Brexit woes faced by food and drink manufacturers as uncertainties bite

11 June 2018 Consultancy.uk

Confidence in the UK food and drink industry remains high; however, it has fallen somewhat on previous years. Concern around future staffing and input costs, as a result of Brexit uncertainties, are in part affecting confidence.

The production of food and drink is still a key component of the UK’s wider manufacturing base, generating around 16% of the sector's GVA, generating revenues of £97 billion, making it an important part of the wider UK economy as a whole. As is the case with the broader manufacturing industry, however, the sector remains finely poised in a period of major uncertainty relating to Britain’s relationship with the European Union.

Last year, research from Grant Thornton suggested that M&A activity had cooled in the segment at the start of 2017, while Brexit presented the possibility of a strained relationship with suppliers on the continent, inflated import prices thanks to a devalued pound, and tariffs for import and export activity. A year later, as the food and drink sector braces itself for the 2019 deadline for Brexit negotiations, BDO has released its own ‘Food and Drink’ report, covering major trends in the UK’s food and drink industries.

How positive are UK food and drink companies about their future prospects

The report notes in 2016, a study of the same respondents found 79% were optimistic; largely as the result of Brexit related uncertainty, and a crisis on high street as consumers batten down the hatches in the face of slow, and even declining, real wage growth. Now, the rating has fallen by around 27%, hitting 52% with relative positivity about the industry’s future prospects, and 8% of respondents very positive. This may still count as a majority, but the rapid decline in confidence points towards a continued failure by negotiators in Brussels to deliver concrete proposals to businesses about what post-Brexit Britain will be.

Areas of concern and risk

54% of those polled expect growth in sales to continue over the coming period, thanks largely to the development of new products. This has been driven by a shift in consumer tastes toward more natural and organic products, with the drinks market for instance seeing a 6% rise in sales to more than £2.2 billion due to the rise in niche products, such as craft beer and lemonades, drawing increased attention from consumers as a result.

For the food and drink industry, Brexit looms large – with 42% citing it among their top five challenges for the coming year. This is still relatively low, at two fifths of all respondents, however, one area of broader concern is a squeeze on labour, which too stems from Brexit, cited by 32% of respondents. While the absence of ‘skilled labour’ from the EU resulting from Brexit is often lamented, an ageing population in the UK also means significant migration is required to replenish the workforce in manufacturing. With around a third of the food and drink segments 400,000 workers stemming from the EU, populating the workforce remains a key headwind faced by the industry. More than 140,000 new recruits are expected to be needed by the industry to 2024.

Pricing pressure from consumers, whose finances are squeezed, takes second spot on 34% of respondents, while the price volatility of raw materials scores 32%with Brexit and macroeconomic conditions, from the value of the pound to monetary policy, affecting both consumers and companies.

Impact of Brexit

Brexit trading performance in the short-term was noted by 31% of respondents as having a negative impact, while 36% said trading in the medium/long term would be negatively impacted. Access to imported raw materials was noted by 33% as being negatively impacted, while 55% said it would negatively affect their access to labour and skills. Finally, they project the regulatory environment to deteriorate (27%), rather than improve (11%).

Paul Davies, Head of Food and Drink at BDO said, “If there were hopes that many of Brexit’s unanswered questions would be resolved over the last 12 months, the reality is we are only now starting to dispel the unknowns. What we do know is that food and drink, the UK’s biggest manufacturing industry, could be unfairly hit by leaving the European Union (EU). We depend on foreigners for almost a third of our workforce and two of our three largest export markets are in Europe.”

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UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019 Consultancy.uk

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”