The Top 5 Risks of No Deal for the UK Food and Grocery Sector

Date : 22 November 2018

“I believe we can get a good deal, but, it’s right that we say, because we don't know what the outcome is going to be, let's prepare for every eventuality.” Theresa May, UK Prime Minister, July 2018. 

Although the UK and EU are working hard on a settlement, there is no guarantee of success and No Deal remains a possibility. This note summarises the main short-term risks of that scenario for the food sector. 

Ever since the referendum, we have been advising companies to prepare for a worst-case scenario even though we expect a better outcome. The UK government has reached a similar view and has issued over a hundred technical notices providing guidance.

If government is making provision for No Deal, it will expect businesses to do the same. Fortunately, according to our latest supply chain survey, the great majority of major companies are planning on this basis but with much work still to do.

No Deal breaks into many sub-scenarios. Governments would attempt to head off the worst consequences. Even without an over-arching settlement, a ‘barebones agreement’ should be possible. For instance, such an  agreement might  provide a basic legal framework, mutual recognition of some authorities and a working agreement on air space.

However, we have been  considering No Deal without any mitigating arrangements. This really would be the worst case. It is not our forecast but it is conceivable and important to consider. Let’s all be aware of the potential consequences to help prepare as best as possible.

We do not discuss opportunities arising from Brexit here although that has been the subject of a previous paper. 

We have reviewed the government advice, held discussions with our industry expert groups and assessed reactions across the food sector. Here are five risks for the food chain from No Deal, in no particular order. 

1.    Unpredictable demand  

If the negotiation process stalls or breaks down, we’d expect a growing number of consumers to start building stocks of food and other essential goods. This could unfold well ahead of ‘Brexit day’ on 29 March. It might even become official advice. Institutions, such as hospitals, schools, prisons and care homes, would probably build stocks too. 

A measured approach could tip over into urgency if gaps begin to appear on shelf. Such behaviour would be difficult for the food chain to respond to, especially as the extent and timing are impossible to predict. 

Suppliers would be limited by production, distribution and storage capacity. In extreme circumstances, retailers could introduce limits on the number of items per shopping trip but that could be circumvented by making more trips. 

People on low incomes, with limited resources for building stocks, could get left behind, making this a social welfare issue. In the very worst scenario, extreme winter weather could add to the challenge and speculators could buy into food commodity markets, pushing up prices.  

2.    Export barriers 

"A scenario where farmers face an immediate trade embargo for many of their products would have devastating effects and would severely threaten livelihoods and businesses." Minette Batters, NFU President.

From a UK industry perspective, exports appear to be at greater risk than imports, simply because they are outside of the UK’s control. We cannot be sure of the approach that other European countries would take and this could vary. 

The only EU country highly reliant on food from the UK is the Republic of Ireland, partly because many goods from mainland Europe pass through the UK in transit. The Irish government  is likely to be pragmatic in finding solutions . However, some other European countries could interpret the rules very strictly. 

The biggest concerns for UK food exporters, if there is No Deal, would be tariffs, border controls, transportation and certification. 

In the absence of a trade deal, UK exports would automatically qualify for the Common External Tariff. According to IFS analysis of WTO data this averages 35% for dairy products, 21% for confectionery and 17% for meat, to give three examples. That would make many UK products uncompetitive in EU markets. 

Assuming the UK retains at least some of its own food tariffs, producers would enjoy cost advantages in their home market. For sectors where the UK is a net exporter (such as lamb and shellfish) this would not fully compensate. 

New border controls could present major challenges. Some countries have been building capacity at their border posts but this is unlikely to be enough to cope with such a large and sudden increase in workload. A tailback of vehicles, waiting to leave the UK, would be the likely result, a particular problem for short shelf life products such as shellfish.   

Products of animal origin would be the ones most affected. These are subject to detailed inspection and must enter the EU through designated Border Inspection Posts (BIPs). The only BIPs in the Republic of Ireland are Dublin and Shannon, presenting an immediate obstacle for land-based livestock, meat and dairy imports from Northern Ireland. 

Calais, the main port of entry for Roll-On Roll-Off freight from the UK and the main route for fresh food, does not have a BIP. New inspection posts would be needed but that requires finding space to build inspection facilities and probably, rerouting traffic. 

In a No Deal scenario, British haulage companies would need permits to operate in the EU. The UK government has said it expects ‘demand for permits will significantly exceed supply’. Another likely bottleneck is the capacity for veterinary inspections. These are mandatory for animal-based exports to the EU and require specialist vets.     

Certification issues might even put a complete stop on some exports. For instance, the UK would need to be approved as a supplier of animal-based products. To quote government advice: “The EU would require the UK to be a listed third country. The UK would apply for this status but cannot be certain of the EU response or its timing. Without listed status no exports [of animal origin] to the EU could take place.” 

It is also conceivable that EU authorities insist on audits of UK food processing plants before they are approved for export to the EU. Organic food products couldn’t be labelled and sold as such within the EU until UK organic certification bodies are officially recognised by the EU Commission, which the UK government estimates could take up to nine months.

If the UK does find itself unable to export certain products, this would create a sudden domestic surplus of supply, which is likely to provoke a fall in prices. 

3.    Delays to imports 

A total block on imports is highly unlikely. The UK government has already stressed its intention to keep new regulatory checks to a minimum and where possible, to introduce these away from the borders to avoid creating bottlenecks. 

It aims to avoid any hold-ups for imports but that is highly ambitious, especially in the immediate transition period. Any delays would result in higher costs, shorter shelf life and potentially, food waste and gaps on shelf. Two factors will be critical: the availability of vehicles with drivers and smoothly functioning procedures. 

