Grocery on the frontline
The referendum is over and UK voters have chosen to exit the European Union (EU) by 52% to 48%. Turnout in the referendum was 72% - slightly higher than average for a UK general election.
Business impacts in the UK and Europe will be profound. The UK has been a member of the EU since 1973, and current business structures and processes have been shaped by decades of membership.
This applies to the grocery industry in particular: a key objective of the EU since its earliest days was the provision of abundant, sustainable food supplies.
The development of EU policy has therefore created numerous legal overlaps with the grocery industry. As the UK begins to extricate itself from the EU, the grocery industry will be at the forefront of change.
Some EU interfaces with the grocery supply chain
So, what now?
Under the Treaty of Lisbon, an EU member state is allowed two years to negotiate exit from the moment that it declares its intention - the referendum itself does not provide notification.
Given the complexity of negotiations, this seems ambitious. The deadline may be extended, if all remaining EU states agree. It is likely that all parties will wish to conclude negotiations quickly and extension is not assured.
At present, it is impossible to say what view remaining EU members might take of the negotiation process, or how successful the UK negotiation team will be.
This IGD briefing paper therefore considers a range of possible outcomes for the period after negotiations are completed.
The topics chosen are four areas highly relevant to the grocery industry although these are not the only ones that will affect it:
- Food production policy
- Labour movement
- Trade terms
Food production policy
Maximising food production continent-wide was an aim of the EU from the start, hence the development of the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP).
Subsidy plays a role in managing and incentivising farming activity in the EU. Subsidies make up c.40% of EU spending1 and have historically made up a large part of UK farm income (not all farmers are subsidised on the same basis, however).
The structure of UK farming and the activities undertaken naturally reflect the goals and methods of the CAP, which have changed over time (eg: current arrangements stress sustainability, not volume production).
Subsidy is not unique to the EU – most countries have some form of scheme. Outside the EU, the UK will have the opportunity to develop its own, independent farming policy, for the first time in decades.
Affordability of agricultural support will be a key issue. With public finances likely under severe pressure in the post-exit period, farm subsidies, if available, could be less generous than before. If so, some form of structural shift may be expected within UK farming.
For shoppers, this is possibly the most critical variable, especially since the UK is not self-sufficient in food; in 2015, about 39% of all UK food was imported, much of it from the EU2.
Over the long term, the structure of UK farming and the viability of farming enterprises will have significant impacts on UK food security, consumer pricing and the range of goods available in-store.
Food policy - possible scenarios
Trade benefits from harmonisation of laws and business regulations. This harmonisation is a key role of the EU although EU regulation was also an issue for some pro-exit campaigners, who saw it as needlessly burdensome.
When the UK was a member of the EU, EU law was automatically incorporated into UK law and took precedence in the event of a conflict.
Exiting the EU will not, in itself, cause laws originating from the EU to lapse or over-rule case law. Much tedious legal “unpicking” will be required. Some regulations will lapse, however.
As this process is pursued, UK businesses may benefit from a reduction or refinement of regulation, although many issues (eg: labour conditions, product standards) will still require some regulation.
Some “divergence” of legal and regulatory regimes is perhaps inevitable in the post-exit period, creating new cost and complexity for businesses that with to trade between the UK and EU.
Laws and regulations - possible scenarios
Free movement is a key principle of the EU and so, pre-exit, UK businesses could recruit from anywhere in the EU (restrictions applied when recruiting from outside the EU).
In Q4 2015, UK businesses employed about 3.2m foreign-born workers, with about two-thirds of these coming from the EU. Foreign born workers held about 10% of all UK jobs, many of them working in the grocery supply chain3.
These workers may be expected to feel personally vulnerable and uncertain post-exit and managers will need to provide additional leadership and moral support.
Leaving the EU will not necessarily prevent UK businesses from recruiting from the EU – in fact, options for recruitment might expand, depending on how government policy evolves.
However, a UK which is outside the EU may be much less attractive to foreign born workers, which might create significant recruitment challenges for businesses.
Availability of skilled workers may be a particular question – if these cannot be recruited from overseas, then employers will need to develop necessary skills in-house.
Labour movement - possible scenarios
In 2015, the EU accounted for 59% of UK grocery exports and 71% of UK grocery imports4. Given the scale of UK’s food trading, terms of trade will be a key factor determining long-term outcomes for businesses and shoppers.
Within the EU, the UK traded tariff-free with other members and with additional countries where the EU has special arrangements. The EU negotiated on behalf of the UK in deals with other nations or blocs.
Leaving the EU could mean reduced access to markets and exclusion from special arrangements, current and future (eg: TTIP). Negotiating terms of trade will be high on the diplomatic “to-do list” for a post-exit UK.
A range of outcomes are possible, over both short and long term. Absent any other arrangements, the default position would be WTO standard trading terms, which allow for high tariffs on many foodstuffs, a change that would be inflationary. Much will depend on the attitude of remaining EU members.
This issue will affect not just trade in food and drink but other items that businesses source overseas (e.g: spare parts, vehicles, professional services).
On the positive side, new barriers to trade could mean new opportunities for UK businesses to serve domestic demand. On the downside, reduced trade may mean less choice and higher prices for shoppers.
Terms of trade - possible end games
Next moves for grocery businesses
Clearly, the referendum has not yet delivered certainty, either for businesses or for shoppers – the long term impacts of exit from the EU will play out slowly and, good or bad, they will be profound.
Grocery businesses need not be passive in this process. Pre-referendum, many were reluctant to become involved in a sensitive political process, but with exit now a reality it may be easier for them to speak out and to offer guidance in the exit process.
(1) European Commission, data is for 2013
(2) Agriculture In The United Kingdom, DEFRA, May 2016
(3) Labour Force Survey and UK Labour Market, ONS, June 2016
(4) UK Trade Info, HMRC, June 2016
Following a referendum on 23 June 2016, the UK has voted to leave the European Union
In the wake of this decision, we examine the key issues for grocery businesses and explore different scenarios and possible outcomes you should consider.
To download 'Referendum 2016: possible outcomes for UK grocery businesses' simply click on the link below and complete your details.