Whether you are optimistic or pessimistic about life after Brexit, there’s no denying the food supply chain could face some major obstacles without a comprehensive trade deal being agreed with the EU. Some even claim a no-deal outcome could cost the food and drink sector dearly.
Using each of its client’s statistical data, financial services provider KPMG has calculated the extra costs food and drink businesses might face in the event of a no-deal Brexit. Its model includes the impact of World Trade Organization (WTO) tariffs on UK/EU trade, the loss of EU free-trade agreements, and additional administrative burdens, like customs declarations.
“Our calculations show the sector can expect a wide range of impacts, each unique to a business’ operations model and supply chain,” says Bob Jones, customs lead at KPMG. “We looked at affected products valued from £3m to £0.75bn. In these cases, the overall additional cost impacts of a no-deal Brexit ranged from £300,000 to £60m.”
KPMG says this type of work helps businesses to know what’s coming down the line, identify the most appropriate mitigation techniques, and plan a timetable for action.
Despite the clear need for pragmatism, it’s difficult to get away from just how divisive the terms of the Brexit deal have become. Advocates of a hard exit still view it almost spiritually as the ‘road to paradise’, while many see it more in terms of the ‘road to perdition’. For food and drink firms caught in the crossfire, it makes for anxious times.
Though not seeing it in quite such stark terms, the Food and Drink Federation (FDF) continues to raise concerns about the threat to continuity of supplies and frictionless trade between the UK and EU without a deal.
“Imports of ingredients and raw materials are essential to the continued success of the UK’s food and drink manufacturing sector and provide consumers with the wide range of products they have come to enjoy,” says an FDF spokeswoman.
“We have repeatedly highlighted the importance of imports for our industry to Government, to help ensure they secure the best outcomes for the UK food and drink supply chain.”
Contingency planning
Of equal importance to the FDF is the role businesses play in terms of contingency planning and ensuring their supply chains are prepared for every eventuality, including a worst-case no-deal scenario.
“Depending on the outcome of future trade negotiations with the EU, businesses that are not prepared could find themselves in a very difficult position with their customers,” says the spokeswoman.
To aid its members, the FDF has launched a Brexit Roadmap, to help businesses navigate the divorce from the EU.
But uncertainty continues to be the watchword. This was highlighted most recently by the response of numerous organisations, including the FDF, to the Government’s publication of a set of no-deal technical notices, including ones for the certification of organic food and drink. A no-deal Brexit was described as a “grisly prospect” by FDF chief executive Ian Wright. And he is not alone in this view.
“Industries that have the most complex or nebulous supply chains are the ones that will be hit hardest by Brexit, particularly if there is no deal – a situation that is looking increasingly likely,” says Matt Brown, partner and head of commercial (Liverpool) at legal firm Brabners. “Food manufacturing is undeniably one such sector.”
A key question for food manufacturers will be whether the UK stays in the European Economic Area (EEA) and, thus, part of the Single Market, Brown argues. “Leaving the EU doesn’t automatically mean leaving the Single Market as the Government hasn’t formally triggered the exit provisions of the EEA agreement – article 127. There is likely to be a period of doubt and legal challenge post-Brexit where the UK will probably be treated under the WTO standard rules.”
Despite the difficulties, there are some options open to food and drink manufacturers looking to plan ahead, says Brown. “They could try to negotiate some form of fixed pricing to guarantee a supplier’s continued revenue and agree a price for the manufacturer that acknowledges the added cost of importing from the EU,” he suggests. But he acknowledges this could be a hard sell.
“UK food manufacturers should try to identify the elements of their supply chain that will be most affected,” Brown advises. “Are there ingredients that go into the production process that could be sourced from the UK to avoid trade tariffs altogether? Equally, for manufacturers selling into Europe, could an EU-based operation be established to serve that market?”
Result of negotiations
It’s too early to call the result of negotiations between the UK and EU, says grocery think tank IGD. “However, we have always taken a cautious approach and have counselled members to plan for a worst-case scenario,” says an IGD spokeswoman. “That would mean no trade deal, and no transition period.”
Although stockpiling is one possible response for the food industry – and in the case of Mondelēz reportedly already a reality – it would only offer a short-term ‘cushion’ against the full impact of Brexit, suggests IGD.
Besides, some food imports, such as fresh produce from Spain and elsewhere, have a short shelf-life and cannot be stored for long, it warns. While other products such as frozen food could be stored, available capacity is limited, IGD adds.
The UK Warehousing Association is equally sceptical about the practicalities of stockpiling goods.
“To mitigate the risk of supply shortfall, businesses are likely to respond by holding more stock in the supply chain, moving away from the just-in-time model,” says chief executive Peter Ward. “However, this will not be as straightforward as it sounds. There is a critical lack of fit-for-purpose warehousing close to large population areas.
