Brexit a ‘rude awakening’ for spirits

A new Rabobank report claims the fall-out from the British vote to leave the EU will have “critical implications” for the beverage sector, with the “rude awakening” requiring significant contingency planning.

Brexit was a ‘rude awakening’ for the spirits industry, according to Rabobank

In Beverage Companies in the Wake of Brexit, authors Francois Sonneville and Stephen Rannekleiv identify short- and longer-term implications of the Brexit vote on 23 June and suggest a number of contingency plans for drinks producers.

Alongside the impact of the devaluation of the British pound, the authors identify the implications of potential trade barriers as a challenge to the sector.

Once the UK triggers Article 50 of the Lisbon Treaty (expressing the decision to leave the EU), the country will have two years to re-negotiate trade agreements.

While it is unclear what these new trade agreements will look like, “it is difficult to see how the current situation for the UK can improve,” the report reads.

“The trade tariff of 0% is a main characteristic of the common marketplace and is as good as it gets for companies with international exposure,” the authors state, adding that while for some British companies facing competition from within the EU may benefit from protectionism, it “would prevent British consumers from having a broad choice of products”.

Brexit and spirits

For the spirits sector in particular, the weakness of the pound will hit imports including Cognac, Bourbon and others, the report reads. “The weakness of the British pound will likely provide some opportunities for scotch exports in the near term, but scotch suppliers are clearly concerned about the potential of losing the free trade agreement with their largest market.” Sonneville and Rannekleiv also add that in the event Scotland breaks away from the UK to remain in the EU, “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”.

Contingency planning

Looking forward, the Rabobank report suggests hedging against exchange rate volatility as short-term solutions to mitigate the effects of Brexit.

Pipeline loading – moving as much product into the end market as possible while conditions remain favourable – and shifting geographic market focus, with foreign companies moving away from the UK to “focus their sales efforts in order to generate greater returns”, could also offset challenges.

Looking to the longer-term, the Rabobak report suggests adjusting the value chain to minimise impact of future tariffs and increasing activity in end-market as ways to manage the Brexit impact. In addition, “[companies] could consider changing the country of origination of inputs and/or the ingredients used, provided this does not lead to a large change in consumer perception”.

However for products with GI status, including Scotch, or those sold as ‘export’, will be unable to physically move operations.

Rabobank also forecasts an increase in merger and acquisition activity as the depreciation of the pound crates attractive buying opportunities.

“The Brexit has been a rude awakening for the beverage industry in the UK and abroad. The devaluation of the British pound will have an immediate impact, and there will be winners and losers in the industry,” Sonneville and Rannekleiv conclude.

“Outside of the EU, new trade deals might raise or lower barriers, but for trade between the UK and the EU—where barriers are currently absent under the common market agreement— deterioration is likely.

“Some companies might benefit from this, but the overall effect will be negative, and those that might be impacted should look at contingency planning.”

Immediately following the Brexit vote on 23 June, representatives of the international drinks trade spoke of “serious issues” that will require “urgent attention” to support producers.