A lot has happened in the past month and the implications for UK food and drink are significant. It is too early to say that dust is settling, but what is clear is that the UK food industry faces a period of major upheaval. Businesses will need to review their strategies in the light of Brexit and other headwinds which are likely to impact their operations. As always, winners will be those who anticipate the changes and adapt their strategies.
In our view there are 3 macro issues that Brexit brings directly and that businesses will need to adapt to. These are on top of other recent changes in economic policy and ongoing trends in the market.
Firstly, there will be an immediate need to adapt strategies to reflect cost inflation.
Secondly there will be an unprecedented tightening in the labour market particularly impacting both agriculture and factory operatives.
Thirdly there will be a shift in competitive costs versus European suppliers impacting domestic supply and export markets
These changes will overlay against an already complex trading environment with continuing shifts in the make-up and share of the UK’s major retailers and channels, and in the landscape of global Vs local brands and indeed in the role of retailer brands. Developing strategies which can navigate the short and medium term volatility as well as address the longer term industry trends will determine the future winners.
Who will be the natural winners in this environment?
The companies best able to pass through cost inflation with a mix of price, product pack size and promotional strategies. The companies with the highest value add and lowest labour input requirements. And the companies with the international networks in place to develop and grow viable export businesses
Recent estimates suggest the devaluation of sterling post- referendum will add 4% to food cost inflation. How (and potentially whether) to pass on those costs to consumers will determine short term trading performance. UK domicile will not protect food manufacturers from cost inflation as raw material commodities, packaging, energy and fuel are all priced on an international basis. However in the most recent periods of rapid food cost inflation in 2008-9 and again in 2012, we saw some companies that successfully managed cost recovery through a range of tools such as pack size, depth of promotion and price and emerged stronger than before and as much more successful than their competitors.
This time around, input cost inflation will take place against a hugely strengthened Hard Discounter presence in the UK, which will add further challenges to how both manufacturers and the traditional major multiples respond in terms of their price and value propositions.
Brexit will have a strong effect on labour availability and the impact is likely to be felt well in advance of any formal exit from the EU. By definition, migrant labour has choices – come to the UK or go to France or Germany. The attractiveness of the UK as a destination is driven by a number of factors, but for many, the reduction in value of earnings when repatriated to home currencies, as well as the uncertainty around longer term residence rights in the UK is likely to have had an immediate deleterious impact.. Our clients are telling us that the availability of agency labour is already tightening.
Negotiation of Brexit terms will determine whether free movement of labour will continue. If it doesn’t then labour availability will reduce still further.
Overlay onto this, cost increases driven by government policy with respect to rising minimum wages and the labour market as a whole will see significant inflationary pressures.
How companies deal with these challenges will depend upon the availability of options open to them. Is the right strategy to invest in automation or to increase attractiveness of employment to a broader pool of workers? Companies need to have clear plans to deal with labour supply challenges.
Britain is a substantial net importer of food from the EU. Arguably that is not surprising when you consider the size of our agricultural base versus our population. But if one looks at the quality of the food from our food processing industry, and the truly impressive innovation from our food companies’ R&D departments, , it is surprising that our brands and technologies have not taken export markets by storm. That is not to say there aren’t great case studies to be found – Walkers Shortbread in the USA, Tyrrells Crisps and so on. But why aren’t more of our great food brands capable of more success overseas than they have so far achieved? Why aren’t our chilled ready meal businesses solving the cooking challenges of busy people in Rome and Berlin as much as they are in London and Manchester.
The devaluation of sterling provides UK food and drink companies with a unique opportunity to accelerate and establish themselves overseas. Export can provide an outlet for growth in the face of a domestic market that may well experience choppy conditions in the coming years as the markets settle following Brexit.
So a call to arms! UK food companies will be beset by new challenges. But there are opportunities too. Careful review of the implications to your business and the options open to address them is what strategy is all about.Tags: Brexit, Cost inflation, Export, Labour market, Post-Brexit, Tyrrells