“We are facing a ‘perfect storm’ in the warehousing and logistics industry, with little speculative build in the pipeline – urban development land earmarked for residential but not for the warehousing required to fulfil rising consumer demand – and a severe labour and skills shortage, exacerbated by the ‘Brexodus’ effect as eastern European immigrant labour heads home.”
Should “rest of world” rules be applied, new food inspection facilities would be required, suggests Ward. “And, to keep the vital Dover corridor clear post-Brexit, these may have to be located inland,” he adds. “This is a critical issue for ensuring continuity of food supply throughout the UK.”
The real solution is to find ways to facilitate and “lubricate” cross-border vehicle movements post-Brexit, argues the IGD spokeswoman. “At a minimum, businesses should prepare for new veterinary checks on Products of Animal Origin, and new phytosanitary checks on plant foods.”
These, in turn, may require shipments to go via different routes as not all ports offer these facilities, she adds. And lack of inspection capacity may slow things down, too. There may also be tariff payments on imports (to be paid by the importer), the need to meet Rules of Origin, and, over time, regulatory deviation between the UK and EU.
‘Ring-fence goods’
“The need to ring-fence goods is an interesting one,” says IGD. “This would apply to goods that land in one jurisdiction but are then shipped to another. This usually means holding goods under bond as they pass through (ie, verifiably outside the local tax system). The much-disputed Chequers plan would likely require ring-fencing and tracking of goods. This technology already exists, but probably could not be implemented in time.”
IGD also notes that it would need to be implemented in the EU as well, “and persuading them to do this may be tricky”.
Meanwhile, Allan Wilkinson, head of agrifoods at HSBC UK points out that, critically, each manufacturer, processor or operator in the supply chain will have differing cash flow needs, and this will influence their terms of trade with suppliers and customers.
“As such, they should be planning – both physically and financially – as soon as possible,” says Wilkinson. “With each business’ case being so different, they should consider what contingency measures best suit their situation. We’re already seeing some firms starting to make contingencies for additional storage or planning to toll processed products in regions of Europe where it may be needed.”
However, customs expert Rob Hardy, a director at Oakland Invicta, a multi-temperature supply chain specialist covering the UK and Ireland, argues that a lot of “scaremongering” about transport delays and tariffs after Brexit is politically motivated.
Before joining Oakland, Hardy ran the UK’s largest 24-hour customs station and works with the European Commission on international trade matters. He recognises the talk about stockpiled foods, long delays at Dover port (and the Eurotunnel terminal in Folkestone) and high tariffs on imports post-Brexit, can be scary to people without a good grasp of customs practices. But he dismisses the need to stockpile foods.
“Organised importers can pre-register with customs as a trusted trader and gain access to simplifications, which convert customs requirements to an audit rather than a transactional base. But you need to act. These approvals and simplifications are not going to come looking for you!”
Today, 140,000 traders generate 50 million customs declarations a year, says Hardy, adding that, post-Brexit, this is expected to grow by 200 million declarations and expose 140,000 additional importers/exporters to customs formalities for the first time.
Hardy also dismisses fears of delays at Dover port and the Eurotunnel terminal. “Non-EU traffic passes through Dover at exactly the same speed as EU traffic today,” he claims. “So, why would that be any different post-Brexit?”
He concedes, however, that customs clearance can be a “cumbersome inconvenience” to the uninitiated, which can create delays. Those affected should get expert advice, Hardy says. “Customs entries can be done retrospectively or, in the case of customs warehousing, not at all – at least not until the goods are sold and ready to leave the storage facility,” he explains.
Simplification tools for Authorised Economic Operators, customs freight and customs warehousing are already available to help smooth the border process, advises Hardy. “It is possible to embed customs processes within your day-to-day business, but you need to accept change and adapt. Denial is not a strategy.”
Scenario planning through software
While uncertainty over the final Brexit deal persists, food and drink businesses could make life easier by modelling different potential outcomes and adopting the latest systems to improve supply chain transparency and efficiency.
“The very least a supply chain professional should be doing is scenario modelling the resilience of their current supply chain against the various different options that might occur,” says Nick Giuffrida, sales director at supply chain software specialist FuturMaster. “This will expose areas of risk and may highlight measures possible today, which will provide benefit post-Brexit, regardless of the details of the final deal.”
FuturMaster claims to have software tools geared towards ‘what-if’ scenario planning. For example, what if orders were transferred from a supplier in Spain to one in the UK. Or, what would be the impact of fluctuations in pound sterling against the euro on costs and revenue.
Giuffrida says that one of his company’s food manufacturing clients with “significant imports from the EU” has already opened a packing facility in Europe to mitigate the potential risks of Brexit.
