Brexit_UK_grocery

Britain’s decision to leave the European Union is one of the most seismic political events in recent memory. Its impact will be the subject of intense speculation for everyone in the UK, particularly those in the grocery retail sector; an industry that depends upon favourable trade agreements, stable commodity prices, sustained economic growth and healthy consumer spending. How, then, have the industry’s key players been responding to Brexit? And what do we think the future might hold for retailers, suppliers and customers alike?

Brexit will undoubtedly have an effect on everyone in the grocery sector, from major supermarkets and local newsagents, to international brands and rural farmers.

Supermarkets could suffer from a devalued currency and high import tariffs, while farmers stand to lose their substantial subsidies and access to the EU’s free market. On the plus side, Britain has a chance to renegotiate trade deals with the entire world, while the prospect of deregulation and reduced immigration could benefit small business owners and low-wage workers.

Whatever impact Brexit does have, the general public will inevitably feel the final effects – whether that’s higher prices, a greater focus on local produce, an end to EU food regulations, or major job losses. Let’s assess the prospects for all the retail industry’s major stakeholders: supermarkets, farmers and suppliers, and retail employees.

The supermarkets’ view

Leave campaigners were barely home from their polling station parties when official statements from businesses and institutions across the world began popping up. However, the UK’s major grocers have been a little more cautious, preferring to remain relatively neutral for fear of adopting an overtly political stance.

Notable responses from the retail sector have ranged from reassuring platitudes about ‘ongoing commitment’ (although GSK actually invested heavily in Britain post-Brexit to back up their vote of confidence), to cautious uncertainty and outright pessimism.

While many companies were careful to remain neutral, almost none declared it to be a positive thing for their business; unstable markets, a fall in sterling and ambiguity around trade seemed to be the primary concerns. The bottom line is that uncertainty is never welcome in business, at least in the short-term.

Former bosses of a number of major UK supermarkets – including Tesco’s Sir Terry Healy and Sainsbury’s Justin King – at least seem to agree that prices will rise and some jobs will be lost, while Leave backers argue that the benefits of deregulation will offset any medium-term effects, and point to the potential boon for supermarkets when higher prices increase the value of their products.

Supermarkets need customers though, and although the value of individual items might rise, the value of overall baskets might diminish due to a wider economic slowdown.

The reaction from farmers

The story is quite similar for those further up the supply chain: Britain’s farmers. Again, the reaction to Brexit ultimately boils down to a weighing up of a potentially weakened trade position with a promise of wide deregulation; something that has historically divided farmers. Tangible deregulation is perhaps unlikely to happen due to public support for food safety and environmental protection, while others see it as an opportunity for greater autonomy and, therefore, productivity.

The situation for farmers is exacerbated by a potential drop in the supply of low-cost labour from the EU – something that regions like Herefordshire are particularly reliant upon – as well as an end to direct subsidies from the EU.

Many argue that the EU subsidies are completely crucial to the future of Britain’s agriculture, while others saw the CAP budget as a burden; the EU demands constant compromise and, as Brexit campaigners argued, those subsidies could potentially be matched or exceeded by expenditure from the UK government’s coffers once the UK regains its EU membership fee.

Farmers will have to wonder though: when the British government comes to renegotiate trade deals with EU countries and reallocate a budget buoyed by the lack of EU membership fees, how much of a priority will be placed on agriculture?

If Britain’s farms are priced out of international markets or see a drop in productivity due to lack of funding, then these shortcomings will inevitably be passed onto the consumer through higher prices, less local produce and a lower quality product.

Retail staff

The good news for supermarket employees is that they don’t appear to have been disproportionately affected by Brexit in terms of wages or job security. The bad news is that the general picture across the UK is one of higher unemployment and depressed wages. It’s unclear whether this is a direct result of Brexit, but analysts have suggested that companies are more reluctant to hire in these uncertain times.

Of course, this could be offset in the long-term by improved wages for those in low-skilled jobs thanks to reduced immigration from the EU, but the link between immigration and lower wages has hardly been conclusively demonstrated.

Again, the picture is a muddy one which can only become clearer once tangible decisions are made with respect to the UK’s adherence to EU employment law, post-Brexit immigration policy and wider economic performance.

An unsatisfying conclusion

As it is probably becoming increasingly clear, the dominant reaction to Brexit in the grocery sector is one of uncertainty.

So much depends on the specifics of a future trade deal between the UK and EU countries, leaving major retailers in a state of limbo with respect to preparations.

What we can be sure of is that sterling has fallen as a result of Brexit. This delivers a tangibly negative effect due to the UK’s position as a major food importer (40% imported up from 20% in the last few decades) which will pose a number of question for supermarkets.

If the price of food goes up, can supermarkets maintain their profit margins? Will they have to look at other ways of cutting costs and utilising technology to weather changes? Will consumers keep spending given a troubled economy and potential inflation?

In spite of these concerns, supermarket bosses have been almost universally optimistic in terms of their ability to adapt (particularly discount stores like Aldi and Lidl). They are, after all, major international companies with a great degree of flexibility and a huge amount of resources available to manage drastic change.

Small business owners and individual consumers, on the other hand, don’t have the same luxury. It’s for the sake of these vested interests that everyone hopes Brexit can bring positive change to the UK, once the uncertainty subsides.

Despite dire warnings from economists in the lead-up to Brexit, retailers don’t yet appear to have registered any substantial negative effects, but the real test will come once Article 50 brings about Britain’s formal exit and the daunting prospect of protracted negotiations and volatile markets.

Everyone in the industry will be united in their hope for a coherent and positive vision from the UK’s representatives once negotiations begin.

Thanks for reading! If you found this interesting, you may want to give this a read – Nielsen research recently indicated that the growth of the European grocery market is slowing up.