Marketing

Brexit and the Irish drinks industry

Brexit will have a negative impact on the Irish drinks industry believes Economist Tony Foley of Dublin City Business School. He explains here why it will worsen conditions for trade with the UK.

Depending on the details of a new – as of now unknown – trade relationship and agreement between the UK and the EU, new trade regulations and barriers will increase costs for both imports and exports.

This will be a particular problem for small drinks enterprises such as the new craft breweries and small distilleries which may be targeting the UK as an export entry market.

In addition, Sterling has already declined in value because of overall concerns with Brexit in the foreign exchange market and this will continue and accelerate if Brexit occurs.

A declining Sterling reduces the competitiveness of exports from Ireland to the UK and improves the competitiveness of imports from the UK. Consumers may benefit from the latter but Irish drinks producers competing on the domestic market will lose out.

However fluctuations in the exchange rate with Sterling are not a new phenomenon for the Irish drinks industry. The drinks industry has a substantial volume of trade with the UK but the industry, notably in liqueurs and whiskey, has generated substantial export sales in non-EU markets which do not have the easy market access of the EU and EEA countries.

In addition, Brexit is expected to have – and is currently having – an immediate and short-term negative impact on the level of UK economic activity which reduces UK demand for imported products and services.

A continuing negative overall economic effect on the UK economy is expected from Brexit but this is less certain and depends on how the UK uses its increased policy scope and freedom over the next few years.

There may also be a wider negative Brexit effect whereby the uncertainty raised by Brexit, for example on the future maintenance of the EU, has a global negative economic effect resulting in lower growth and lower levels of economic activity. However this can be minimised by a speedy determination of the new trade and economic relationship between the EU and the UK.

 

Drinks industry exports

The Irish drinks industry generated exports of €1,241.8 million in 2015 of which €314.4 million or 25% went to the UK. €224.8 million was sold to Britain and €89.6 million was sold to Northern Ireland.

The largest national market for Irish drinks exports is the US at €485.4 million or 39%. Britain is our second-largest national market for drinks exports and Northern Ireland is our third-largest.

The UK market share of 25% for drinks exports compares to a UK share of 14% for total Irish merchandise exports. The drinks exports are therefore more dependent on the UK market than overall exports.

Individual drinks products such as soft drinks and cider are particularly reliant on the UK market – much more so than the average drinks situation, as referred to below.

 

Drinks industry imports

Drinks imports were €785.1 million in 2015 of which the UK provided €305.8 million or 39%. The UK provided 27% of our total imports resulting in drinks imports being more UK-focused than overall imports. Britain provided €273.3 million in drinks imports and Northern Ireland €32.5 million.

Britain is by far the largest source of drinks imports followed by France with €89.2 million. By contrast, the US provided only €18.2 million in imports compared to the UK.

The UK imports include products produced in the UK and products produced elsewhere but distributed from the UK. Adding imports and exports, Irish drinks international trade totalled €2,026.9 million in 2015 of which the UK accounted for €620.2 million or 30.6%.

The sectoral drinks export dependence on the UK market is shown in Table 1 below. There are very substantial differences with varying levels of impact from Brexit.

 

 

Table 1 UK role in individual export beverages

Beverage Exports

€ million

Exports to UK €million UK share %
Soft drinks 132.4 107.8 81.4
Cider 56.9 40.2 (Britain only) 70.7
Beer 282.9 121.6 43.0
Whiskey 443.9 19.1 (Britain only) 4.3
Other spirits (mainly liqueurs) 313.2 13.5 (Britain only) 4.3

Source: CSO Trade Statistics

 

Soft drinks exports

Soft drinks exports are very reliant on the UK market and hence are particularly vulnerable to the negative effects of Brexit. 81.4% of soft drinks exports are sold on the UK market. The same is true of cider where 70.7% of cider exports are sold in the British market. Beer has a much lower (but still high) share of its exports sold in the UK market, 43%.

 

Whiskey/liqueurs exports

The situation is completely different with whiskey and liqueurs. Whiskey has been the Irish drinks export growth story of the past few years but the UK has contributed little to it.

Of €443.9 million in whiskey exports, only €19.1 million or 4.3% is sold in the British market. 65% of Ireland’s whiskey exports are sold in markets outside the EU. The US on its own accounts for €233.7 million or 52.6% of total whiskey exports compared to the British 4.3% share.

In the liqueurs category Britain accounts for only 4.3% of exports, the same as whiskey. Non-EU markets absorb 78.4% of Ireland’s liqueur exports compared to Britain’s 4.3% share. The US absorbs €163.8 million or 52.3% of total Irish liqueur exports.

 

Sectoral exposure to UK market

Overall, within the drinks export sector soft drinks and cider are very exposed to the UK market, beer is also significantly exposed to the UK but whiskey and liqueurs have only a small degree of exposure to the British market.

On the import side, soft drinks accounted for €248.9 million of which Britain supplied €173.0 million or 69.5%.

There were €233.0 million-worth of wine imports (excluding sparkling wine) of which Britain supplied €14.6 million-worth or 6.3%.

Britain supplied €33.6 million-worth of beer imports or 24.2% of the total of €138.7 million.

Whiskey imports were only €15.6 million of which Britain supplied €6.4 million or 41.0%.

Imports of other spirits and liqueurs amounted to €59.9 million of which Britain supplied €16.2 million and Northern Ireland €23.8 million. The UK share was 66.8%.

Overall, the British- or UK-sourced drinks imports were:

 

  •          soft drinks €173.0 million
  •          beer €33.6 million
  •          whiskey €6.4 million
  •          liqueurs €40.0 million
  •          wine €14.6 million.

 

The increased competitiveness advantage of UK drinks imports into Ireland will be most felt by domestic producers of soft drinks and to a lesser extent, beer producers.

 

Short-term/long-term impact

It is definite, in my opinion, that the short-term and current economic impact of Brexit will be negative for Ireland and the drinks industry. There will be lower UK economic activity; Sterling is declining relative to the €uro which reduces Irish trade competitiveness while trade costs and regulatory costs will be higher.

The longer-term performance of the UK economy under Brexit is not definitely going to be worse than if in the EU. Much will depend on how the UK government uses its increased policy discretion. The scale of the negative impact will depend on the speed and detail of the new UK/EU trade and economic relationship but it’s very likely that a reasonable new trade deal will be done with low impact on trade transaction costs.

While some Irish drinks enterprises and sectors will be significantly hit by the direct and indirect effects of Brexit, others, such as whiskey, have very limited direct exposure to the UK economy.

 

New arrangements

Apart from the export/import issues discussed above, Ireland will have a strong interest in the details of new arrangements for border/customs control, tariffs, regulations, labour mobility, work visas, security and foreign investment.

Unfortunately Ireland itself will not negotiate this new relationship with the UK. It will be done by the EU as a whole and while Ireland will have an input, the eventual agreement will reflect the overall EU.

Ireland engages in high volumes of trade with countries outside the EU where the drinks industry has established substantial sectoral markets outside the EU.

Membership of the EU is not a necessary condition to develop exports but clearly the lower the trade barriers the easier is the task.

Brexit is not equivalent to termination of economic relations. There will be a new trade relationship between the UK and the EU as there is a trade relationship between the EU and other economies in the global economy. The impact of a Brexit can be minimised and kept low by a speedy agreement on the ‘new’ relationship.

 

 

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