Will Brexit be bad for our baskets?
- By 7am this morning, Britain imported £5.5 million of food and exported £420,000.
- By 10am, 778,000 avocadoes were imported.
- By 2pm, 4.4 million apples were imported into the UK and 246,000 were exported.
- Every day, £18.8 million of food is imported into the UK and £1.4 million is exported.
- Bearing this in mind, will Brexit be bad for our baskets?
Throughout this blog I will focus on a no-deal scenario, how a hard Brexit will impact your food operations and how you may be able to mitigate the challenges that a hard Brexit will bring.
I hope to present the facts in an apolitical manner, to assess whether Brexit will be bad for our food baskets. By the time you have read this blog, I hope that you will go away with an idea of the key areas that you need to plan for and some idea on how to do this to ensure that you are able to continue to provide healthy and tasty food for all your customers, whether they be pupils in a primary school, students in a college or visitors to your business.
Where do we find ourselves currently?
As of the 14th of October, Brexit talks continue in Brussels ahead of the crunch summit on 17th October. After talks in Brussels this weekend, EU ambassadors were told the UK would make concessions to its post-Brexit plan for the Northern Irish border. But the bloc’s chief negotiator, Michel Barnier, said a “a big gap” remained over customs arrangements.
Both sides have said they hope to agree a deal before the EU summit on Thursday and Friday. The government says if a plan is agreed, it will introduce a withdrawal agreement bill to be voted on next Saturday in a special Parliamentary session. It is seen as the last chance to do this before Brexit is due to happen at 23:00 GMT on 31 October.
The UK currently has 759 trade arrangements by being part of the European Union. Only 15 deals have been replicated to date with third party countries, which include South Korea, Chile, Tunisia and Switzerland.
Operation Yellowhammer, the Government’s official document which was leaked earlier this year, showed that the country faces many potential difficulties. Businesses are experiencing Brexit fatigue after nearly three years of uncertainty, and many are by no means ready for Brexit at the end of this month. The run-up to Christmas is one of the most challenging for retail and storage space is therefore not available for food stockpiling.
British fishing quotas could disappear overnight in the event of a no-deal Brexit and British fishermen fear that they could be excluded from “British” waters after 31st October.
Bear in mind that one in five freight vehicles on British roads is a food delivery vehicle. In the event of a no-deal Brexit, transport delays are highly likely due to the freight challenges already forecast on the Calais to Dover route, the busiest in Europe. 50-85% of HGVs may not be ready for French Customs, and this will particularly impact short shelf-life goods. A two-minute delay to each lorry going through Customs will cause a five-hour traffic delay.
This will have a knock-on effect on the road network, with closures and diversions which will further stress the British supply chain. The Department for Transport has forecasted that, in a worst-case scenario, on Day One of a no-deal Brexit, transport flow rates could be reduced to 40%, and this could last for up to three months.
Operation Yellowhammer states that all of these challenges could lead to civil unrest as people cannot easily buy the foods they have been used to choosing whenever they want.
The Government has identified that 70% of the extra costs incurred by a no-deal Brexit will be shared by five industries: financial services; consumer goods; automotive industry; chemicals and plastics; agriculture, food and drink.
No-deal: a pricing perspective
Focusing on 3 key areas of cost through the supply chain: tariffs; red tape; exchange rates.
The World Trade Organisation imposes tariffs on those countries who do not have bilateral trading agreements. By exiting the EU, we are no longer part of the single market and therefore no longer have access to the current trading agreements. Moving to WTO tariffs will impact imports and exports in different ways. Non-food tariffs average at a 4% tariff increase, cars 10%, apparel 11% and food and drink incur 27%.
To mitigate the impact of WTO Tariffs the Government has proposed temporary UK tariffs in the event of a no-deal Brexit. These tariffs would remain in place for a maximum of 12 months and represent a considerable liberalisation of the UK’s current tariff policy. It would mean 82% of imports from the EU would be tariff-free, down from 100% now. 92% percent of imports from the rest of the world would pay no border duty, up from 56%.
We are likely to see an increase in the levels of food imported from outside the EU:
- Beef: current import tariff: EU 0%; Rest of the World 41%; new tariff 35%
- Lamb/mutton: current import tariff: EU 0%; Rest of the World 60%; new tariff 60%
- Chicken: current import tariff: EU 0%; Rest of the World 29%; new tariff 18%
- Pork: current import tariff: EU 0%; Rest of the World 35%; new tariff 5%
This could bring down the prices of UK-reared meat in the short term as exporting to the EU will now have tariffs. However, there are concerns about the ongoing viability of some livestock farming sectors.
