BREXIT

Brexit fallout: Snack sales face threat of drop in discretionary spend

23-Jun-2016 - Last updated on 24-Jun-2016 at 12:49 GMT

Analysts warn Brexit may hit discretionary spend. Photo: iStock - Evgeny Gromov

Sweet and savory snacks will be among the hardest hit UK food categories as a result of the Brexit vote, according to analysts Euromonitor International.

As industry comes to terms with the outcome of yesterday’s referendum – when 52% of voters declared they want to leave the European Union – Euromonitor said volume sales in categories most reliant on discretionary income, including confectionery and ready meals, would feel the most impact.

The UK was the second largest consumer – after Belgium – of biscuits, snack bars, chocolate confectionery and crisps among the 28 EU countries last year, according to Euromonitor (see graph below).

“Those categories that will be most affected will be the discretionary items,” said Sarah Boumphrey, Euromonitor global lead for economies and consumers. “Staples are not driven by changes in income to the same extent.”

Fall in the value of sterling

Analysts Edison Investment Research said that, in the short-term, a fall in the value of sterling – which dropped to a three-decade low today - would bring a sharp rise in fuel pump prices that would divert spending from other areas.

“That presumes the Remain campaign’s threats about the extent of the economic nuclear winter that would follow Brexit have been ignored and that consumers are still spending,” added Edison analyst David Stoddart.

It was a view echoed by Shore Capital analyst Clive Black, who said higher fuel prices would eat into discretionary spend if the pound remained weak against the dollar.

“Thereafter it will take time, with imported seasonal food prices in dollars and euros likely to test the market,” he added. “The key question is whether or not it is passed through and what happens to the balance of prices, volumes, mix and margins.”

Uncertainty is key challenge

Many commentators believe uncertainty will be a key challenge in regard to Brexit.

“This uncertainty will contribute to falls in business and consumer confidence as well as delays to investment decisions,” said Boumphrey.

She added that the outlook in the medium term would depend on the terms of the exit negotiations, which made it difficult to quantify economic impact or determine the regulations UK business would still need to adhere to.

Analysts have also warned that the impact on sterling could push up inflation and increase the price of imported food, particularly fresh produce.

Weak currency good for UK exporters

And while a weak currency is good news for UK exporters, it could hit businesses depending on where they are based.

“Strategic and operational decisions will need to be made about where businesses locate their operations,” added Boumphrey. “I doubt we will see a wholesale removal of operations, but a rebalancing of where (geographically) business invests is likely.”

Meanwhile, flour milling trade body the National Association of British and Irish Flour Millers (Nabim) said it did not expect any immediate changes as a result of the Brexit vote.

“Nabim will be working hard with members and UK government officials to establish the implications for the flour milling sector, our customers and suppliers – but we don’t expect any quick answers," said director general Alex Waugh.

“Obviously there has been a strong adverse reaction in currency markets, which will inflate raw material costs if maintained, but other than that we don’t expect any immediate material change that will affect day-to-day business.”

'The great fear'

Edison Investment Research said a collapse in the value of sterling was “the great fear” following the vote to leave, adding that businesses will have covered against a short-term fall.

Edison said that whether foreign direct investment fell to a level where sterling was permanently reduced in value would depend on the policies the UK adopts.

Boumphrey said businesses were entering “uncharted territory.”

Cautious approach to investments

“The challenge is the length of the negotiations and this makes it very difficult to implement effective strategies. There is an uncertain future for the UK economy for the next two years at least and there are flow-on effects to Europe as a whole.

“I think taking a cautious approach to investment decisions would be wise until the dust settles and we see the likely direction of the negotiations.”

She suggested companies exporting into the UK should avoid 'knee-jerk' reactions and take a calm and measured approach.

“The UK will not be leaving the EU overnight,” she added. “Weighing up whether to pass on price rises to customers and end consumers is not a straight-forward choice.”