The Buyer
Richard Siddle: We’re not doomed. How we bounce back from Brexit

Richard Siddle: We’re not doomed. How we bounce back from Brexit

So far the trade has collectively stayed calm and carried on in the wake of the Brexit vote. But the time has come for more practical steps to be considered, including increasing drinks prices across the board, if the industry as a whole is to be fully prepared for the difficult months ahead.

Richard Siddle
8th July 2016by Richard Siddle
posted in Insight,Opinion,

There have been times over the last couple of weeks that the words of Private Frazer from Dad’s Army that “We’re all doomed” have come to mind as we have lurched from one political fall out to another. All played out against a backdrop of a plunging pound that has sent jitters around all the world’s financial markets.

Two weeks on from the referendum vote for Britain to leave the European Union and it feels like we have not gone anywhere. We are no nearer to actually leaving, and certainly no nearer to understanding or knowing what we can expect in the weeks and months ahead.

What we have seen is the rate of sterling fall to its lowest level for 31 years and drop below the $1.30 point against the US dollar.

Even more worrying for a UK drinks industry that imports so much of its beers, wines and spirits from Europe is the euro and the pound are almost one to one. Well £1 to €1.17 as of today.

Time for tough decisions

There is, though, a growing sense in the trade that we are simply going to have to start making some tough decisions. But, it seems, just not yet.

It feels like we are currently in some sort of virtual holding position, hiding behind our currency reserves – hedged before the Brexit vote – waiting to crash land on a runway our navigation systems haven’t even worked out where it is yet.

Australian Vintage, one of the UK’s biggest individual suppliers of wine from Australia, gave a sneak preview in to the future when it announced to the Australian markets this week that it was set to lose at least A$1 million (£570m) this year as a direct result of shortfalls in currency trading.

We won’t really know the full impact of what Brexit means to the trade until around September when most of our major drinks suppliers and retailers are exposed to whatever the true rate ofcurrency is at that time.

Prices will have to rise – won’t they?

But either way it appears obvious that prices will have to rise. Prices both from producers wanting to sell their wine in the UK and then prices from suppliers, and distributors to their customers be they in the on or off-trades.

Perhaps the trade should follow the lead of Marc Patch, founder of GM Drinks, who this week sent out a tongue in cheek, but also very real promotion for its Santa Loretta Prosecco. Entitled ‘Brexit Promotion’ it says: “Santa Loretta Prosecco: Was £7.99. Now £8.99. Offer ends when we return to the UK.”

Sadly, in reality, there will, no doubt, be a push back, starting with the major supermarkets, for price rises to be absorbed down the supply chain.

But is it not time for us all to share the pain at this time? And that includes the consumer. Yes, in the short term, price rises can no doubt be pushed back. In the same way that any duty rise some how finds a way of settling down through the trade.

The fall out from Brexit, however, is different. It is unprecedented. It is not just the actual cost price of our beers, wines and spirits that we in the trade need to be concerned about, but the wider implications of a global financial market that is losing faith in the overall UK economy which has much deeper and longer term consequences.

It is time the trade started to collectively and individually start to make the case for introducing price rises, when they are necessary and appropriate, for all channels of the trade. It is one thing making soundings “off the record” about the need to put up prices, it is another standing up and saying so in public.

More trade support

Which is why it would be good to hear more from our leading drinks bodies about what the future holds. Yes, it is understandable they feel uneasy about saying too much when, frankly, there is not a great deal to say.

But there is still much that could be shared, a need for scenarios to be played out and more practical advice and support about how to handle future trading to be given at this crucial time.

Rabobank, the financial analysts that specialise in assessing the global drinks industry, has today released a report, Beverage Companies in the Wake of Brexit. It does well in setting out the facts and the issues, but it too is short in actually giving any solutions.

As it says itself: “The full effect of the UK’s departure will be difficult to predict.”

But what decisions are made will, it stresses, “have critical implications for the beverage sector”.

Particularly for wine. Rabobank says that whilst it might take years for trade agreements to be agreed between the UK and the various European countries, the fall in sterling means the implications of Brexit will have an almost immediate impact in the way it trades with its main European wine markets.

Equally countries like France, Italy and Spain, that made up 60% of all the wine imported in to the UK in 2015, may rather quickly have to find new markets for their wine if, as Rabobank says, “the soft pound reduce demand for wine imports”. We can expect to see the US, China and Asia become even more strategically important to the main European wine producing countries. Which in itself should be a major concern for the UK if we suddenly become no longer their number one concern, regardless of what trade agreements are put in place.

But it is not just about Europe. As Rabobank points out, the initial focus might be on the European wine market fall out, but Brexit, and the subsequent drop in sterling will have a knock-on effect with all major wine producing countries. Some good. Some bad.

Planning for the future

We can also expect to see big changes in how our major suppliers, retailers and national drinks players plan their future sourcing decisions, with shifts to where their exposure is.

Holding more stock in the UK is one solution

One solution will be to hold bigger stocks of wine and spirits in the UK to try and offset the currencychanges. But how much cash flow will companies have to be able to plan too far ahead?

The UK drinks market has already seen an increase in merger and acquisition activity as the competitive edge in size and scale becomes more important. The weak pound might now encourage more international players to make bids for UK drinks businesses. As Rabobank points out: “Changing the value chain by shifting sourcing or relocating activities, either organically or through M&A, may help to mitigate the adverse consequences”.

We really do live in uncertain times.

What, though, has been very interesting, has been the small, but hugely influential, groups of trade figures who are now sharing vital information through forums and social media groups that have emerged since the Brexit vote. Be it a running commentary on the day to day events, to sharing reports, articles and economic forecasts from around the world, this has been a unique exchange of views.

Perhaps talking quietly behind the scenes is the way for the trade to slowly, but surely work out a way to get through all this. For after all there really is no road map to follow.

Either way I can’t see Sergeant Frazer being reassured any time soon.