Brexit a ‘rude awakening’ for the drinks sector

11 July, 2016

Brexit will have critical implications for the drinks sector, given the UK’s role as both a major importer and supplier, according to Rabobank, which provides research and insights into the food and drink industry.

In its latest report, Rabobank stresses the need for beverage companies to develop contingency plans following the UK’s referendum in June, whereby the majority of voters opted to leave the EU.

It said that drinks companies will find  there are “a number of short and long-term strategic alternatives that can mitigate risks and help them to take advantage of new, attractive opportunities”.

These options include shifting sourcing, M&A, shifting geography for production/ value-add, pipeline loading, hedging and shifting market focus.

Short-term effects:

The effects of the weakness of the pound will not be immediately visible, the report said, “as hedging strategies might offset currency movement in the short-term, or upcoming transactions might still be based on historic exchange rates”.

Over time the price of products might change because of the pound’s weakness, which will lead to decision making over whether this will cause margin pressure for suppliers or whether this will be passed on to the consumer in the form of higher prices.

Trade negotiations

The decision by the UK to leave the EU will trigger a process of trade agreement renegotiations, although existing agreements will remain in place for two years, starting when the UK triggers Article 50 of the Lisbon Treaty, if this goes ahead.

The report stated: “Many scenarios are possible, but at least for the next two years, the UK will still be part of the EU, have access to the common market and benefit from EU trade agreements with the rest of the world. Once the UK leaves the EU, however, new trade agreements will have to be in place.”

Rabobank does note that it might be possible for the UK to strike a more favourable deal with some countries outside of the EU.

Beer:

Around 18% of consumption volume of beer in the UK is imported while 13% of the production volume is exported. Most leading brands are owned by international brewers with production facilities in both the UK and abroad.

“They may decide to change business models, from imported to licensed beer, but this will depend on the positioning and consumer perception of the brands,” the report said.

It noted that in the craft beer segment British brewers could see domestic competition ease as foreign competitors are affected by the weakness of the pound and the long-term threat of trade barriers.

One point it highlights in beer is that the devaluation could potentially be negative for Asahi, who has agreed to purchase Peroni and Grolsch from ABI for USD 3.5bn. “We no not, however, have insight into the financing and hedging arrangements of Asahi, and the effect might have been mitigated.”

Wine:

The fallout of the Brexit vote will have “critical implications” for the wine industry, with wineries in the EU feeling the effects most directly., but there will be “tangible knock-on effects” felt in nearly all major wine-producing regions.

“The prospect of the largest wine-importing country in the world leaving its free-trade agreement with the largest wine-producing region in the world will have an obvious impact on trade flows in the long-term.”

The devaluation of the British pound will begin to drive some of those changes almost immediately, it added.

“EU suppliers are expected to redouble their efforts in other markets, such as the US and China, which will impact domestic suppliers, as well as other foreign competitors”.

Spirits

The weakness of the pound will impact imports, such as cognac, bourbon and others, it said, although this could also open up opportunities for scotch exports in the near term, although scotch suppliers are clearly concerned about the potential of losing the free trade agreement with their largest market.

It also points out that Scottish voters were overwhelmingly in favour of remaining in the EU and are looking at renewing the referendum in order to break away from the UK and remain in the EU. This could alleviate the problem for scotch suppliers but EU wineries may be less happy about providing free access to the EU market for scotch without receiving reciprocal access to the British market for wine.

In terms of mergers and acquisitions, the report states that it would seem logical for foreign companies to look at the UK for acquisitions, as the depreciation of the British pound creates attractive buying opportunities.

In conclusion, the report states that “the Brexit has been a rude awakening for the beverage industry in the UK and abroad”.

In the longer-term the consequences will be hard to predict and while some companies might benefit from new trade deals it says the overall effect will be negative. “Those that might be impacted should look at contingency planning. Changing the value chain by shifting sourcing or relocating activities, either organically or through M&A, may help to mitigate the adverse consequences.”




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