Red tape, another key cost area, is likely to increase after 31st October, and could add an average of 6.9% to all imports.
A fluctuating exchange rate will also add to import costs. Sterling has devalued against the Euro by 12-15% since the referendum. This weakening of the pound has already been priced into current costs. However, a further devaluation is forecasted, making EU imported food more expensive.
Total cost impact:
The team at allmanhall have modelled the impact of these three components of cost on a foodservice basket, based on the top 500 products bought by our clients. The analysis shows that the foodservice basket will experience a 12% weighted increase in food prices for the standard WTO tariffs.
With the UK temporary tariffs in place, this figure reduces to a 9% increase on basket cost.
No-deal: a supply perspective
From Day One in a no-deal scenario, the impact on supply will be immediate. Business stockpiling and EU public holidays on 01 November may minimise initial delays, however after the two-week ‘favourable’ supply window forecast by some, shortages are predicted to occur.
UK annual customs declarations are expected to increase from 55 million to 250 million.
The British logistics system is very efficient and as a result, additional storage capacity is very limited. Just in time supply chains will be severely impacted by supply disruption and border delays. The situation could deteriorate even further in January 2020 if the EU withdraws temporary basic air, road and rail transport access for UK operators, as current arrangements will expire on 31 December 2019.
As mentioned earlier, Christmas is a key profit period for the hospitality and retail sectors. Disruption at this time could be challenging for businesses.
Looking at Northern Ireland, an increased burden will fall upon cross-border trade into and out of the country, particularly for the dairy and meat industry. Prolonged disruption would likely create some food shortages within just a fortnight.
There are three key areas where shortages are most likely: fresh food, particularly fruit and vegetables; food exported to the EU for packaging and processing before re-import e.g. chicken; key food ingredients e.g. wheat, milk powder.
This disruption to supply could lead to a possible recession, depending upon how bad the impact turns out to be, and levels of consumer and business confidence.
So how are manufacturers and retailers working to mitigate the potential risks of supply disruption?
Stockpiling ambient goods is one way to minimise supply risks but warehouse space is becoming challenging. Retailers have already secured most temperature-controlled warehouse capacity, and according to Savills Research, warehouse vacancy rates are currently at 5% – the lowest since statistics began.
One national food wholesaler has put into place a robust Brexit planning strategy:
- Priority supply for schools, hospitals, elderly care homes, prisons
- Additional warehousing
- Despite pressure from manufacturers to resist stockpiling, the company is stockpiling 6 weeks’ supplies with 7,000 additional pallets of long-life EU goods worth £8million at cost
- Increased stockholding of ‘own label’
- Moving the import route of high-risk short shelf-life goods such as fruit and vegetables and potato products to Rotterdam & Zeebrugge
What can you do to mitigate the risks of a no-deal Brexit?
As a provider of great catering to your consumers, you need to prepare a checklist in the event of a no-deal Brexit:
- Prepare for disruption to take place from 01 November
- Understand your suppliers and their ‘Brexit readiness’
- Review your menu and consider creating recipes that include less ‘at risk’ categories
- Communicate with your consumers and wider stakeholders to ensure they are kept informed of any supply challenges. A hard Brexit will result in supply disruption
- Consider increasing stock levels of ambient and frozen products to alleviate any initial challenges on fresh produce from the EU
- Frozen veg and tinned fruit may need to be an option. Assess whether you can allocate extra storage space for ambient product and/or additional freezer space
- Be flexible around quality of fresh produce
- Wholesalers are more likely to increase stocks of own-label products. Prepare to order own-label instead of branded goods where availability issues occur
- Increase your order lead time. It is not recommended to order day 1 for delivery on day 2 for use on day 2. Operational flexibility is key
- Supply disruption may cause increased product substitutions, so it is imperative that your Allergen Management processes are best practice and followed.
What are the key facts to take out of a no-deal Brexit?
- The UK is leaving the European Union on 31 October
- There will be increased tariffs and non-tariff costs
- There is likely to be supply disruption
- As a food provider, you need to create a plan and prepare to be flexible
For more information about any of these issues, do contact the team at allmanhall. As food procurement experts, we are working with all our suppliers to mitigate the risks posed by a no-deal Brexit. We are a British, independent, family-run business which puts our clients at the heart of everything we do.