Brexit sparked a big fall in the value of the Pound

Brexit sparked a big fall in the value of the Pound

Earlier today, Rabobank released a report on what it predicts will be the effects on global beverage companies of the UK's exit from the European Union. Here, just-drinks looks at what the financial group believes are the alternatives facing companies looking to mitigate the effects of last month's referendum.

Short-term solutions

  • Pipeline loading

If Brexit does eventually lead to trade renegotiations between the UK and its trade partners, companies may want to shift as much product as possible before new, possibly less favourable, conditions come into play. There will be two years of exit negotiations once the UK triggers Article 50 of the Lisbon Treaty, effectively signalling the country's EU exit: Plenty of time for selling.

  • Hedging

The traditional method of safeguarding against currency fluctuations, hedging will have already come into play this month as existing hedges mitigate the big drop in Sterling following the referendum. However, analysts predict further falls are ahead, perhaps to as low as US$1.20 to the Pound. Rabobank suggests further hedging.

  • A geographical rethink

Sterling's softness, if maintained, will make the UK market much less appealing as an export destination for global beverage producers. Rabobank says suppliers may have to recalibrate their export focusses, with EU wineries looking instead to the US and China and US craft brewers seeking sales elsewhere in Europe. For UK companies, they may benefit in the export market as their goods become cheaper abroad.

Long-term solutions

Over time, companies will take more radical steps as a UK outside of the EU becomes the norm in the global marketplace. Rabobank suggests that companies will look to source more of their ingredients from within the UK to take advantage of lower costs. They may also want to shift as much of the production process as possible to the end market, provided GI indications or other geographical factors do not limit opportunities.

Rabobank warns that consumers in the UK may not be happy to find that previously exported products, such as beer and cider, are now made domestically. However, it notes that Heineken's New Zealand-branded Old Mout Cider hasn't been much affected by the fact it is made in the UK.

  • M&A

Could Brexit be an M&A bonanza for asset-hungry companies? With the share prices of UK companies (expect Diageo, whose investors have so far benefited from the referendum result) falling, suddenly a UK purchase becomes much more affordable. However, M&A targets will depend on the type of exposure the purchasing company has to the UK consumer.

"Companies that sell a lot to British consumers might look at buying British activities, while companies that have a lot of exposure to British activities but sell to foreign consumers, may want to explore potential assets that give them better access to their end markets," Rabobank said.

For just-drinks' coverage of the UK's vote to leave the European Union, click here