The top 5 risks of a no deal Brexit for the UK food and grocery sector - revisited

Date : 10 September 2019

Last November, we published an assessment of the greatest short-term risks for UK food and grocery from a No Deal Brexit. Ten months on and with the UK still mired in political uncertainty, we decided to revisit and update that article.

 

As we said last year, the outcome on the ground would depend on many factors, including the number of ‘side or standstill agreements’ to mitigate the consequences. Here, we consider the worst case, in which no further cushioning measures can be agreed ahead of time and where relationships after the event have largely broken down.   

 

This is not a forecast and not a rounded view on Brexit. Our aim is to inform contingency planning.

 

Last time, we listed the top five immediate risks in no particular order and this time, we run through these again, considering what’s changed and what’s stayed the same over this period.  

 

1. Unpredictable demand

 

Last November, we were concerned that household stock-building might become infectious and cause a big spike in demand but so far, that hasn’t happened. Our shopper tracking shows that only 5% of people built stocks of food at home in the run up to March and in August only 4% were doing this. These amounts were not enough to be visible in the industry’s monthly sales figures.

 

There are several reasons why this has not yet been a major issue. Most people didn’t expect the UK to leave without a deal in March. Others felt that if any problems did arise, the food chain would cope. Some lacked the space or funds to build stocks and others just switched off from Brexit entirely.   

 

So, as we approach the October deadline, it’s tempting to assume the same will apply and yet this shouldn’t be taken for granted. The political mood has changed considerably. A higher proportion of people now anticipate leaving without a deal. The possible impact of this on food supplies has received a lot of publicity.

 

Also, beyond ‘Brexit Day’, the psychology would change again. If queues do start to build at the ports, the urge to build stocks will be stronger, for institutions as well as consumers.

 

In summary, the stoicism of UK shoppers has now been proven and so we would downgrade the risk of mass home stockpiling somewhat but we wouldn’t discount it. This still needs to be watched closely.  

 

2. Export barriers

 

From a UK industry perspective, we felt last year that exports were at greater risk than imports. That’s because they’re beyond the UK’s direct control and with the exception of the Republic of Ireland, the EU is less reliant on maintaining the flow of food with the UK.  

 

Our concerns in this area surrounded tariffs, border controls, transport and certification. So, let’s revisit these in turn.

 

On tariffs, UK exports would automatically qualify for the EU’s standard rates for countries outside of a trade deal. From IFS analysis of WTO data this would average 35% for dairy products, 21% for confectionery and 17% for meat, to give three examples. That would be enough to make many UK products uncompetitive in EU markets. Nothing has changed in this respect.

 

The hit would be offset, to an extent, for UK companies by added protection in the home market. The UK’s proposed tariff schedule (if unchanged and approved by Parliament) would apply tariffs to various agri-products. However, for products where the UK is a net exporter (such as lamb and shellfish) that wouldn’t fully compensate. Also, few processed products are in line for protection from UK tariffs.

 

For border controls, there have been several steps forward since November, most notably in France. The French government has now launched an e-based customs system for a No Deal Brexit. Calais has installed a Border Inspection Post, so products of animal origin could still be routed this way. The (private) owners of the Port of Calais are confident that it’s ready to handle the extra workload. 

 

However, concerns do linger. The French customs system relies on every importer into France completing all its admin accurately in advance, otherwise queues will build. Perfection is implausible, especially from day one.  

 

In acknowledgement of this, the UK government intends to apply border-readiness document checks for freight heading to Dover. That will help to prevent unready vehicles holding up everyone else. However, the quality of the documentation won’t be checked, so it won’t be failproof and with such little parking space at the ports, there’s minimal margin for error.   

 

The land border in Ireland remains Brexit’s great conundrum and on this, there’s been no significant advance. We still have no idea how the Irish Government would police this entry point to the Single Market on behalf of the EU.

 

In the opposite direction, the UK government has said it won’t introduce a hard border, at least not immediately, but it hasn’t explained how it would police flows of goods via Northern Ireland into mainland Britain.

