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Brexit and the effect on the UK FMCG sector

So the Brits have voted and they want to pull out of the EU over the next 2 years or so. Unless the British parliament ignore the will of the people (it can be seen as a non-binding popular vote), the fact of an England outside the EU has some dramatic repercussions on their retail trade and a very small effect on the South Africa food scene.

Studies by Retail Planet and IGD arrive at similar outlooks and there are clearly some pros and cons to the whole affair.

Let us start with the cons

Uncertainty is the biggest factor affecting business confidence and the next two years may well be a trying time for the industry, as the politicians try to find a solution that works for both parties (the British and the EU). In the meantime, certain long-term investments may be put on hold until the investors have some certainty on the outcomes.

The British Pound has dropped in value against the major trading currencies and there are already signs that the UK could feel the start of an economic recession.

As the consumer confidence wanes, job security becomes another negative factor that weighs on the overall market sentiment and the spending capability of the consumer.

Those retailers who rely on imported products (39% of all food sold in the UK is imported) will feel the pinch and they may have to source more local products to counter the effect of increased cost prices.

Food security may be affected as many EU-based suppliers change their trading terms while dealing with the UK.

Hypermarkets, who sell more imported non-food items, will have a specific challenge to appeal to their consumers with either higher selling prices or by finding local product replacements.

New supply chain agreements will have to be negotiated with manufacturing and distribution companies in the EU and elsewhere and this process will prove to be disruptive.

In the medium to longer term, the possible restrictions on free movement of goods, services and people will have a negative effect on the British food retail trade.

A possible new immigration policy (based on the Australian points system) may reduce the availability of manpower who take lower paid jobs (normally taken by immigrants) as the British avoid these jobs.

Are there any positives?

Even though some or all of the above negatives may occur, analysts have identified a number of positive outcomes (opportunities) that will assist the trade.

Discount retailers, who sell value for money propositions, will probably grow the fastest as the consumer looks for more items for their Pound.

Convenience shopping will probably fare better than out-of-town big box outlets as the consumers conserve their budgets by restricting car travel and using local transport instead.

Private label products, especially those in the “economy” or “value” ranges should benefit.

Exporters of British goods will see increased orders from overseas markets.

British chains with overseas exposure will repatriate higher profits by getting more Pounds for the foreign currency of each country.

The possible new immigration policy may introduce some highly skilled people from around the world that can add value to the food industry.

What about the effect on the SA FMCG trade?

The effect will not be pronounced but there are some small repercussions that will affect various players differently.

For example, exporters of citrus or fresh produce or grapes and even groceries may find a reduction in orders as the value of the Pound drops against the Rand.

However, the limited range of available imported items from the UK, such as HP Sauce, Callard & Bowser sweets or Lyle’s Golden Syrup will become more affordable to South African consumers.

We will watch these developments with interest.

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