Brexit

A weak pound and uncertainty likely to undermine the industry on the brink of another recession

Wednesday August 03 2016 by Sharon Nagel

Strategists and analysts will have been racking their brains since the British referendum at the end of June in an attempt to establish possible scenarios after the United Kingdom leaves the European Union, and during the transition period. Ultimately, though, the impact is still very unclear and will remain so for several years, with inevitable consequences for the drinks industry. Vitisphere asked Jeremy Cunnington, senior alcoholic drinks analyst with Euromonitor, to outline some of the changes that may occur in the short and longer term future.

Firstly, what is the UK’s exit from the EU likely to entail in terms of changes to market access for EU wine producing countries?

Looking at the short-term situation, the value of the pound has fallen, which has had a beneficial effect for the high-end wine importers/exporters such as Berry Bros & Rudd. They’ve had a short-term boom because the exchange rate has been favourable for the Americans to come in and buy. This won’t be sustainable, however, because they have to replenish stocks which will involve costs. In reality, the impact in the short-term is two-fold: the weak pound and the uncertainty. The wine companies that have invested in wine operations in the UK and are using it as a base for Europe are going to be wondering whether they continue to invest or whether they need to start bulking up in places where they are strong such as Scandinavia. Also, the UK market is notoriously price-driven. Discounting is already quite heavy. If there are price rises, will they impact on wine consumption in this country? Also, there is the likelihood of a recession next year which could be exacerbated by the uncertainty caused by the referendum vote.

Has Euromonitor established any possible scenarios?

It is very difficult to predict how drinks will perform. In the deepest recession, for instance, premium products might be expected to fail to perform whereas they sometimes do. English super premium gin, for example, grew phenomenally well in the deepest Spanish recession we have seen for a long time. The expensive items don’t necessarily suffer the most during a recession. Probably one of the most depressing outcomes of Brexit is that there is absolutely no plan: some people want to shut up shop and return to 1955 whilst others want to launch out into the world and enjoy free trade with everybody, regardless of whether we have any treaties with them. Also, we don’t know how the EU will react – will they change tack on freedom of movement and reform it in a small way, for instance? In which case, would Britain then have to leave?

This not knowing is terrible for the wine trade and the uncertainty will occur for a long time, and have an impact on the UK-based wine companies. The likes of Gallo, Accolade and Treasury won’t leave the UK because they have such massive volumes here and it’s a big market that they can make money out of. But the issue is, do they switch operations and look to other markets where they have decent volumes in say, the Netherlands or Scandinavia as a base for their continental European operations. Until people have actually worked out what we want and then actually get it, and the deal is sustainable, then the uncertainty will continue.

Do the Commonwealth countries have different market access conditions into the UK than EU producer countries?

The agreements are all done with the EU so the Australian deal with us is the same one that it gets with the EU. I’m not aware that there is any preferential deal between the Commonwealth countries and the UK in the wine industry.

Are the Commonwealth countries making any noises that suggest they hope to reap benefits from Brexit?

They’re not saying anything because they don’t know. Their bigger concern is probably the weak pound because the UK is a price-sensitive environment. You immediately see the impact when one currency does better against another. For example, South African wine imports would suddenly drop because the Rand was doing badly, making South African wine too expensive. The one uniform effect is that the pound is dropping against all currencies so no one country is going to do badly. These are short-term effects. It will be three to four years before anything else is likely to happen and if then, what? The issue is, will the big foreign companies continue to invest in the UK market because that is how they gain access to the wider EU market. On balance, you would have to say, probably not. They are certainly going to be far more cautious than they would have been if the vote had gone the other way. They are going to think twice if not thrice about whether they hire extra people in the UK for their European operations or whether they play it safe and set up a European office in say, Amsterdam.

Could we see a greater shift in bottling in the UK market in the medium term to offset some of the increased import costs?

If you are Concha y Toro, Accolade, Treasury or Gallo, you may look at the UK market and see that it is saturated and that the potential for growth is in continental Europe. At the moment, volumes are small enough to say that there isn’t the scale to think about moving into continental Europe but if that growth scale changed or if those companies just decide to take the plunge, they might well look at the Netherlands or other countries. It won’t be massive because the volumes are still so large in the UK, but we might see a slow drift away of business and jobs from the UK. It won’t happen overnight. It will be a slow incremental decline.

The UK retailers have moved away from some of the deep discounting of the past but is there any leeway for them to absorb the impact of the weak pound?

The UK retail environment is not going to get any easier, particularly if there is a recession. Part of the reason for the rise of the heavy discounters was the recession of 2009-2010. I don’t know how much capacity there is for the international wine producers to take the hits that the retailers ask. One of the consequences might be that the bigger players get an even bigger share because they’re the ones with the scale to comply with the discounts demanded by the retailers. This remains to be seen and a lot of strategists and retailers in the wine industry are currently doing a lot of head scratching and trying to work out different scenarios, and realising that we really don’t know.

Is the pound likely to recover once the immediate shockwaves of Brexit have run their course?

I suspect that in the short term the pound will remain where it is now or get a little weaker.

Some industry members have suggested that there have always been ups and downs in trade relations and things will ultimately return to normality. Do you share this optimism?

What is normality? Normal will certainly be different. The greatest problem for business people is the uncertainty, which stymies investments, which in turn stymies employment, which in turn stymies the economy.

What could be the implications of Brexit for the English wine industry?

The English wine industry is still relatively small and this won’t have a massive impact. There may be some export opportunities but the UK is their major market and they have quite high price points – how is that going to work now? Things are changing all the time. We thought there would be uncertainty about the leadership of the ruling party for another two months and that issue has now been resolved. So any predictions are risky. Even short-term predictions are difficult and that is bad because if people don’t know what’s going to happen, most of them won’t do anything – and that’s the damaging and key aspect. We’ll have to wait and see what happens.

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