision, much uncertainty remains, with the effects most likely to be felt within six months to a year, when more certainty returns to the sector.