Brexit is now only weeks away, scheduled for 29th March, but constitutional and diplomatic outcomes remain uncertain.
A Brexit deal exists, agreed by UK and EU negotiators, but this was rejected – emphatically - in the House Of Commons when put to a vote on 15th January.
In fact, it seems unlikely that any vision of Brexit can currently win a majority in Parliament and so there is a distinct possibility that Brexit will be disorderly, ie: sudden and complete, with no post-Brexit trade deal.
That would see trade barriers appear between the UK and EU, raising the risk of delays and disruption at the border, with short-life foods being most vulnerable.
This would be a challenge to grocery businesses on both sides, since supply chains are designed for capital efficiency, with minimum stockholding – smooth flow of goods over borders is needed to ensure availability.
The “optics” of availability
For grocery businesses, out-of-stocks (OOS) mean lost sales and, perhaps, lost share if disappointed shoppers buy from rivals. This explains the desire to maintain availability, even in the face of supply chain disruption.
For shoppers, on-shelf availability (OSA) is a gauge of retailer capability; where a store does not have the goods required, it cannot offer value or utility.
Availability can be observed and comprehended easily, by any shopper – unlike, for example, value for money, which requires fine calculation and which is somewhat subjective.
Availability can also be seen determined on entering the store – or even from outside: in most large stores, the fresh produce section, which requires constant resupply and is most at risk from disruption, is at the front.
Stock-building is on the agenda
News coverage suggests that stockpiling goods is a common grocery business response to Brexit risk and this view is backed-up by IGD’s own research.
Extra stock would provide a “buffer” to limit the impact of any supply chain disruption and, with time running short, businesses are increasingly willing to discuss this issue in public.
Manufacturers have been most vocal; ABF, Greencore, Mondelez, Ornua and Premier have gone on-the-record to discuss Brexit in general and stock-building in particular.
More recently, retailers have also discussed stock-building; in the last week, both M&S and Tesco have made public statements on this matter.
Of course, stockpiling is really only practical for ambient or frozen goods - chilled and fresh items cannot be held for long and businesses in these categories do not have this option (unless they can be temporarily frozen, as fish can).
ONS data shows that the volume (ie: value adjusted for inflation) of food and drink products created by UK manufacturers rose slightly in H2 2018, when compared with H2 2017.
(Note, however, that this data measures only finished goods leaving factories; it would not pick up any stock-piling of goods in manufacturers’ own warehouses or stockpiling of intermediary goods)
Increased factory output is not easily accounted for by higher retail demand – total retail volumes for food and drink were pretty flat in H2 2018.
Extra production for export is a possibility. Food and drink exports did rise slightly in late 2018, perhaps due to weak Sterling, which makes UK production more competitive on global markets.
However, it is reasonable to say that at least some of the increase in production may be accounted for by stock-building.
The same may apply in other markets also. This was highlighted by the latest IHS Markit Purchasing Managers’ Index data, issued in early January.
This release – which achieved quite wide media coverage – showed an uptick in output for all UK manufacturing businesses in December.
Again, some of this might be attributed to export demand but, IHS Markit considers that the key driver was stock-building, in anticipation of a bad Brexit outcome.
Food storage may be divided into three temperature “regimes”: ambient, chilled and frozen. Ownership may be either “private” (eg: a retailer RDC) or “public” (ie: available to hire).
Ambient storage is potentially flexible and expandable, as any space may be used, although regulations may apply (eg: registration of premises with local authorities and, for animal products, approval of premises).
Chilled and frozen space is harder to expand, since dedicated buildings cannot be constructed quickly. Also, chilled space in the grocery supply chain is generally configured for “flow-through” rather than storage.
It may be possible to develop temporary temperature-controlled storage space by using trailers or containers but these offer only limited capacity and they are not easily connected to the wider supply chain.
It is hard to gain a view of how much stockpiling might be going on or the storage capacity is available, since there appears to be no comprehensive data source (if you are aware of one, please get in touch).
However, anecdotal evidence gathered by industry specialists (eg: the Food Storage and Distribution Federation) suggests that utilisation of temperature-controlled distribution is currently very near capacity.
Stockpiling raises various strategic challenges to food and grocery businesses:
- Demand planning is difficult – Experience shows that shopper demand can “spike” in response to events such as weather and the same could apply to Brexit, especially if media coverage encourages shoppers to increase purchasing.
- Food stockpiling is risky – Building stocks is costly and so businesses may be reluctant to attempt it unless they are sure that it will have commercial benefits.
- Transport is as important as storage – Stockholding can be adjusted, within certain limits, but transport assets may be less flexible. This may make it difficult to distribute goods, even if stock is available.
- Timing is everything – Businesses must decide when and how to release any extra stocks that they hold. There are several possible considerations:
- Release stocks in the run-up to Brexit, to compensate for possible pre-Brexit spikes in demand and maintain OSA
- Release stocks after Brexit, to compensate for effect of new trade barriers such as border delays
- Other considerations – In a situation where food availability is temporarily limited, those holding stocks will need to make some fine judgments regarding how they are allocated.
Stockpiling could be a key tool in dealing with the effects of Hard Brexit and helping to maintain grocery availability for shoppers.
But the approach can only offer a partial solution to barriers to trade – this has the be dealt with by politicians and officials.