Wright forecast 5-10% rise in UK food prices by end of year

Wright forecast 5-10% rise in UK food prices by end of year

UK Prime Minister Theresa May has said the formal two-year process for the UK to leave the EU will begin in a little over five months. Ian Wright, director general of the Food and Drink Federation, the industry association representing food manufacturers operating in the UK, spoke with Ben Cooper about the immediate instability the vote for Brexit has caused and his longer-term outlook for the UK food sector.

The UK's vote to leave the EU on 23 June has had an immediate impact on food and drinks manufacturers, creating uncertainty for both employers and employees, particularly the thousands of workers from other EU countries, with last week's pricing spat between Tesco and Unilever providing a vivid example of one consequence - the devaluation of sterling - has had on the sector.

Ian Wright, director general of the Food and Drink Federation, which represents UK food manufacturers, believes Brexit could eventually have positive implications for UK food and drink exports. "The problem," he tells just-food in an interview in London last week, "is getting there and getting there in one piece."

That stark summary speaks both to the immediate destabilising effects of the referendum result and the impact the UK's eventual exit from the EU, that could now happen as soon as 1 April 2019, will have on the UK food and drinks sector.

Whether those effects will be positive or negative is, of course, the question on everyone's lips, not just about the food sector, but about every aspect of British life. Such is the fundamental nature of the change the UK has embarked upon, and so numerous are the variables, that the question is verging on the imponderable. Predicting with certitude that all will be well is the reserve of "Panglossian fools" in Wright's view.

What is certain, however, is that the UK food and drink industry is among the sectors most fundamentally affected by the vote. "It's fair to argue that food and drink is disproportionately impacted by Brexit," Wright says. "Of course, all manufacturing sectors are affected but we are particularly vulnerable to currency because of the large amount of food in this country which is imported either as ingredients or as finished goods. So any currency change is going to have an impact." 

In addition to immediately increasing input costs, the 20% devaluation in sterling has heaped further pressure on the thousands of food industry workers from other EU countries, Wright says, particularly those who send the majority of their wages back home. While facing an uncertain future and a reduced income, he says, EU workers have also seen "examples of really quite unpleasant behaviour towards them". 

Wright sees last week's dispute between UK grocery retailer Tesco and multinational food group Unilever as in some ways "a harbinger of the future", but doesn't expect such public spats to be the norm. However, Wright stresses his belief the devaluation represents a new normal rather than a fluctuation. He concurs with other food business leaders in the view such a large devaluation cannot be absorbed by either suppliers or retailers and imminent food inflation must result, estimating this will be "significant but not double-digit". 

Wright says the rises will not be uniform, and will depend on how much companies have hedged, but inflation is inevitable. "I am of the view that food prices will have to rise. I can't see how you can contain a 20% decrease in the value of the currency. It's at a scale that simply can't be absorbed. I would expect by the end of next year that food prices will have risen in general by between 5% and 10%."

The UK economy has performed better than anticipated since the vote, leading some pro-Brexit advocates to claim forecasts of doom and desolation were overstated. Commentators have wryly observed the country has not left the EU yet. Once again, a clear distinction needs to be drawn between the effects of the vote and the substantive long-term effects of the UK actually leaving the EU, under whatever conditions that may eventually be.

One of the reasons for the better economic performance is the export bounce the lower pound has precipitated. Whether the food industry will be a major beneficiary of the fall depends on if it offsets the significant challenge of rising input costs. Wright suggests the food industry will have to wait longer to see the full export benefit from its devalued currency. "I just don't think we know. The input cost rises are immediate. I think the export boost is slower burn and so we don't really know; we can't really make the reckoning of that yet." 

Nevertheless, if the devaluation is indeed an effective repositioning rather than a temporary fluctuation, that does provide conditions for any uptick in exports to be sustained or even accelerated, and Wright is optimistic about exports in the long term. "I know quite a lot of members who are really quite optimistic about what this does for their capacity to export. These are people who serious and long in the tooth at doing this. So I think there is some pretty firm ground for optimism in the export sector but the trouble is the import costs have to be paid now."

