Now that the UK has voted to leave the European Union, many industries and organisations are faced with uncertainty and the possibility of change to everything from supply chains to export and manufacturing.
What does Brexit mean for the food and beverage sector?
Q - What is the immediate impact of Brexit?
In legal terms, nothing has changed. The UK remains today in the European Union and all EU law continues to apply within the UK (either directly in the form of EU regulations or indirectly through incorporation of EU Directives in UK law).
However, with exchange rates fluctuating daily, checking how cross-border contracts deal with the exchange rate risk is important, as is putting in place appropriate hedging arrangements.
Almost all contracts will not be impacted legally by the referendum result.
Any material transactions which have not been completed will need to be reviewed.
Q - What should I do next?
There is a significant risk that the UK and the EU may slide into recession due to the uncertainty undermining confidence and the freezing of investment decisions.
It is likely that the food and beverage sector is well prepared for that. After all, it does not feel as if it's that long since we left the last recession, and food and beverage suppliers in the UK have (given the highly competitive and disrupted grocery market, combined with deflation) been coping with a cost down environment anyway.
Still, the usual recession agenda will need to be considered:
- Focusing on decreasing costs. That will mean reviewing workforces, capital investment, and procurement arrangements. This will be challenging given that with a weak pound imports are more expensive which will drive up raw material and energy costs.
- Reviewing solvency risk in supply chain and customers. This means considering contingency plans. After all, becoming insolvent is awful, but that is closely followed by having to deal with a key supplier or customer's insolvency. You should ensure that your contracts have clauses allowing you to terminate on insolvency (permitted under English law) to ensure you have some options.
- Credit might well tighten given increased risks. Check your funding arrangements - is it secure, what happens if the base rate increases? Additionally, a big issue in the 08/09 recession was withdrawal or tightening of credit insurance leading to cash flow getting harder - so consider your exposure.
But don't forget that a weak pound and a possible recession is not all gloom. UK suppliers sourcing in the UK will, with the weak pound, have an advantage over importers. And good businesses may be available for acquisition cheaply while competitors may be distracted.
Q - I have dealt with the immediate issues. What happens next?
The path for the next few years for our relationship with the EU and the rest of the world is very unclear. The main political parties are in chaos as they appoint new leaders, the Leave camp have not set out a proposed pathway, and the EU is currently pushing hard. We may end up with a general election or even a second referendum to give a mandate for the specific proposals.
That might mean that nothing will change (we end up staying in the EU), or little change but loss of influence (the Norway model), or there are some significant changes in specific areas (the Swiss model), or a lot of changes (the Canadian model)!
Our current view is that it is likely that we will end up with at least some form of free movement of goods between the UK and EU with low or no tariffs. That, in turn, is likely to mean that there will be some form of free movement of people (as the price for being able to access the EU market). And, depending on what is negotiated, free movement of services in certain sectors.
There is also considerable uncertainty about the outcome for agricultural policy. The UK is likely also to regain hegemony with respect to trade with third countries and so we must query whether we will see the resurrection of Commonwealth Preference System.
With all that in mind:
Q - Will there be a bonfire of food regulation?
UK food safety, product origin and labelling legislation is based on EU legislation. Therefore, a Brexit could theoretically result in scrapping all food legislation.
But that is unlikely:
- Regardless of the EU, the UK will need for its own purposes food safety and labelling legislation. After all, before the EU legislated in these areas the UK had similar legislation. And, given the enormous amount of legislation to review, the default position is likely to be that we keep what we have. The UK also participated in the crafting of this legislation and so may find that it is in fact fit for purpose!
- Any exporter to the EU will need to comply with EU law in order to gain access to that market.
- If we do have free movement of goods with the EU, which is likely, then we will need to keep EU product safety and labelling legislation.
- And note that if we are not in the EU, but have to comply with EU law, there is a risk that without the UK's close involvement in creating EU law, EU law might become less suited to UK business operations..
Q - What about migrant labour?
