Brexit precautions: stockholding considerations for UK grocery businesses

Date : 06 December 2018

IGD’s Chief Economist, James Walton, explores potential availability issues and stockholding in a post-Brexit world.

The Final Countdown

Brexit is scheduled for the end of March 2019 – now just four months away.

Even with so little time left to run, businesses still have no certainty over Brexit outcomes, which may be anything from “anti-climax” to “severe disruption”.

If the exit deal agreed by UK and EU negotiators is supported by legislators on both sides, then businesses would benefit from a transition period, giving more time to prepare for Brexit.

However, if this does not happen, as still seems quite possible, we would get “Hard Brexit”, which means:

  • No exit deal
  • No transition period
  • No subsequent trading deal with the EU.

In this case, trade barriers would spring up instantly between the UK and EU, disrupting and delaying flow of vehicles in both directions, impacting grocery business operations.

Fresh foods (eg. fish, fruit, salads, vegetables) would be most vulnerable to disruption, since they have short shelf-lives and are often sourced overseas.

Shoppers come first

The shopper experience of Brexit will be critical – this is the measure by which the performance of the grocery supply chain will be judged.

If Brexit proves traumatic, supply chain impacts could be considerable and providing a totally smooth transition for shoppers may not be a realistic goal.

Supply chain problems could be reflected in price changes, poor availability, or both. Availability issues might be exacerbated by unpredictable patterns of demand. Any issues with price or availability are likely to have welfare impacts, especially for the most vulnerable shoppers. If businesses are seen to be failing to provide for shoppers, there is sure to be criticism at the very least and perhaps more dramatic action (such as emergency legislation).

Shoppers are accustomed to good availability and so gaps are easily-spotted. Media coverage of Brexit may leave shoppers especially sensitised to availability problems.

So, what might shoppers do, if they arrive at a grocery store just before - or just after - Brexit and see gaps? Much will depend on:

  • Messages received about food availability
  • Level of trust in those messages
  • Perceived length and severity of problems

Hoarding instinct

Shoppers might seek to protect themselves from shortages and disruption by building up food stocks in advance of Brexit.

IGD ShopperVista research shows that only 2% of shoppers are currently actively building food stocks 1, but more may choose to do so as Brexit approaches, depending on the situation. Rather than “panic”, this should be seen as a rational, predictable response to the possibility of higher prices or lower availability.

Some businesses have also spoken openly of building up stocks as a precaution, notably Mondelez, Premier Foods and Ornua 2,3,4.

IGD’s supply chain surveys have shown that stockbuilding is a popular business response to Brexit uncertainty, although this may be limited by lack of storage. Again, this should be seen as rational precautionary behaviour.

Some considerations for businesses

Every grocery business is likely to have a different situation and a different perspective on stockbuilding, but IGD offers some pointers:

  • Client guidance - This should be your starting point: doing what you client wants is unlikely to be the wrong move! But realistically, you may not get much attention from a big retailer before Christmas, so you may need to take “best guess”.
  • Client view of out-of-stocks - For your company, out-of-stocks as a result of supply chain disruption are obviously bad news. But will your clients see it that way? They may prefer to look at availability for each category as a whole. If they can keep something in stock, which is affordable and fit-for-purpose, they may see this as a “win”.
  • Length of any disruption - Disruption to Channel traffic is not unusual, especially in winter. However, disruption is usually temporary – disruption due to Brexit would likely be long lasting. Extra stocks can only be a temporary measure. In the longer term, moving production may be a better solution.
  • Shopper responses - We know how fast goods sell under “normal” conditions. But post-Brexit conditions may not be normal and rate-of-sale in the days after Brexit may be very high.
  • Cost of stockholding - Cost could come from working capital tied-up in stocks, cost of warehousing and handling, cost of credit to cover purchasing extra materials. This needs to be balanced against potential short-term or long-term losses if you are unable to keep clients satisfied.
  • Logistics challenges - If you store extra stocks, will you be able to move them into your customers’ distribution centres and stores as needed? Remember that logistics issues may lead to trucks or drivers being unavailable when needed. As well as stock, you would need the means to move it!
  • What priority might officials lend to your products - If there is disruption at ports, officials may decide to prioritise some shipments over others. Products like medicines and fresh food is likely to receive a higher priority than longer-life or less essential products.

Finally…

The best way to address Brexit disruption to supply chains is, of course, to develop an agreement between the UK and EU which is favourable to trade, as soon as possible.

Failing that, grocery businesses will be expected to act prudently and rationally, to protect shoppers. Lack of clarity is unlikely to be accepted as an excuse if things go badly.

A good place to start may be IGD’s “no-deal” Brexit checklist, a to-do list of things that could take immediate effect after Brexit day.

Sources:

(1) IGD ShopperVista, November 2018 – base: 1,700 shoppers, fieldwork October 2018

(2) Independent, 11th September 2018

(3) Reuters, 13th November 2018

(4) Guardian, 11th October 2018

James Walton

James Walton

Chief Economist

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