Brexit’s impact on consumer spending

Preparing for a post-Brexit environment

By March 29, 2019, it had been anticipated that the European Union (EU) and United Kingdom (UK) would agree on a Brexit plan for an orderly withdrawal of the UK from the EU. However, this did not come to pass. The UK’s Parliament could not find a majority to pass the “Brexit” deal, formally known as the Withdrawal Agreement, which sets out the terms of the UK’s withdrawal from the EU and had been agreed between the UK government and EU.

There continue to be a myriad of unanswered questions on exactly how Brexit will work and what the future relationship between the UK and EU will entail, leaving many companies in an awkward position in preparing for a post-Brexit environment.

Overall, it’s likely that the implications will vary based on a company’s individual situation. To be better prepared for the new and yet-to-be-defined agreements, consumer packaged goods (CPG) companies could benefit from developing strategies using scenario planning to respond to the varied policies that may ensue.

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Consumer confidence

An analysis of economic indicators since the Brexit vote suggests most consumers and businesses have yet to feel material impacts, even though shifts have occurred in consumer confidence and retail sales. It is not clear what these shifts foreshadow for the UK economy, but companies would likely benefit from being prepared for any eventuality.

In the months post referendum, there have been both positive and negative movements, but overall, consumer confidence remains close to its one-and-a-half year low. It is expected to take longer and more certainty to restore back to previous levels. Further, inflation measured by the Consumer Price Index has been on a downward trend since November 2017 and has settled at 1.9 percent in March 2019.

The Brexit vote had little near-term impact on retail sales, which remained buoyant following the referendum. Retail sales (by value) excluding fuel on a non-seasonally-adjusted basis were exceptionally strong for March 2019, with a rise of 4.4 percent as compared to a year earlier. On a quarterly basis, UK consumers bought 3.9 percent more than in the same period in 2018, according to the Office of National Statistics.

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There are also several other possible scenarios that could come into play:

• The UK could hold a second referendum on Brexit on whether to accept the Brexit deal on the table.
• An alternative that has emerged recently is a general election, which would result if two-thirds of the UK Parliament vote against the government and trigger an election. The rationale being that general elections could determine the populace’s preferred view on Brexit and change the parliamentary arithmetic to gain a majority for a way forward.
• The UK can unilaterally revoke Article 50 to cancel Brexit. This is an alternative that seems to have a low likelihood since the UK government remains committed to Brexit.

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What this means for CPG companies

Negotiating the terms of Brexit is a highly complex process that is continually evolving. For CPG companies, there are implications related to a calculus of interrelated factors.

Market access and tariffs
In any Brexit scenario, there likely will be an increase in the costs associated with the movement of goods between the UK and EU due to tariffs, which would either be passed on to consumers or negatively impact a company’s profitability. CPG companies could benefit by outlining in advance how these additional costs could be dealt with to help ensure that their goods remain competitive in the EU market.

As an implication of Brexit, it may no longer be viable for certain companies to manufacture their products in the UK. It may be beneficial to produce products in the EU, or other countries, then sell them back to the UK.

Company headquarters
The impact of Brexit on CPG companies will vary based on the extent of a company’s exposure and involvement with the UK. While companies fall on a wide spectrum of exposure to the UK, companies headquartered in the UK are likely to be affected to a larger extent compared to global companies headquartered outside the UK. The impact is anticipated to be in terms of market access, nontariff barriers, and tariffs relating to the sourcing of raw materials, the operations, the market for end products, and ultimately financial performance.

For those CPG companies trading into or with the UK from outside the EU, there could be improved trading terms and reduced tariffs in the future, depending on the relationship the UK agrees upon with the EU, and what it then negotiates in terms of Free Trade Agreements around the world.

Supply chain
As noted, UK-based companies with a multicountry supply chain are likely to be affected more than companies that have a simpler and UK-specific supply chain. Brexit could make movement of goods through existing supply chains more complex, costly, slow, and difficult to execute.

To accommodate this, it may be necessary for companies to invest in surplus storage and warehouse spaces at multiple locations to counter for delays in the movement of goods. Companies that deal in the movement of perishable food items will likely be most affected, given their limited shelf life. Finally, the extent and complexity of the changes needed to IT systems to cope with the almost inevitable increase to administration once companies need to make import/export declarations for goods moving between the UK and the EU should not be underestimated.

Talent
UK nationals could face a more complicated future traveling and working in the EU. Unfortunately, not all EU member states have guaranteed the rights of UK nationals in a no-deal scenario. Countries such as the Czech Republic, Denmark, and Finland, for example, have confirmed that UK nationals can continue living and working in those locations without the need to certify their status as their existing rights have been confirmed. Others such as France, Germany, and Italy require UK nationals to apply for a new permit to confirm their status. Austria and Croatia are yet to legislate in order to secure the rights of UK nationals.

Product labeling and safety
UK-based CPG companies will likely have to assess the benefits of continuing to adhere to EU standards for product labeling and safety. On one hand, since EU standards for product labeling and safety are among the strictest in the world, UK companies may want to continue to adhere to EU standards to help ensure continued access to EU markets.

However, post Brexit, there could be a gradual dilution in standards for any number of reasons—from lowering product-production costs to changes in marketing communications. CPG companies could benefit from a cost-benefit analysis to assess the costs of making a change and the increased profits resulting from the change.

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