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Brexit round-up - Issue three

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Latest views and news on Brexit and its impact on food and grocery businesses. For further help through strategic briefings, scenario planning workshops or research customised to your business, please email brexit@igd.com

Prime Minister Theresa May has stuck to her timetable and has invoked Article 50. Last summer, to coincide with the EU referendum, we produced a summary of the range of possible outcomes from Brexit for the UK food sector. Much has happened since. To support your planning, we have updated the deck to include what we have learned and what still needs to be resolved. 

DOWNLOAD HERE

Also in this issue:

  • Shocks to the system – 2016 provided several political shocks including the UK’s vote to leave the EU and the election of Donald Trump as the 45th US President. We look at where the next shock might arise and the impacts on sourcing policy and supply chains.  
  • Shopper resilience – the consumer reaction to the UK’s vote to leave the EU has confounded most forecasters who expected people to be shocked into spending less and building savings. We look at shopper confidence and if the trend will last.
  • Inflation bites back – After a prolonged period, where deflation was the bigger concern, inflation across all items has been strengthening both across Western Europe and the USA. Why are many forecasters saying that inflation is probably a bigger risk than deflation? 
  • Immigration and the food chain - One of the biggest questions for UK based companies about Brexit is how it will affect access to labour. How exposed is the food chain and how might your company adapt?

Need to understand the implications of Brexit on your trading relationships?

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Shocks to the system

The shocking truth

Which did you consider the bigger shock in 2016? The UK’s vote to the leave the EU or the election of outsider Donald Trump as the 45th US President?

When Matteo Renzi, the Italian President, lost his referendum and resigned in December, this came as less of a shock but still a jolt to the established system.

To understand the drivers behind these dramatic events, consider those things which haven’t changed recently.

The USA, UK and many other developed nations share a range of long-standing and seemingly intractable issues including an ageing population, weak productivity growth, unfunded social commitments and mounting public debt.

So far, governments haven’t been able to find effective responses. The headline performance figures may look reasonable, with growth in most economies but underneath this, wealth distribution is becoming increasingly skewed. An ECB report of December 2016 suggested that household wealth in the Euro Area is in long term decline1.

Under these circumstances, we can all understand why many people are unhappy and eager for change, even in countries which are apparently wealthy and stable.

More shocks ahead?

Unless Western governments can find quick solutions to these challenges, we can expect a growing number of people to feel squeezed and resentful. Exactly how they express that resentment is the difficult part to predict.

Where might the next shock arise? Many are looking at elections to come in Germany and France. The political direction for Italy appears to hang in the balance. Hungary and Poland are increasingly rebellious towards the EU.

If any other country follows the UK and elects to leave, the future of the Union would be thrown into doubt. Meanwhile, the UK could be heading for a breakup with a second Scottish independence referendum seemingly inevitable at some stage.

The recent mood has furthered the causes of nationalism although the shocks of 2016 could act as a rallying point for internationalists. Either way, political uncertainty will continue, creating an unstable environment for your business.

Is international trade secure?

Amongst the biggest concerns for businesses is that the world trading system could begin to unravel. Brexit clearly has the capacity to redraw trade between the UK and the EU whereas the ‘America First’ policy of President Trump could prove even more globally significant, especially if it triggers counter-measures.

In the fullness of time, we could well find that the changes are relatively minor and manageable. However, if globalised markets begin to fragment, it will present big challenges for your company, particularly if you’re a major importer or exporter.

At best, it would add cost and complexity. At worst, it would require rethinking of sourcing policy and supply chains, perhaps even putting some products out of reach for consumers for parts of the year.

For UK based readers, the charts below show the UK’s particular exposure to these forces. In 2015, it was the fifth largest food importer in the world and the 15th largest exporter, accounting for 5% and 2% of trade flows respectively.

It also had the largest food trade deficit in the EU, at least in terms of value. This leaves the supply routes vulnerable although nations exporting to the UK have a strong incentive to keep trade open.  

Global food trade - annual value

Source: WTO, March 2017 (latest data available)

Global food trade - key participants

Source: WTO, March 2017 (latest data available)

The UK has the biggest food trade deficit in the EU

Source: WTO, March 2017 (data is for 2015 - latest data available)

Political shocks are, by their definition, difficult to anticipate but after the events of 2016 investors will expect companies to put greater emphasis on scenario planning and business resilience. IGD can help with this. Please contact Adrian Williams on adrian.williams@igd.com or +44 (0)1923 851987 to discuss how IGD can assist in your strategic planning and decision making.

(1) The Household Finance & Consumption Survey No 18, European Central Bank, December 2016


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Shopper resilience

Crisis what crisis?

The resilient consumer reaction to the UK’s vote to leave the EU has confounded most forecasters who expected people to be shocked into spending less and building savings. In fact, spending on groceries moved into sustained growth territory for the first time in years whereas unsecured consumer credit (in other words debt) grew by almost 11% in 2016, the fastest pace for 11 years.

