What impact could Brexit have on FMCG brands?

Since the referendum in June 2016, many companies have been preparing for Brexit and scenario planning. Although great uncertainty remains, it is clear that Brexit would strongly impact FMCG brands. It has already affected consumer behaviours, slowing overall spending. In this article, we explore the impact of Brexit and potential consequences for consumers, retailers and FMCG companies.

How it has changed consumer behaviours

British consumers have been holding off on spending over Brexit worries. In June 2019, consumer spending was at its weakest since the mid-90s. However, according to the latest BRC – KPMG Retail Sales Monitor, in October, total sales grew 0.6% year-on-year and like-for-like sales grew 0.1% year-on-year.

Paul Martin, Partner, UK Head of Retail at KPMG said: “Growth of 0.1% like-for-like in October would normally be little cause for celebration, but after several disappointing months, any tiny hints of growth are most welcome. Retailers have clearly been peddling hard to win over disengaged shoppers, especially given continued Brexit uncertainty.”

Esme Harwood, Vice President Public Policy at Barclays told the Financial Times: “Uncertainty over Brexit appears to be driving a shift in behavior. Discretionary expenditure has seen a considerable decline — spending at retailers continues to decrease, and even hotels, pubs and restaurants are feeling the impact of cutbacks.”

In that context, Helen Dickinson, British Retail Consortium (BRC) Chief Executive, warned in The Guardian: “Businesses and the public desperately need clarity on Britain’s future relationship with the EU. The continued risk of a no-deal Brexit is harming consumer confidence and forcing retailers to spend hundreds of millions of pounds putting in place mitigations – this represents time and resources that would be better spent improving customer experience and prices.”

How it could change the British FMCG retail landscape

Kantar has conducted an extensive analysis on How Brexit will affect UK supermarkets. A significant share of the food purchased by UK consumers is at risk of disruption. 50% of all food consumed in Britain is imported, with 32% arriving from the EU. 62% of all fresh food is imported, with 46% coming from Spain and 22% coming from the Netherlands.

According to Kantar, in anticipation of Brexit, grocery retailers have been:

• Buying varieties of products that have longer shelf life
• Investing in local products and encouraging consumers to buy local
• Reviewing ranges and delisting certain products
• Rejecting fewer fresh produce items
• Providing “Eat Seasonally” educational materials
• Merchandising their stores differently

There has also been a stockpiling trend. About 10% of consumers are already stockpiling and 25% are considering it. The top three categories in which stockpiling is occurring are food cupboard essentials, household goods and medicines.

Report authors Ray Gaul and Fraser McKevitt commented: “The decision to leave the EU has affected consumers in different ways, but it’s apparent that ongoing uncertainty is having a definite impact on purchasing trends and behaviours. From a supplier’s perspective, there is little doubt amongst retailers, producers and farmers that Brexit will result in a significant disruption to the UK’s food supply, including unharvested produce and empty supermarket shelves.”

Justin King, former CEO of Sainsbury’s told IG: “One can say very clearly what the direction will be: higher prices, less choice, and poorer quality, because all of those dimensions have been improved by these open trading relationships that we’ve had over the last 40 years […] Brexit, almost in whatever version it is, will introduce friction, it will introduce barriers. That makes it less efficient, which means all three of those benefits — price, quality, and choice — go backwards.”

Kantar Retail IQ has also undertaken a retailer-by-retailer analysis. According to the research, the big four would be impacted by Brexit on different scales. Discounters Aldi and Lidl seem well positioned to absorb the rise in food prices and inflation due to their limited range, lean supply chains and economies of scale. Kantar believes Amazon should also be able to quickly capitalize on the situation.

How it could affect FMCG companies

Deloitte has looked at how Brexit could affect FMCG companies. Its report Brexit’s impact on the horizon: what it might mean for CPG companies highlights five key considerations:

• Market access and tariffs: Brexit could result in the imposition of tariffs and trade barriers between the UK and the EU. This could increase manufacturing costs and the price of finished goods, especially in the case of a hard Brexit. The surge would have to be absorbed by FMCG brands or passed on to consumers.
• Company headquarters: Companies with headquarters in the UK are likely to be impacted to a greater extent than global companies headquartered outside the UK. Deloitte notes that the impact will be in terms of market access, non-tariff barriers and tariffs relating to the sourcing of raw materials, operations, the market for end products and ultimately financial performance.
• Supply chain management: Companies that rely on a multi-country supply chain may have to revisit their process, upgrade IT systems and maybe warehouse products in new facilities. Brexit could make current processes inefficient and costlier and increase the time required to move goods.
• Talent: Brexit could also significantly affect access to talent. There could be fewer EU workers coming to the UK and EU workers currently in the UK could choose to return to their country.
• Product labelling and safety: Product labelling and safety standards could evolve after Brexit. The EU currently has some of the strictest standards in the world, requiring complete transparency for consumers. It is unclear whether these standards would be maintained.

How FMCG companies are reacting

Many FMCG companies have been working on comprehensive action plans to mitigate the potential impact of Brexit, including:

• Mondelez, which has taken several steps in preparation. Dirk Van de Put, Mondelez Chairman and CEO, shared during an analysts’ call as reported by Food Business News: “Our contingency plan is quite extensive. And it basically is focused on the disruption and the ease of the flow of the goods. And so we’ve invested in additional resources in logistics operations. That means we’ve rented many more trucks, we’ve rented much more warehousing space, we’ve increased our inventories. We are making sure that we are capable even in difficult circumstances to maintain our customer service. And we are very focused on demand planning. And so we’ve also increased, for instance, our additional raw and packaging materials in the U.K. and in Europe.”

• Unilever, which has said that it is holding a few weeks’ worth of extra stock in case of disruption to supply chains. Alain Jope, Unilever CEO, said to the BBC: “We have built inventory on either side of the Channel. It’s weeks of inventory – not months or days. If I was in the designer handbag business then I might have built further [inventory] cover but we’re not, we are in fast-moving consumer goods and one of the things we have learned is, when you build inventory, it can end up being the wrong mix of product.“

• Coca-Cola, which has also been increasing its inventory in case of a no-deal Brexit. Coca-Cola CEO James Quincey told CNBC: “It would be fair to say that in the short term, the U.K. business has been impacted by the consumer sentiment, driven by Brexit in the U.K., which has affected everyone — the entire business outlook in the U.K.”

In summary, Brexit could have a significant impact on the FMCG sector forcing UK supermarkets and FMCG companies to revisit how they operate. However, more than 3 years after the referendum, there is still little clarity over when, how and even whether Brexit will happen. This situation has strongly affected consumer confidence, with many households limiting their spending. The British Retail Consortium (BRC) hopes for rapid resolution of Brexit once and for all. “The UK cannot teeter on the edge of Brexit indefinitely” says Helen Dickinson, Chief Executive.