Over two years post the Brexit vote, it is clear a period of uncertainty and volatility continues. As negotiations progress, food and agribusiness companies continue to operate in a politically volatile and extremely uncertain trading environment. In the immediate aftermath of the UK vote, currencies and share prices displayed material levels of volatility, which is indicative of the uncertainty that prevailed.
While the sector has weathered its share of crises, Brexit is the most challenging to date. Businesses are having to think about a plethora of challenges, such as the impact on their ability to trade profitably with the UK, retain customers and competitive edge, manage supply chains, deal with increased levels of regulation, potential delays with customs and border crossing, the imposition of tariffs and currency volatility.
Ireland has a significant bilateral trade dependency with the UK. Exports to the UK represent 35% (€4.5bn) of total Irish exports (€12.6bn). In the UK, the economy is becoming more challenged, and recent indications from a variety of sources are calling out increases to food prices for the consumer, as well as a reduction in consumer spending. While the UK is a net importer of food, it’s likely that price will be a big factor in consumer choice. The potential imposition of tariffs, combined with the time and cost of increased regulation, will likely increase the cost of Irish food for UK consumers. Bord Bia advises companies working in the sector to ‘prepare for the worst’, or in other words a hard Brexit.
Bord Bia commissioned Aon to support the development of ‘Brexit Barometer’, a risk diagnostic tool designed to assess the exposure of Bord Bia’s clients to Brexit across six key areas.
1. UK customer relationships
Ongoing dialogue with UK customers is key to a strong business relationship. While almost all companies (85%) have a continuing dialogue with their UK customers, there were mixed levels of success reported when it came to be having Brexit-specific discussions. Almost half (46%) reported that UK buyers clearly did not want to discuss Brexit. A possible explanation is the significant amount of disruption in the UK market, such as:
• Growth in market share of discounters (Aldi, Lidl, Netto)
• Increased activity in online channels (Ocado)
• Significant consolidation (Tesco/Booker, Asda/Sainsburys and Co-op/Nisa)
• High profile business failures (Palmer & Harvey)
The UK is an important market for Irish food and drink producers, with 80% of the view that they will continue to have growth opportunities in the UK market. Bord Bia advises companies to develop a marketing strategy specifically tailored to the UK market and to assign a UK-focused sales and marketing team, either in-house or managed by a third party.
2. Supply chain
Supply chain management is fundamental to strong risk management, and the food sector is certainly heeding best practice, with 62% of companies stating they have mapped their supply chains. The main risks were identified in the areas of distribution, whether by sea or via land-bridge, and availability of imports.40% of companies have reduced their supply chain costs because of Brexit.
Of some concern is the fact that 61% of participants have not developed contingency options for possible location and levels of stockholding levels in their supply chains due to Brexit. Undertaking an impact analysis through a series of scenarios will help companies understand the needs of their business in regard to stockholding.
24% of companies have changed their sourcing strategy because of Brexit. There is valid concern in relation to security of supply, whether for raw materials, or packaging. Emphasizing the importance of detailed supply chain mapping, when changing from a UK supplier to a supplier from a different country, it is important to understand where the new supplier is sourcing from. If the new supplier is sourcing from the UK, then the challenge of security of supply is simply pushed further down the chain.
Supply chains are fragile, and it is important that companies put measures in place to ensure they are as resilient as possible. 62% of companies stated that relationships with their key supply
chain partners are of significant strategic importance to their business. What is concerning is that of those who identified a critical dependency on supply chain partners, 59% have not tested the resilience of their chains, which could leave their business extremely vulnerable in the event of a failure with their supply chain partner.
3. Customs & Tariffs
The potential introduction of customs and tariffs has caused alarm bells to ring loudly within the industry, particularly for companies with no experience exporting beyond the EU. While segments such as dairy and seafood are truly global businesses, others such as prepared consumer foods and meat export primarily to EU markets.45% of respondents felt they had either significant or a reasonable amount of experience in complying with official requirements relating to the importation or exportation of raw materials & inputs from/to non-EU locations.
Confidence levels in managing customs processes were also mixed, with 28% highly confident and 45 % moderately confident.
While only 25% of companies state that they have modelled the cost of customs processes, this is an increase on the previous year (17%). Companies are advised to engage with Revenue at the earliest opportunity to clarify any questions they may have in relation to tariff classifications.
4. Financial Resilience
The Irish food and drink industry has decades of experience in being exposed to the vagaries of currency volatility.
Use of hedging strategies as a means of managing currency volatility is mixed, with 48% stating they hedge their currency exposure. When looking at companies in the €100m+ turnover range, 88% hedge, which is indicative of the fact that larger companies can tend to be more financially sophisticated.
For half the companies surveyed, Brexit has not had an impact on their investment strategy over the last 12 months.
In an environment of financial volatility, it is not unusual for credit and working capital to become less accessible, and for insurance costs to increase.
5. Market Diversification
As the sector in Ireland is quite export-led, market diversification is always on the agenda of food and drink companies. All companies with turnover more than €100m have market diversification strategies in place. 85% of all companies are looking to expand their business into new markets.
Key growth drivers include attending trade fairs, using market research and leveraging networks. Progress from 2017 was identified, with 61% of companies having a marketing strategy specifically developed and /tailored for non-UK export markets, compared to 56% in 2017.
6. Emerging risk
While many Brexit risks have been identified, as Brexit moves into the next phase, it is important for companies to consider emerging risks. Developing and maintaining a risk register, and regularly reviewing it, is a simple and effective way to identify risk.
The Top 3 future risks identified were:
1. The impact of UK inflation on Ireland
2. Regulatory and legislative changes
3. Increasing competition
Many companies have created a Brexit team, with representation from a variety of functions, so that a holistic business-wide view of Brexit related risk can be identified and assessed. Best practice advises that companies should prioritise those risks that are within their control, before addressing external risks.