IGD’s ShopperVista survey shows that UK shoppers’ personal financial confidence has remained broadly stable. Admittedly, the financial optimists are in the minority but that has been the case for several years.

The forecasters wrongly assumed the public would share their own sense of risk. As IGD has been arguing, ever since the Credit Crunch almost a decade ago, we have been living through times of ‘perma-uncertainty’. The public’s spending behaviour suggests it doesn’t view Brexit as beyond the bounds of this new normality.

 There are two ways of interpreting this. Perhaps the public is correct. The experts may have exaggerated the risks. More optimistic recent forecasts give weight to this view.

Alternatively, even though the forecasters wrongly guessed the public reaction they could still be right about the risks. If shockwaves do hit the economy, the rising level of debt would make the impact more severe.

The business community will be hoping that strong consumer spending will continue for as long as possible while preparing for the possibility that the next downturn is not far away.

Shopper sentiment is moderate, but stable

Source: ShopperVista, IGD Research, March 2017
Base: 1,700 shoppers per month, balanced sample (sample frame changed Sep 16)

Concern over future food pricing is rising


Source: ShopperVista, IGD Research, March 2017
Base: 1,700 shoppers per month, balanced sample (sample frame changed Sep 16)

Shoppers see a strategic need for UK grocery production

Source: ShopperVista, IGD Research, March 2017
Base: 1,700 shoppers, fieldwork: Dec 2016

Planning for the next recession

So, whenever the next downturn does occur, what will it mean for consumer spending?

We can get an idea by looking backwards, at the last period of economic turmoil and rising prices. When UK grocery shoppers were faced with a drop in personal wealth from 2007-09, their main response was to shop around more.

Shaken out of their long-established habits, they took a fresh look at the options and moved increasingly between retailers and products, hunting for value. One-stop shopping eroded and big stores in particular bore the brunt.

In similar circumstances people are likely to adopt similar tactics. Shopping behaviour in any future financial squeeze could therefore be characterised by:

  • Increased readiness to switch retailer and brand
  • More cherry-picking of products on promotion
  • A renewed emphasis on minimising product waste
  • Smaller but more frequent transactions

However, the landscape will have moved on from the last recession, with for instance, a larger footprint of discount stores across the UK, a wider range of online options, a more advanced food-to-go sector and vastly more data available for both companies and consumers to deploy.

How could you convert those conditions into an opportunity? Consider which channels and which categories/tiers would benefit and which would lose out. How well positioned are you for that?

Your competitors’ loyal consumers would become ‘in-play’ again. So how would you entice and then retain them; and also retain your current loyal consumers?

2007-09 saw an explosion of price promotions that encouraged the ‘merry-go-round’ of shoppers. Can you be smarter next time, for instance by using data, technology and new reward systems to lock your consumers in?

It’s a relief that British consumers have proven so resilient. Their refusal to panic is a good sign if choppier waters do lie ahead. However, we remain in an age of ‘perma-uncertainty’ and many different futures are possible. Planning for these can make companies resilient too.


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Inflation bites back

Costs in the pipeline

After a prolonged period, where deflation was the bigger concern, inflation, across all items, has been strengthening, in the USA and across Western Europe.

Although still low by historical standards, there are several reasons why inflation is reasserting itself.

  • In November 2016, the oil cartel OPEC agreed its first cut in production for eight years, causing an immediate 10% surge in the price of oil.
  • Although still patchy in places, most of the world’s big economies are in a growth phase. There’s also anticipation, that under President Trump, the US economy will embark on a large-scale, resource-hungry, investment programme.
  • Various primary commodity markets have surged recently, including metals and food ingredients. OECD/FAO and EU forecasters predict further price increases, albeit modest ones, for agricultural products over the next few years.
  • Many governments have expanded money supply in recent years to offset the risk of recession. Theory suggests that this should eventually lead to inflation as money circulates out of the banking system and into the real economy.
  • Potential restrictions on freedom of movement could push up labour costs, especially in the UK where increases in the minimum wage are also about to come into force.
  • In some countries, currency movements have exacerbated the problem.

This is not to say that the only way for prices is up. More recently, the oil price has been falling again with signs that the OPEC agreement is already disintegrating. The global economy remains fragile and new shocks to the system could hit economic activity, demand and therefore prices.

However, the consensus amongst forecasters is that inflation is probably now a bigger risk than deflation.

Feeling the squeeze

If you work for a business in the UK, you might welcome a little inflation, especially after a period of depressed prices that made your sales and growth targets more challenging to hit. Inflation is also helpful if you need to pay off any loans.

However, this assumes you can pass on your cost increases, rather than taking them out of profits. At a time when many retailers are simplifying their ranges, it’s an awkward moment for suppliers to be negotiating a price increase.

Fortunately, some cost pressures, such as those related to currency change, may dissipate or reverse over time. Others may be more permanent though, requiring a strategic response.