 

For transport, the No Deal default is that British hauliers would need permits to continue operating in the EU from Jan 2020. The supply of these is limited to a level well below the required demand.

 

A second concern is wooden pallets, on which most finished food products are transported. To comply with EU’s third country rules, these pallets would need to be heat-treated and again, the supply could be limited. The same applies to any other form of wooden packaging materials.  

 

The risk that certification issues might put a complete stop on some exports has diminished though. In March, the European Commission agreed to list the UK as a country entitled to export products of animal origin to the EU. That needs to be reapproved October but is expected to pass again unless there’s a breakdown in relationships.   

 

Similarly, the Commission confirmed that the current list of UK approved premises for processing animal products will be accepted in a no deal Brexit, eliminating one risk we identified last time.  

 

However, there would still be a barrier for organic exporters. 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, which could take up to nine months. At least organic products could still be sold as conventional ones though.

 

Other issues concerning exports include:

  • Export health certificates for meat and dairy products, where the capacity of qualified vets to cope with the extra workload is in question
  • The risk of exports being barred or confiscated because of labelling errors
  • Volatile currency movements which could make UK exports more or less competitive depending on the general direction  

 

In summary, the outlook for UK food exports has improved but remains distinctly risky.  

 

3. Delays to imports

 

By last November, the UK government had made it clear that it wanted to keep new regulatory checks to a minimum and away from the borders where possible. Even so, we were concerned at the time, that a range of factors could disrupt the flow of goods into the UK.

 

We felt that two areas would be critical: the availability of vehicles and the smooth running of new procedures.

 

We are still concerned that any delays to vehicles leaving the UK would also affect their return journeys. Ferries may have to run less frequently. Some European hauliers might avoid travelling to the UK if they anticipate problems. 

 

One bit of reassurance (though not necessarily for the drivers involved) is that the UK government has said it would relax the working hours rules if necessary. There has also been a change of heart over cabotage (the transport of goods or passengers between two places in the same country by a transport operator from another country) which the UK government has now said it will allow to continue for European hauliers.

 

The announcement that companies will be auto-enrolled for UK EORI numbers has reduced the risk that importing companies will be unknown to HMRC and therefore unable to make customs declarations. However, there is a still a risk that many exporters within the EU will fail to enrol for an EORI number in their territory preventing customs clearance there. Also, EORI numbers are just the first step in the customs process and there’s no guarantee companies will be ready for the next steps.

 

There is now more clarity over customs procedures for imports. Transitional Simplified Procedures have been set up allowing registered importers to submit most of the admin needed retrospectively.

 

However, the system has yet to be proven and there could be glitches. Not all importers have registered, in which case their deliveries would need to be checked at the border. Goods will also require an export declaration before leaving the EU and checks at the outgoing European border posts could create queues.     

 

Vital new systems are now in place: CDS for customs declarations and IPAFFS for notifying intention to import products of animal origin, both running in parallel with their predecessors. The extension has given more time for bedding in the new software but some bugs may only be revealed when they’re running at full demand. If so, there would be a risk that companies couldn’t log their imports as required, requiring a manual work-around.  

 

Finally, the risk of paying new tariffs without necessarily being able to pass on the cost, could cause some European companies to withdraw from selling into the UK market, creating some short term interruptions.

 

In summary, the flow of goods into the UK may continue to be less of a concern than the outward flow but the two are intrinsically linked and we still believe that delays are likely.    

 

 

4. Extra cost and work

 

Last year we flagged up the risk of higher business costs arising from stock building, tariffs and additional admin.

 

Reviewing this now, we know that plenty of stock was built ahead of March but in the run up to Christmas, less space will be available. That would mean less of a buffer against disruption but also on the positive side, a lower investment in working capital. However, if it quickly became apparent that Brexit meant more delays and uncertainty, then many companies will need to build higher stocks permanently.

 

We’ve now seen the UK’s proposed tariff schedule, even though it could be amended. It represents a minimalist approach in the first year after Brexit to avoid excessive inflation. However, most of the tariffs proposed are for agri-goods, i.e. ingredients for food manufacturers and that would impose new costs for those buying goods from the EU.

