To Deal or Not to Deal: The Brexit Equation

Two days before the UK was due to exit the EU, a new extension has just been secured. The country can remain part of the Union until October 31, with a “term paper” intermediary report due in June. All scenarios are still on the table, from a no-deal Brexit, to no Brexit at all, by ratifying Article 50.

The new extension comes after the failure to agree on a Brexit deal and as more than one million people marched in London to demand a second referendum, under the motto “Put it to the People”. A separate petition to the UK parliament — which calls on Britain to revoke Article 50 and remain in the EU — has over 5 million signatures.

In these circumstances, scenarios are bleak for the food industry and set to impact bakery manufacturing, too, due to the deep uncertainty of the path ahead in a little while. But to what extent? Something analysts refused to even compute three years ago is here now: a no-deal Brexit could cost the UK food industry USD1.5bn, according to Euromonitor research, which also forecasts sales value of packaged food in the UK to be affected to a greater extent than volume through to 2023.

“Under the Light/No Brexit scenario value will be higher than the Baseline by 1.2% (or USD1.0 billion). Under a No-Deal Brexit, however, value is forecast to be 1.7% lower (USD1.5 billion less), and a Disorderly No-Deal Brexit would mean sales below the Baseline forecast by 4.4% (down USD3.9 billion),” Euromonitor says, anticipating that the fresh food supply chain could receive the biggest shock, as the UK imports approximately 2/5 of all its food.

Brace for a Brexit Landing

Dairy, confectionery, and savory snacks are forecast to take the hardest hit to sales value under a No-Deal/Disorderly No-Deal Brexit. “Less exposed” packaged foods categories include baked goods, biscuits, and snacks; however, we must navigate possible uncharted territories for trade pertaining to any ingredients, machines, intermediary, and final products. Contingency plans are starting to take shape: in a recent joint letter to the Secretariat General of the European Commission, Copa and Cogeca, CELCAA and FoodDrinkEurope, on behalf of the entire EU agri-food chain, were welcoming the set of measures taken in the case of a no-deal Brexit by the EC.

However, they expressed the belief that more could be done to mitigate the potentially devastating impact of a no-deal Brexit. Further clarifications followed suit, on April 4, among which: the flexibility provided by the suggestion to allow for the exhaustion of stock already on the market before the date of departure, and proposals for checks on product safety to be carried out in the least disruptive manner, away from the land border on the island of Ireland if possible. FoodDrinkEurope reiterated that either way, whether it is a “soft” or “hard” Brexit, it would be disruptive to the market. “The UK imports EUR33bn worth of food and drink products every year from the EU; should the UK leave both the Single Market and the Customs Union, there will be significant difficulties in continuing this trade,” the organization said in a statement.

For many companies, particularly SMEs, this would be the first time they do business with a “third country”, a demanding move looming ahead as the feared No-deal Brexit starts to look like a likely scenario. For the extraordinary European Council Summit on Brexit held April 9, FoodDrinkEurope recommended “that an extension to the Article 50 procedure to allow for an orderly Brexit be agreed in this week’s summit.” This would ensure a much-needed transition period so that businesses could prepare for the new status.

And this doesn’t only impact businesses, but also consumers. The continued uncertainty has already had changed purchasing behaviors throughout the UK, with consumers retreating into a cautious stance as a reaction to the deep political unknown.

Possible Scenarios

UK’s Agriculture and Horticulture Development Board (HDB) warned about potential outcomes, and are now a comprehensive source of information for any Brexit to support the market. In this equation with a destabilizing amount of variables and unknown elements, there are also optimistic views (cereals will have no tariffs imposed, for example); Alantra’s UK advisory business was telling us not too long ago that due to the nature of the products, which are simple and have a short life, the bakery industry is at an advantage when (any) Brexit comes. This is further driven by the consumers’ mentality, Alantra noted; they have high expectations and require premium quality products, fresh and local. Although businesses would prefer British products (ingredients, services) post-Brexit, prices will undoubtedly go up as anything imported would cost more. Labels will need to change, from day one, since as of the withdrawal date, EU food law no longer apply to the UK. The EC sent a notice at the end of March, reminding economic operators the legal repercussions that need to be considered when the United Kingdom becomes “a third country”.

On the other hand, the following months might bring many changes. As final preparations are taking place in working groups, individual baking businesses and affiliated organizations, mapping the unknown is the challenge, deal or no deal. With the cards all on the table, from the disruptive No-deal Brexit, to the “flextension” currently granted, the resolution has a new date. In these circumstances, cautiousness is the sentiment as all-encompassing solutions are penciled in.