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March ’19 Editorial comment: Brexit’s potentially heavy cost to coffee

March ’19 Editorial comment: Brexit’s potentially heavy cost to coffee

The High Street, where one would normally find all of the best-known retailers in the UK, has been enduring a torrid time in recent years. Since the financial crisis, incomes have been squeezed, consumer tastes have changed and more and more people are choosing to shop online. Retailers’ overheads have risen and many are burdened with unsustainable debts.

Against this backdrop, which has seen many leading retailers either go out of business altogether or close down poorly performing stores, coffee shops have thrived and have enjoyed nigh on 20 years of growth. But all that could be set to change because, as is highlighted in the story opposite this comment, the Brexit deadline is approaching and as a country the UK is woefully under-prepared for what is likely to be a jolt to the economy of some sort, potentially a very serious one.

Coffee is one of the world’s most widely traded commodities. In addition to the supply chain actors directly involved in the physical trade, it is bought and sold by investors and price speculators as a tradable commodity on global exchanges, but as the UK approaches departure from the EU there is still a huge amount of uncertainty about the post-Brexit settlement and its impacts.

The implications for the coffee industry in the UK and how its economic effects unfold in a rapidly shifting political and economic landscape are also uncertain. What we do know is that an unfavourable Brexit outcome is likely to have a considerable impact on the coffee industry. In the immediate aftermath of the Brexit referendum, the value of the pound fell steeply against the Euro and US dollar. As a report by the Centre for Economics & Business Research (CEBR) for the British Coffee Association noted, this ramped up prices of imported goods and particularly affected coffee, as a dollar commodity. As the report also noted, despite the fact that the largest single coffee category imported into to the UK is green coffee, the supply chain arrangements in place mean that the imports of coffee and coffee products from the EU are of greater value than that with the rest of the world.

If the UK leaves the EU without reaching a free trade agreement, the most likely scenario would be a UK-EU trade relationship governed by the terms of the World Trade Organization (WTO). This would place upper bounds on the allowable tariff rates and also require each member to grant the same ‘most favoured nation’ market access, to all other WTO members. This will, for example, see EU tariffs of 7.5 per cent on roasted coffee and 9 per cent on instant coffee in the UK. A WTO solution is a worst-case scenario likely to disrupt the free flows of coffee and coffee products from and to the EU at the UK’s borders (see elsewhere in this issue) and by extension throughout the entire supply chain of the coffee industry.

The contentious issue of a hard border between the UK and the Republic of Ireland is also of great concern to the coffee industry as it would subdue trade flows of goods across the Irish border. On a long term basis, the existence of tariffs and major trade distortions are likely to manifest themselves in terms of reduced supply and higher prices that affect the end users. Even if the UK reaches a frictionless free trade agreement with the EU, restrictions on the free movement of EU workers might have a knock-on effect on the coffee industry. At an operational level, a high percentage of workers in the food service industry are from the EU, particularly baristas. A stringent immigration policy is likely to increase the costs of recruiting, retaining and compensating workers in the food service industry. This will in turn increase coffee prices for end users and may even subdue demand and ultimately harm the industry’s output and its economic footprint.

Given the unprecedented nature of the Brexit decision, leading up to the exit date, it is difficult to predict the types of relationships with Europe and the rest of the world the UK will secure. The most pressing issue for the coffee industry is the impact on the value of the pound. Manufacturers and suppliers have absorbed cost increases for some time, but this may no longer be possible. The effect of this is already being felt in the marketplace, with price of coffee steadily increasing. Considering the long-term, the growing coffee culture in the UK, fuelling the current surge in the out-of-home coffee and sales of specialised coffee products in the retail sector, hinges on macroeconomic factors related to jobs and disposable income. Anecdotal evidence suggests that allocation of capital to expansion has already slowed right down, as it has throughout the economy. As I write this, it has been confirmed that the UK economy expanded at its slowest annual rate in six years in 2018, after a sharp contraction in December.

If the Brexit transition process or its final settlement places household budgets under pressure, necessitating a more cautious approach to discretionary spending, the growth rate in the coffee shop market is likely to slow down, potentially quite sharply. The coffee shop market has become a very competitive one, and a hard Brexit could see even more empty shops, of all types, on High Streets around the UK.

This Editorial comment  first appeared in the March’19 issue of C&CI. Click on subscribe now if you wish to read more informative articles in the current and future issues of C&CI.

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