UK retail sector is a key customer for Irish food

The food sector’s shock over Brexit is beginning to give way to the development of coping strategies. But it’s not just exporters taking action. In 2016, Ireland exported around €4.107 billion worth of food to the UK. But it imported €3.75 billion.

“Ireland has a long and historic trading relationship with the UK where food taste, culture and consumption is very similar,” says Eddie Hughes, Enterprise Ireland manager dairy, functional food, beverages and food technology. The UK retail sector is a key customer for Irish food, with Tesco and Sainsbury alone accounting for around €2 billion worth of food exports annually.

For the businesses dependent on these sales, there is some comfort in the fact that trade between the two countries will not cease. The UK is not self sufficient when it comes to food, and imports around half of its food consumption requirements. That will not stop. “Opportunities still exist for Irish companies that are competitive and have a unique and innovative offering,” said Hughes.

“For fresh and chilled product that has shelf-life limitations, the short supply chain and closeness to the UK that Irish companies enjoy is an advantage,” he says.

Most at risk are producers of fresh, low margin produce, such as mushrooms; prepared consumer foods which depend on the UK for 65per cent of its export sales and beef, 50per cent of which goes to the UK. Within the dairy sector, cheddar cheese is particularly exposed, given that Ireland supplies almost 40 per cent of the UK’s cheese consumption, and the UK’s fondness for cheddar is hard to find elsewhere.

Key concerns among food companies include likely increases in the cost of doing business. As well as currency pressures related to a weakening sterling there are fears about tariff costs.

Border fears focus on the cost of customs delays and of additional certification and regulatory burdens. On top of that is the potential for increased competition from UK food suppliers in Ireland’s domestic market.

The risk of the UK entering into new bi-lateral agreements to secure cheaper food supplies from third countries poses a significant potential threat too.

And while the obvious solution is for the food sector to start work on market diversification, entering new markets costs time and money.

Enterprise Ireland is responding by “proactively contacting food clients who are most exposed to the Brexit impact”, he says.

Its focus is on improving the competitiveness of food industry players through the implementation of Lean manufacturing programmes and management development techniques. These help businesses deliver more value to customers, while at the same time using fewer resources.

It is supporting innovation through in-company research for new product development, and through collaboration with higher level research institutions. In collaboration with food exports agency Bord Bia, it is supporting companies looking to expand their reach overseas and, as part of that, has launched a packed trade mission schedule for 2017.

A report last year from Teagasc, the agriculture and food development authority, estimated that, depending on the Brexit negotiation outcomes, Irish food producers look set to lose between €150m and €800m a year on UK exports. On top of that are issues in relation to currency fluctuations.

“In the past, currency fluctuations have been cyclical, you’d gain at one time and lose at others. Now it’s structural,” says Lance O’Brien, head of management services at Teagasc. There are however alternative markets with the potential to ease food exporters’ pain, he says, including the US and Asia, particularly China, where Ireland is already the biggest maker of baby formula sold there.

“People in the developing world are showing more demand for meat and dairy. In 1965, people ate an average of 10.2 kilos of meat a year in developing countries, that is expected to reach 36.7 kilos by 2030, and dairy consumption is rising there too,” says O’Brien.

The issue facing the agrifood sector isn’t just exposure to the UK market, however, it’s the complexity of the all-island dimension of the sector, says David Carson, corporate finance partner at Deloitte.

“All wheat grown in Ireland is processed in Northern Ireland, for example. And 30 per cent of milk produced in Northern Ireland is processed in south, and 40 per cent for chickens. The problem with Brexit is that, the more you get into the details, the more issues that arise. There are four Border issues alone; movement of people, restriction of market access, cost of market access and potential opportunities. Those issues affect all sectors, but the one most likely to be impacted is food and agriculture, without a doubt.”

The challenges, while daunting, are not overwhelming, he says. “If you look back to where we were in 2008, after the financial crisis, and you look to where we have got to now as a country, you can see we are incredibly resilient and good at turning around a bad situation. We need all those skills now,” says Carson.

“Just as the recession did for some, every crisis presents opportunities for those with the foresight to see them. We need to stop the ‘I don’t think it’s really going to happen’ comments, plan for the worst-case scenario, and then innovate, change our market patterns, diversify and look to opportunities on mainland Europe and beyond. Remember, some of our biggest and most global businesses are in this sector, like Kerry Group and Glanbia. We can both lean on and learn from them, because a little bit of their entrepreneurial spirit and innovation is what is required right now.”

Borders challenge for Brexit

For those trading globally, borders mean one thing – red tape. And it’s not just exporters who will have to negotiate it, according to Carol Lynch, partner customs and international trade services at BDO.

“Those importing from the UK will face import tariffs and barriers too, increasing their costs. While EU barriers are fixed, we know what they are and they are very high, adding between 25 and 50 per cent on to the cost of food products. On top of that are import licences and different certification requirements.”

The key to coping is to start planning for the introduction of new customs obligations as quickly as possible. “People who have only been trading within the EU over the past few years are going to face a hard skills issue,” says Lynch.

“There is a lot of legwork to be done and a significant amount of planning required. Talk to the support mechanisms out there, whether it is Enterprise Ireland, the Irish Exporters Association or professional services people. Food companies have two years to plan this, so don’t panic. Brexit poses a big challenge, but it’s not insurmountable.”