One way to turn is to automation, especially if labour costs keep on rising. Rapid advances in robotics and artificial intelligence could offer you big opportunities, especially for roles that require repetitive tasks.

A second opportunity is to take cost out of the system through better end to end supply chain management. When IGD studied 33 product chains, around ten years ago, we found that at least 20% of the costs in an average chain, add no value to end consumers. They arise because of co-ordination problems, resulting in waste, price markdowns, empty vehicles, gaps on shelf and so on.

Instead of asking your customers for a price increase, have you considered asking for a cost decrease, i.e. a change to any procedures which add to your costs for no underlying good reason?

The era of falling commodity prices may be coming to an end

Source: IMF, March 2017

Grocery manufacturers are seeing input prices rise ahead of output prices

Source: Tables T1 and T2, Producer Price Inflation MM22, ONS, March 2017
Codes refer to specific ONS measures; indices rebased by IGD
“Grocery” refers to food, beverages and tobacco; “input” prices are for goods only - not energy, labour etc; “output” prices include duty

Grocery price inflation seems set to return

Source: ONS, March 2017


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Immigration and the food chain

Where next for immigration policy?

One of the biggest questions for UK based companies about Brexit is the impact it will have on access to labour.

The government’s Brexit White Paper states: “In future we must ensure we can control the number of people coming to the UK from the EU” but it’s currently far from clear how the new immigration regime will operate.

There are 5 broad options:

  1. Continue to favour European born workers but with some new restrictions
    This might involve a quota, for instance, initially set quite high to minimise disruption
  2. Adopt the work permit system currently applied for people from the rest of the world
    This would have the merit of being administratively straightforward
  3. Equalise the rules applied globally but relax them in some areas
    It might prove necessary, for instance, to apply exemptions for various trades to avoid severe shortages
  4. Discriminate against European born workers
    This could happen if Brexit negotiations become acrimonious or if other parts of the world are given preferential treatment as part of new trade deals
  5. Tighten the rules for all nationalities
    This might happen if the government introduces strict new total immigration targets

How exposed is the food chain?

The decision will be critical for food companies. Using ONS data from 2015, 41% of the UK’s food manufacturing workforce were born outside the UK. According to the Migration Observatory at the University of Oxford, this is the highest for any sector of the economy.

Also, 33% of foodservice workers were born outside the UK, 22% of those working in farming and 24% of those in distribution. At 16%, the figure for retailing/wholesaling is close to the average for the whole UK economy of 16.7%.

Over a third of foreign-born people working in the UK have gained UK citizenship but nonetheless the food chain clearly relies considerably on expatriate labour. About two-thirds of all expatriate workers in the UK were born within the EU, so if their access is restricted in future, the employment landscape would be transformed. There could also be a retention challenge if a higher proportion than usual of expatriate workers choose to return home once the UK leaves the EU.

With 3.9 million people employed in the food chain in total, it will take time to adjust to any new immigration regime. If the rules are significantly tightened, the biggest impact is likely to be on ‘lower-skilled’ roles which are disproportionately filled by EU born workers. This group includes crop pickers, warehouse operators, café staff and waiters in restaurants.

Skill level UK nationals EU nationals Non-EU
High 44% 34% 46%
Medium 46% 44% 41%
Low 10% 22% 13%

Source: The Fiscal Impact of Immigration in the UK, Carlos Vargas-Silva, 2016

For people from outside of Europe, it is much easier to obtain a UK work permit for roles with a salary above £25,000, rising to £30,000 in April. So, if similar rules become applied to Europe, companies could face a shortage of applicants for roles below that pay rate.

It is possible, that a surge of British born people will emerge to fill tomorrow’s vacancies, especially if pay rates were to rise. However, if today’s economic conditions persist, this is doubtful. UK unemployment is at its lowest level since 2005 and there is a mismatch between where the jobs are needed and the remaining pockets of unemployment. Currently 43% of all expatriate labour is based in London.

How will companies adapt?

The CIPD has polled companies to assess how they would try to counteract any future restrictions on importing labour. The results are summarised below.

Response % of companies
Create more apprenticeships for existing staff 10
Recruit more school leavers 10
Leave positions unfilled 10
Consider relocating operations abroad 13
Build links with schools/colleges to boost talent pipeline 14
Recruit more UK born graduates 16
Recruit more apprentices 17
Invest more in training or upskilling staff 17
Seek to retain older workers 19
Continue to recruit from the EU if possible 26

Source: CIPD 2017

What might work for individual employers might not work for the economy as a whole, for instance not everyone would be able to recruit more school leavers.

Time to speak up

According to the Migration Observatory: “There are few obvious statistical metrics for prioritising different kinds of immigration in the low and middle skilled echelons of the labour market, making it inevitable that political judgment will play a strong role in how the overall system should be designed.”

Those political judgments are already being formed. If your business is affected, it’s vital to speak up, either directly or via your trade association. As a non-lobbying body, this is not a role that IGD performs but for most trade associations, access to labour will be high on their action list for years to come.


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