Marketing

Brexit’s economic impact on drinks sector

The drinks industry is responsible for 10% of all the jobs in Ireland, as the DIGI’s new report on the possible effects of Brexit on the drinks and hospitality sector makes clear.

Between May 2015 and September 2017 the €uro appreciated by 22.0%. This resulted in the Sterling cost of a €1,000 holiday here increasing by around £135 between May 2015 and May 2017 (from £721.43 to £855.54) – by last month, that cost had risen to £880.43.

In May 2015 an item selling in the UK for £100 would generate €138.61 for an Irish exporter. By May 2017 the same £100 would generate just €116.89, a decline of 15.7%.

An item selling for €100 on the Irish market would generate £72.14 Sterling for a UK exporter in May 2015, but by last May this had increased to £85.55, giving the UK exporter substantial scope for reducing prices in the Irish market and/or improving margins.

Such illustrative comparisons form part of the Drinks Industry Group of Ireland’s new report, The economic impact of Brexit on the drinks and hospitality sector, authored by DCU Economist Tony Foley. It illustrates the challenge facing Ireland’s hospitality industry in remaining competitive with a declining Sterling and peers into the shadow of Brexit hanging over businesses here servicing the UK market.

 

Impact mechanisms of Brexit

According to the report, Sterling’s decline “negatively affects Irish exports to the UK, Irish enterprises competing with UK imports in the Irish market and Irish enterprises competing with UK exporters in markets other than the UK and Ireland” while at the same time increasing the attractiveness of cross-border shopping.

Paradoxically, the report also points out that the impact of new restrictive trade rules under a hard Brexit will improve Irish exporters’ position relative to the UK exporter in EU and Irish markets, because the UK will face trade barriers to these markets.

“This will also apply to some of the rest of the world markets which have preferential trade agreements with the UK,” it adds.

“The same direct/indirect impact paradox applies to cross-border shopping. The decline in the value of Sterling increases the incentive for Republic shoppers to shop in the North but a hard Brexit with customs rules, purchasing restrictions, border posts and delays would be a disincentive to cross-border shopping.”

 

Tourism hospitality

Of our 9.58 million visitors in 2016, 3.92 million, or 41%, were from Britain. They spent around 23.2% of total inward tourism expenditure compared to a US/Canada share of 29.2%. The ‘rest of Europe’s’ share was 36.2%.

“The tourism industry has reduced its dependence on the UK over the past few years,” states the report, “In 2009, 46.7% of visitors and 30.4% of revenue came from Britain.”

 

Beverage imports/exports

Drinks imports were worth €824.2 million in 2016 of which the UK provided €339.3 million or 41.2%.

Britain is by far the largest source of drinks imports here followed by France with €92.5 million. By contrast the US, our main export market, provided only €17.4 million in imports (Chile is the largest non-EU source of drinks imports into Ireland).

Soft drinks accounted for €243.0 million of which Britain supplied €170.4 million or 70.1%. Of the €249.5 million of wine imports (excluding sparkling wine) Britain supplied just €19.9 million or 8.0%.

However Britain supplied €45.5 million of our beer imports, 29.1% of the €156.5 million total.

The Irish drinks industry generated exports of €1.29 billion in 2016 of which €301.6 million or 23.4% went to the UK.

But the largest national market for Irish drinks exports remains the US at €512 million or (39.7%), with Northern Ireland our third-largest.

However, while only 23.4% of our beverages exports are sold to the UK, the bulk of the remaining 76.9% use the British transport system for the EU and rest of world markets.

Whiskey has been the drinks export’s growth story of the past few years but the UK has contributed little to it. Of €505.5 million in whiskey exports only €22.2 million, or 4.4% goes to this market.

But soft drinks, cider and – to a lesser extent – beer, are particularly reliant on the UK market, much more so than drinks overall.

 

Table 5.3

UK role in individual export beverages 2016

Beverage     Exports € million            Exports to UK €m           UK share of sectors exports %

 

Soft drinks              133.9                                                81.8                                                 61.1

Cider                         66.2                                                50.3 (Britain only)                          76.0

Beer                        277.6                                              123.0                                                 44.3

Whiskey                  505.5                                                22.2 (Britain only)                            4.4

Other spirits          293.7                                                11.8 (Britain only)                            4.0

(mainly liqueurs)

 

Cross-border shopping & other economic flows

The last quarter of 2008 was the peak period for percentage of Republic-registered cars (65.5%) in shopping centres in Northern Ireland according to Intertrade figures but 2016’s third quarter saw 56.8% of them compared to only 37.1% in Q3 2015. 2008’s Q3 percentage was 55.3%. Up to Q3 2016, the highest value for Q3 since 2009 had been 47.6% in 2013. This suggests a large increase in cross-border shopping by RoI residents, returning to the high levels of 2008/09.

Northern Ireland’s lower alcohol tax reinforces the exchange rate impact.

A Revenue Commissioners’ survey of alcohol prices and tax differences between Northern Ireland and RoI shows the significance of the tax differential. The survey refers to November 2016 and shows a significant difference between the two jurisdictions in terms of tax for some alcohol products.

Vodka and whiskey, for example, show €3.83 and €3.76 per bottle tax difference respectively. The beer tax difference is lower but the sparkling wine tax difference is higher at €4.24.

“The current differentials are sufficiently large to justify ‘special event’ purchasing such as for parties, domestic celebrations and other large-scale format events,” states the report, “If one considers a basket of goods that would be deemed appropriate for a large party, the tax-related savings on the selected ‘party’ bundle of beverages is €133.53.”

The more recent exchange rate further increases the attraction of cross-border shopping.

 

Supply chain, pathway to market and transit arrangements

The UK is a very significant part of the transport and distribution system of the Irish economy’s international trade. A hard Brexit would increase the cost and reduce the efficiency of this system.

A 2017 survey by the Irish Exporters Association found:

  • 67% of exporters make use of the UK land-bridge to access continental markets
  • 57% of exporters said that if transit time through the UK land-bridge increases due to additional controls and/or costs increase they’d be able to supply using a direct shipping service to Benelux or other continental ports.

 

Even where exports to the UK are small the impact of Brexit still looms large, says the report. But there’s good news for the drinks industry too in this.

Bord Bia’s 2017 Brexit Barometer Industry Findings report shows:

  • 73% of responding drinks enterprises’ main products have a shelf-life of over 42 days indicating that the product is less vulnerable to customs inspection delays than, for example, fresh vegetables
  • 80% of respondents have experience of complying with customs requirements for non-EU trade indicating an ability to handle trade in a “non-free trade environment”.

However 87% of respondents are dependent on low supply chain costs and it’s likely that a hard Brexit will increase these.

“Some drinks companies have all-island and Ireland/Britain integrated supply and production systems, including canning/bottling and inputs sourcing. For individual companies, the cross-border movements relating to inputs, semi-finished products and finished products can amount to thousands of cross-border movements of goods annually,” the report warns, “Customs checks and inspections on this volume of transactions would add significantly to transport and administration cost.”

The UK’s exit from the EU also increases the complexity of protecting and maintaining all-island GI designations.

The UK may wish to protect domestic manufacturers and impose higher tariffs than the current EU ones. As drinks exports are more dependent on the UK market than overall exports, these can expect a greater exposure to trade restrictions in a hard Brexit.

The DIGI report concludes, “The role of the UK in the Irish international trade transport and distribution system merits a higher level of attention than it has received in the context of a hard Brexit. The impact of Brexit on Irish exports and imports of beverages is not confined to the goods supplied to and sourced from the UK”.

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