One danger is that goods vehicles could be held up leaving the UK and unable to complete their round journey. This could also cause drivers to hit their legal maximum working hours. Some may refuse to travel to the UK if their return time is unpredictable. Drivers’ experiences on their first journey after Brexit could prove critical. 

Cabotage (the transport of goods or passengers between two places in the same country by a transport operator from another country) is allowed within the EU but would not be available to UK companies after No Deal. The same is likely to apply to European hauliers (and shipping) within the UK. Various transport routes would have to be reconsidered and with restrictions in place, the network would be less efficient, reducing total capacity. 

Import and export administration is particularly detailed for food products, especially those of animal origin. Currently, importers (buying from beyond the Single Market) use the EU import notification system called TRACES. That would no longer be available within the UK. A replacement system is being developed by government but will only be available for testing in January, giving little time to resolve any teething problems. 

In the event of severe disruption, suppliers reliant on imports may need to limit their range and ration supply across their retail customers. If forced to find new sources of supply at short notice, this could affect quality.  

4.    Extra cost and work 

“It’s all very well for the government to suggest that small businesses ensure they have the software, freight forwarders and brokers needed to make customs declarations … but these are not big corporations, they don’t have thousands of pounds to throw at it.” Mike Cherry, Chairman of the Federation of Small Businesses.

Many companies will seek to build stock as a buffer against disruption in the days after Brexit. This will provide some resilience but at a cost. Both storage and distribution capacity are limited and the price for booking this ahead has been escalating. 

To illustrate the extra workload No Deal could impose on companies, consider the following steps that a company would need to take before importing goods from the EU. This is drawn from the government’s advisory paper: 

  • Register for a UK Economic Operator Registration and Identification (EORI) number. 
  • Ensure your contracts and International Terms and Conditions of Service reflect you are now an importer
  • Consider how you will submit import declarations, whether through a customs broker, freight forwarder, logistics provider or directly (which requires software and authorisations from HMRC) 
  • Decide the correct classification and value of your goods for customs declaration
  • For certain sensitive goods, apply for an import licence  

For each subsequent import transaction, companies would then need to:

  • Ensure their carrier has submitted an Entry Summary Declaration 
  • Submit an import declaration to HMRC 

New tariffs would involve extra work too and create cash-flow challenges. Company import/export teams, who currently manage trade with the rest of the world, could become overstretched. There would be few people with relevant experience, available to draft in. Inexperienced people could make expensive mistakes.  

For some companies, not used to trading beyond Europe, this would be their first experience of these procedures. They would probably turn to agencies for help but their capacity is limited too, and so small companies could be affected disproportionately.

VAT rules will change in a variety of ways, requiring extra administration and with impacts on cash flow.     

For shoppers, the price of some products could fall but the overall effect is likely to be inflationary, unless the UK radically cuts its tariffs. 

5.    Legal uncertainty 

No Deal would create many areas of legal ambiguity.

No doubt, governments would seek to resolve any emergencies quickly which could include temporary measures. For instance, some regulations, such as for food labelling, might be relaxed for a period (within limits) enabling companies to amend their sources and recipes at short notice. However, if regulations are in flux, this would undermine the legal underpinning of some commercial contracts and insurance policies. 

There would be no automatic framework for civil judicial cooperation between the UK and EU to cover commercial disputes. Companies could face the dilemma of whether to prioritise continuity of supply or certainty of compliance. 

To give one example, some treaties with individual countries, signed before EU membership, could come back into force, allowing UK hauliers to operate without permits but this would be a legal grey area, subject to interpretation on the ground. Companies may also be unsure about the legal rights of some employees to continue working in the UK. 

The legality of transferring any personal data from the EU to the UK would be uncertain until the European Commission makes an official ruling on this. 

A further area of potential legal uncertainty is trading with the rest of the world once the UK is no longer covered by the EU’s schedule with the WTO and by various bilateral trade agreements. Thus far, 20 countries have objected to the UK’s proposed tariff and quota schedule after Brexit and this requires detailed negotiation to resolve. We don’t expect this to cause a complete block on trade but it could store up future financial liabilities. 

Longer term risks 

This paper has concentrated on the immediate challenges in the weeks before and after Brexit without any deal. Over a longer period, until a settlement on the future relationship was reached, other risks would arise, including:

  • Ongoing higher costs for ingredients and equipment imported from Europe  
  • Less predictable lead times, requiring extra stockholding and thereby new warehouses, adding to working capital and reducing shelf life 
  • Skills shortages 
  • Extended uncertainty, affecting confidence and investment  

This could combine to put a longer-term squeeze on competitiveness and growth. Some legal issues could drag on through the courts for years and this might be compounded by political uncertainty. 

Of course, Brexit could also deliver opportunities for the sector (see our previous note on this) but in the main, these benefits would also be maximised by an orderly exit and friendly relationships with neighbouring countries.

Over time, a new market equilibrium would be reached but the adjustment would be a jolt for both consumers and producers.  

How to prepare 

To reiterate, we are not predicting the worst-case outcomes outlined in this paper. Even without a Withdrawal Deal, we would expect enough goodwill (and self-interest) to prevail for some steps to be taken to soften the impact. The difficulty for companies in managing their preparation, is that no-one can be sure what would be possible from negotiations in the time available.    

If you are a food or grocery company, preparing for Brexit, we recommend these three steps: 

  1. See the full set of government notices here and study the ones most relevant to your business. Each one is short and easy to read. 
  2. Work through IGD’s No Deal checklist, at igd.com/brexit
  3. Seek expert advice from technical and legal specialists in your areas of greatest exposure including from any trade associations that you belong to 

The information in this paper is accurate to the best of our knowledge but is subject to change. We recommend all companies seek specialist advice to inform any major decisions.  
 

Jon Woolven

Jon Woolven

Strategy and Innovation Director
Brexit and Economics

BREXIT AND ECONOMICS

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