Immigration was a key theme to the referendum. There must then be a high chance that the UK will want to restrict immigration in some way.
That presents risks to the food and beverage sector as it's a significant employer of migrant labour, especially seasonal labour.
However, the EU is currently making it clear that the price for low or zero tariff access to the EU markets is to accept free movement of people, as one of the fundamental four freedoms of the Single Market.
It is difficult to see how that conflict will be resolved.
Q - So, what opportunities might Brexit present in cutting costs?
Although goods legislation is unlikely to change, there are opportunities to review and change other areas. A key area which is seen as especially vulnerable is European-derived employment protection legislation e.g. Working Time (limiting the number of hours an employee can work), and temporary workers. Changing this presents significant opportunities for cost saving to food/beverage businesses. Whether the UK will want to decrease protection in this area will depend very much on the bent of a future UK government.
All businesses should be considering the impact of EU law on their businesses and identifying what EU laws restrict them or increase costs. Business should be channelling views via their trade associations to lobby government.
Q - Aside from cutting costs, what other opportunities does Brexit present?
The Leave camp talked of substantially increasing trade with non EU countries. Assuming that is delivered, then combined with a weaker pound, that should create good opportunities for UK exporters (assuming they have a low reliance on imports in their own cost inputs). Non-EU markets looks like an area worth investing in.
Note, though, that liberalised trade with non-EU countries creates not just opportunities for exporters (who do not rely on imports) but also imports into the UK, where appropriate trade agreements are put into place.
Q - What is the position on UK agricultural policy?
The future position on agricultural policy is especially unclear. If the UK leaves the EU, then in most of the Brexit models (e.g. Norway) agricultural policy (and related to that subsidies) would return to the UK. It is unclear what the UK government would do with that freedom, but it would mean stopping blaming the EU for all agricultural issues!
The Leave camp indicated that they would expect that the money the UK currently contributes to the EU to support agriculture would be provided direct to UK farmers. However, there is no more detail than that. Would the UK want to change agricultural policy, and change or reduce subsidies? And what about where agriculture meets trade? That usually presents some of the most difficult issues. For example, should sugar continue to be protected to promote beet farming or will the barriers be dropped to sugar cane?
Q - I am a branded supplier - I own trademarks. What is the impact?
There is no immediate change. However, the future approach to trade marks in the EU is unclear. It is likely that we will end up with separate UK and EU trademark systems. If you have, or plan to, register trade marks, you should seek advice as the position gets clearer.
Q - I am a supplier investing heavily in product innovation. I have, or may have, patents and designs. What is the impact?
There is no immediate change. However, the UK will need to extricate itself from the existing EU system for designs. Patents depends on whether the UK stays in the EEA, and with the approaching changes to European patent enforcement the position is complex. If you have patents or designs you should seek advice as the position becomes clearer.
Q - I am an indirect supplier of services - what is the impact?
For UK suppliers supplying services in the UK, change will be limited except to the extent that any EU legislation gets repealed.
For UK suppliers of services into the EU, the position is uncertain. Most Brexit models suggest no or limited free movement of services with the EU. Given the importance of our financial and professional services market, this is likely to be an area where the UK does push for EU market access.
Q - What about GSCOP and the Groceries Code Adjudicator?
No impact. GSCOP is an entirely UK-derived law. It will continue.
Note that GSCOP is shortly subject to its three-year review by BIS. Given that dealing with Brexit will take priority it will, in our view, probably result in a deferral of that review.
The food and drink sector is fast-moving, fiercely competitive, high-profile and highly regulated. With in-depth expertise across all areas of this diverse industry, Gowling WLG is helping clients to achieve their commercial objectives against the backdrop of a challenging business environment.
Clients including Bakkavor, My Goodness Shakes, Coca Cola, Premier Foods, United Biscuits, Weetabix and Nomad Foods (Birds Eye Iglo) call upon our sector specialists for fast, efficient and accurate advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
