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Image for Are you Brexit-ready?

Are you Brexit-ready?

Brexit is the largest constitutional change in the UK for some considerable time, according to the fourth UKHospitality & CGA Future Shock Report. For the Hospitality sector that means that planning and communication is more important than ever.

Brexit has contributed to an uncertain politi- cal environment, and just several months out from the scheduled departure date much of the important details regarding our departure remain undecided.

Regardless of the politics, Brexit represents a set of circumstances that have already impacted business and will continue to do so for an indeterminate peri- od. The two most significant impacts upon the hospitality and food service sectors are likely to be availability of EU labour, and cost/availability/quality of the food and drink that we resell.

The decision to leave the EU has already triggered significant changes in these areas, with an over 50% decline in labour migration from the EU, and exchange rate weakness being the primary driver of almost 10% food and drink inflation (at its peak in 2017).

Brexit is one of a number of risks and challenges facing our sector in 2018 and beyond. Like all uncertainties it’s good practice to evaluate, monitor, and react to events as they unfold. This requires a strong methodology, the necessary discipline to follow through with action, and great communication from those responsible for procurement and supply chain.

Seven things to do before Brexit

  1. Review your supply chain completely

Understand what you spend, what products you buy, where they come from, and who your suppliers are. Build even stronger relationships with them and understand the challenges that Brexit may bring for them, so that you can plan to be agile in the event of these challenges materialising.

  1. Assess potential impacts

Recognise the impacts that Brexit may have on each area of your business.

COMMERCIAL IMPACTS

  • Exchange rates
  • Tariffs
  • Quotas
  • Labour costs

SERVICE IMPACTS

  • Product availability
  • Lead times
  • Port clearance
  • Labour availability
  • Political disruption

QUALITY IMPACTS

  • Shelf life
  • Food standards
  • Food safety
  • Traceability
  • Accreditations
  • Audit requirements
  • Provenance
  • CSR
  1. Examine supplier agreements

Look carefully at the length of your contracts and the consequences of break clauses. If appropriate, review currency hedging and multi-sourcing. Examine future commercial strategy in the light of possible Brexit scenarios.

  1. Create a risk log

Understand and prioritise based upon the likelihood and impact of risks, deciding how you will mitigate the impacts if the risk materialises. Research Brexit based issues such as potential impacts upon availability/cost/quality. Ask suppliers for their risk logs. Read, listen and learn. Stay in touch with developments and update plans accordingly.

  1. Calculate key exposures and create plan of action

Understand your key exposures and calculate nature of and levels of potential impact within your supply chain. Decide which exposures require action now, and which should be monitored ongoing.

  1. Communicate

Brexit impacts will not just impact supply chain. Build cross-functional teams to monitor the situation and include risk management colleagues, compliance, financial, legal, operational, sales and marketing teams.

  1. Collaborate

Develop a list of credible sources and arm yourself with data and timely, regular information. Keep stakeholders regularly informed, remaining clear and transparent about the implications.

Seven Brexit ‘look-outs’

Look-out 1 – Trade deals

The UK’s food requirements are fulfilled by a combination of products that are grown and produced domestically, as well as products that are imported from other countries – most typically we import food and drink products when the UK’s conditions are not suitable for production, or there is a shortfall in supply or where a trading country has a significant capacity, technological or commercial advantage. According to the most recently available data from DEFRA, 49% of the food consumed in the UK is of UK origin, with a further 30% being imported from the EU and 21% coming from the rest of the world.

The UK is currently a part of the EU Customs Union which is a form of trade agreement where member countries agree to eliminate tarifs on each other’s goods and agree to impose common external tariffs on goods from countries outside the customs union.

Changes to trade deals can increase or reduce tar- iffs on goods, and create additional costs associated with the importation process. They can also impact exchange rates.

Look-out 2 – Freedom of movement of people

Most of the UK’s agribusiness and foodservice sectors are currently heavily reliant on the exports of EU Nationals.

41% of roles in food manufacturing and 28% of roles in food service are currently fulfilled by foreign- born workers (EU Nationals make up around 50% of all foreign-born workers). The uncertainty around future conditions for these employees post-Brexit has led to lower net migration into the UK (a fall of over 50%) with businesses struggling to replace these typically low-skilled workers. The situation has not been helped by a rise in perceived xenophobic behaviour and the devaluation of Sterling which has made the UK a financially less attractive country to work in for migrant labour. Steep rises in the cost of soft fruit this year are an example of the impact of this situation.

Look-out 3 – CAP and agribusiness impacts

The Common Agricultural Policy is the agricultural policy of the European Union, which exists to ensure a fair standard of living for the agricultural community, keep markets stable, ensure availability and provide food at reasonable prices.

It does this through a combination of taxes, subsidies and quotas. When the UK leaves the EU, CAP will no longer necessarily apply and so future conditions for UK farmers are uncertain.

Today, 55% of current UK farm incomes are derived from CAP payments, and their removal would be highly disruptive to both the UK farming industry and to food prices. DEFRA has made some initial statements that will transform CAP into incentives for environmental standards and steward- ship, but the detail of this has not yet been made clear.

Look-out 4 – Food standards

Much of the legislation governing food safety in the UK is derived from EU law. New Trade deals with countries with lower food standards may incentivise the government to reduce food standard, but it is likely to be both unpopular domestically and would also reduce our ability to export UK products to other EU countries. On the other hand, DEFRA has been suggesting that we will make further improvements to standards in the UK, with our dairy, meat and produce industries using quality as a point of difference in the domestic and global market.

Look-out 5 – UK political environment

Both the major political parties in the UK are split with ‘Remainers’ and ‘Leavers’ in both camps, which suggests that even if there was to be a change of government in the next few years, it is unlikely (although not impossible) that a significant change in direction to Brexit negotiations would occur. There is a risk that should the government fall later in 2018 the EU would have no-one to negotiate with, and as yet, undetermined outcomes. Political instability is a major influence on the above Scenario outcome.

Look-out 6 – UK economy

The consensus amongst economists is that the UK economy is under-performing the rest of the EU currently. Consumer demand remains weak, and the period between now and the end of 2019 is likely to generate more instability, which in turn may impact consumer confidence. A further slowing of the economy will dampen rises in food and drink costs.

Look-out 7 – exchange rate movement

Given the degree to which the UK imports food from Europe (and further afield where commodities are generally traded in US dollars), a drop in the value of Sterling results in these imports effectively costing us more – a fact seen in 2017 in food in ation in our sector. Scenario 1 above would be likely to strengthen Sterling against the Euro, but Scenario 2 would impact exchange rates negatively, such that the cost of imported goods would be likely to rise further.

MORE INFORMATION

The UKHospitality & CGA Future Shock Report is available from www.ukhospitality.org.uk

T: 01908 222 678

 

 

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