 

In compensation, there would be lower than previous tariffs on some goods imported from beyond the EU, so there would be winners and losers amongst UK food manufacturers and the net effect is difficult to estimate. 

 

Currency could have the biggest impact on business costs in the short term. Sterling has already depreciated recently and the effects of this will feed through gradually in the cost of imported ingredients and services.

 

More positively, the cash flow risks from Brexit have lessened. The Transitional Simplified Procedures mean that tariffs and import VAT will be payable in arrears. Any additional inventory needed would be a cash flow burden though.    

 

We’re still concerned about the extra Brexit workload on companies. Management teams would be distracted from other issues and investment plans could be put on hold. Import/export expertise will be in short supply. Inexperienced people could make potentially expensive mistakes. This will all be against the backdrop of the busiest and most vital trading period of the year.

 

Agents that help their clients manage their customs admin could become swamped with demand. Small companies could find they have no-one to turn to for help.

 

Finding ways to work around any problems thrown up by a No Deal Brexit, such as finding new sources at short notice, rerouting vehicles, using more air freight or paying extra overtime could all prove expensive.  

 

In summary, some risks in this area have diminished but the depreciation of Sterling and the likely increase in workload are still significant concerns.   

 

5. Legal uncertainty

 

Our final category of risk was the legal ambiguity arising from No Deal.

 

Conceivably, this might include:

  • Contract disputes, e.g. on what would constitute force majeure – bearing in mind there would be no automatic framework for civil judicial cooperation between the UK and EU to cover commercial disputes
  • The impact of any emergency measures from government on contracts and insurance policies, particularly if they become subject to legal challenges
  • Disagreements within the EU on whether national or EU authorities have legal precedence in some areas 
  • Treaties that predate the EU (e.g. on haulier access) that arguably, may be said to come back into force
  • The application of WTO rules, e.g. whether companies transferring goods within Ireland without applying tariffs are in breach  
  • The precise interpretation of ‘continuity trade agreements’ signed with rest of world countries  
  • Conflicting views between UK and EU customs authorities on the correct tariff codes for complex products
  • Competition law, if companies address any supply related problems collaboratively

 

The legal sphere could be the area where ‘unknown, unknowns’ come to the surface. We certainly feel it’s unlikely that suddenly overturning the legal and regulatory platform that has underpinned business in Europe for more than 40 years would proceed entirely smoothly. In these circumstances, specialist advisors may sometimes offer conflicting opinions, leaving companies unsure of what to do.  

 

In summary, although we don’t have the specialist expertise at IGD to assess the legal risks in detail, we are concerned that somewhere in this space, companies will face difficult choices. For instance, when it comes to using non-heat treated wooden pallets, should they prioritise continuity of supply or certainty of compliance?   

  

Conclusions

 

In this analysis, we’ve only considered the short term challenges from a No Deal Brexit. As we said before, various long term issues could prove even more significant than these in the fullness of time. Examples include the terms of any new settlement with the EU, a new farming policy, a permanent tariff schedule, new immigration rules and new trade deals. We recognise there are likely to be positive as well as negative effects from these.   

 

In comparing the current outlook for the immediate aftermath of No Deal with the outlook as it appeared last year, plenty of progress has been made. The worst case scenario is no longer as severe and perhaps there will be further improvements ahead of the new deadline. We can almost guarantee that some of the worst-case concerns outlined in this article would prove to be unfounded in practice.  

 

Nonetheless, no-one should doubt that many risks remain. No deal would represent an unprecedented discontinuity in the rules of business. The global economic backdrop also appears less secure now than it had done last year with the growing number of negative yields in bond markets one strong indicator of this.

 

Confronting the risks with our eyes wide open is surely the right approach.

 

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

 

  1. Work through IGD’s No Deal checklist, at igd.com/brexit

 

  1. Check out the Brexit Food Hub for answers to frequently asked questions: www.brexitfoodhub.co.uk

 

  1. 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. Seek specialist and up to date advice before you make any critical business decisions. 

Brexit and Economics

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