supermarket cheese counter

Two new studies this week have warned food and drink suppliers and retailers would be particularly exposed in the event of Brexit.

Ratings agency Moody’s released a report looking at the overall Brexit effects on UK corporates. It concluded that risks surrounding trade barriers and labour costs were particularly serious.

“The food and beverages sectors could face significant EU tariffs following a Brexit, and potential supply chain disruptions,” it said.

Moody’s said the actual effect would depend on “the extent to which companies source and manufacture their goods locally, thereby reducing their reliance on trade flows”.

The report added larger consumer products firms like Unilever and Reckitt Benckiser will only be marginally affected due to their “marginal contributions from operations in the UK”.

However Tesco, Morrisons, M&S and other food retailers were vulnerable because “Brexit could affect supply chains if import tariffs were imposed by the UK on supplies sourced from the EU or other [countries] with EU trade agreements,” it said.

Diageo, which sells high volumes to emerging markets with existing trade agreements with the EU, could also be impacted. in terms of trading and investment decisions.

Noting the average import tariff into the EU is around 21% for beverages and tobacco and 45% for dairy products, The report concedes much of the impact of Brexit depends on what new trade arrangements would be put in place.

However, even if favourable trade arrangements were negotiated, there would be significant uncertainty during these negotiations. “Given the substantial trade links that exist, there would be strong incentives for both the UK and EU to minimise the effect. Nevertheless, based on the precedents set in other free trade agreements, “it is unlikely a two-year time frame would be sufficient to reach new agreements to fully offset Brexit.”

Limits on labour mobility could also raise labour costs. The food manufacturing sector currently has the highest proportion of foreign-born workers (38%). Food retailers could also suffer as labour costs are a higher percentage of earnings than for non-food retailers.

Sven Reinke, senior credit officer at Moody’s, said: “Any curbs on future labour mobility as a result of a Brexit would hit the food production, business services and retail sectors particularly hard as they have some of the highest share of foreign-born workers.”

He added: “While a Brexit could create additional barriers and staffing costs, the new UK living wage will have a greater impact on labour costs.”

Overall, Moody’s said it would “expect few, if any” near-term rating changes in light of the timeline for a Brexit to take effect. “However, over the longer-term rating changes could be more pronounced if a Brexit were clearly detrimental to trade and investment or labour costs, and ultimately to corporate profitability,” it warned.

While fmcg firms are in the Brexit firing line, the impact of an EU exit would likely be minimal for the tobacco sector given its global revenues, it added.

Meanwhile, a PwC report commissioned by the Confederation of British Industry (CBI) warned UK GDP in 2020 could be 3% lower under a Free Trade Agreement and 5.5% lower under existing World Trade Organisation rules if the UK leaves the EU.

As well as the £55-100bn impact on GDP, the report warns Brexit could cost as many as 600,000 jobs across the UK with food and agriculture particularly hit by migration restrictions.

The reports come after a poll by the Food & Drink Federation last week revealed 71% of food & drink suppliers want to remain in EU, while just 12% were in favour of Britain leaving.

The UK’s largest food and drink supplier by revenues 2 Sisters also told The Grocer last week it was backing the campaign to remain in the EU due to the “uncertainty” Brexit would create.