The vision of Brexit campaigners was that it would presage an expansion of the UK's export horizons beyond the EU, and in that context, the export figures for UK food and soft drinks for the first half of the year are perhaps worthy of note. The three export markets recording the greatest value growth from H1 of 2015 were Malaysia, up GBP46.9m (+268.5%), China, up GBP24.1m (+100.9%) and the US, up GBP21.1m (+31.6%). Wright sees Asia and the US as highly promising but again stresses that it is getting through the Brexit process "in one piece" that will be the issue concerning "almost all of my members over the next two to three years".

Yesterday, the UK government set out its bid to increase the value of the country's food and drink exports by GBP2.9bn, with plans to target a select group of markets

In 2015, the value of UK food and drink exports reached GBP18.1bn. Five-year "campaigns", which will involve ministerial visits, meet-the-buyer events and working with manufacturers exhibiting at trade shows, will be run in what the UK deems "priority markets", including India, China, France and Germany.

It is hard to deny the post-referendum shock has left the UK food industry in a difficult place, so Wright's realism is entirely justified. He has, however, spoken of the need for FDF members to "make the best of Brexit". A confidence survey of its members published by the FDF last week may lead some to conclude this is an industry reeling somewhat rather than one ready to put its best foot forward. Some 69.5% of respondents are less confident about the UK business environment following the referendum, with only 11.2% more confident. When taken with the results of its pre-vote survey which suggested some 71% of its members were in favour of remaining in the EU, the confidence survey may make uneasy reading for the sector's advocates seeking to galvanise a "can-do" spirit.

"I think it's important that we accept that there isn't an alternative to the Brexit," Wright says. "The time for grieving about that is over but I do think in that context you have to have the coldest-eyed assessment of what the risks and opportunities are. And right now the risks look pretty significant with the labour market, with the legislative framework, and in particular longer term with the tariffs."

Wright says a move to a WTO tariff regime two years from next March "even as a short-term measure while we get the rest of the things sorted out", would have a "huge impact" on the UK food market and on shoppers who, he adds, "are going to find that prices will go up and the range of choice will be significantly constrained". Wright believes his priorities are to shore up continued access to EU labour and striving to change the government's perceptions "where necessary" about the implications of leaving the Single Market. 

The growing likelihood the UK will also leave the EU Single Market, the so-called "hard" Brexit option, is worrying enough for the country's food industry but Wright sees the prospect of leaving the EU Customs Union as even more concerning. "Frankly the notion that we would leave the Customs Union is very damaging for food manufacturers in this country."

Wright says the "spongeability" of the UK government's Brexit strategy may be key in determining whether multinational companies continue to view the UK as a potential export hub, but at present he remains relatively sanguine on this key question. "I don't think we see any signs of any decanting yet. I think if we are out of the Customs Union, if it's very difficult to get labour over here, if the investment climate for UK business becomes more challenged, then I think you could see that happening, but we're a long way from that at the moment."

While the UK government is generally keeping its cards close to its chest on its fledgling Brexit negotiations, Wright says the FDF has established a positive dialogue with both Defra, now headed by pro-Brexit minister, Andrea Leadsom, and the Department for Exiting the European Union (DExEU). 

"I haven't met Andrea Leadsom yet so I can't speak for her," Wright says. "I have to say the dialogue with civil servants has been excellent, so we're in pretty much daily touch with Defra as the coordinating department for food and farming on Brexit." 

Tim Render, deputy director for food exports at Defra, is among those speaking at an event the FDF has convened to discuss "the best way forward for food and drink companies as the UK strives to create a workable future relationship with the EU" on 1 November. Wright has met with Robin Walker, a DExEU minister, whom he describes as "very constructive and very sensible".

"We've also had indications of willingness to talk to the Department of International Trade so I'm pretty hopeful of the conversations," he adds encouragingly.

In the second part of this interview, FDF director general Ian Wright gives his views on the longer term implications of Brexit for UK food and farming policy and for the UK food industry's labour force