Whisper it, but WTO tariffs could benefit the UKs soft drinks industry

Whisper it, but WTO tariffs could benefit the UK's soft drinks industry

It's coming up to a year since the UK shocked itself - and Europe - by voting to leave the European Union. Article 50 has now been triggered and Brexit, we have been told, means Brexit. Richard Corbett considers the likely fallout of the UK's departure for the country's soft drinks industry.

The early indicators are that divorce discussions between the UK and the EU are not going smoothly, and that this is not going to be a straightforward 'decoupling'. Indeed, at the current rate of progress, we'll be lucky if we've managed to split the record collection by the end of the allotted two-year negotiation period.

All of the UK's major soft drinks players were far from enthusiastic at the prospect of Brexit. AG Barr even put a price on it, estimating that the drop in the value of the pound would cost them between GBP3m (US$3.9m) and GBP4m per year in higher import costs, adding also that it would have to cut costs elsewhere as a result.

The subsequent fall in the value of the Pound has had implications beyond the price of imported raw materials. Following the referendum, the UK sales for international players like Coca-Cola European Partners were suddenly worth a lot fewer Euros. Exhibit B: In February, private-label producer Cott Corp blamed its 23% drop in 2016 profits on "the post-Brexit adverse foreign exchange impact on the British pound".

Brexit has been flagged by companies in all spheres when issuing bad results, but there have undoubtedly been considerable negative repercussions for the soft drinks industry following the UK's decision to leave.

There will, however, be some changes in a post-Brexit environment that will provide some comfort.

In the short term, the weak pound has inevitably pushed up the price of soft drinks. Further down the line, however, one important ingredient is likely to see a fall in price. Sugar has been subjected to high import tariffs to protect EU beet sugar producers, and this has made prices artificially high. Not surprisingly, sugar refiner Tate & Lyle was one of the more vocal proponents of a 'leave' vote. A drop in the price of sugar may even offset the effect of the oncoming soft drinks tax - if, politically, that is allowed to happen.

The lower value of the pound has also made British soft drinks more competitive on the international stage. This factor already seems to be helping Britvic, which this week announced that sales from its international division had increased by 25% in the fiscal first-half. Elsewhere, exports of bottled water from the UK increased by double digits last year, according to trade data provider Business & Trade Statistics, with CSDs up a more modest 1.5%. If the value of the pound stays low, one can expect these figures to climb at a more amplified rate.

While Brexit is unlikely to be a positive for UK exporters to Europe in the longer term, there may be some short-term wins from the worst-case scenario. If we end up with a so-called hard Brexit, then the UK can expect tariffs, which could actually work to the advantage of the UK's soft drinks producers.

There's quite a balance-of-trade deficit between the EU and the UK: In 2016, the UK imported more than 1.25bn litres of CSDs and waters from EU countries, but sent less than 500m litres in the other direction. The UK is a price-sensitive marketplace, and any added price burden on imports would tip the scales in the favour of domestic companies.

This is particularly evident in the bottled water category. UK consumers love their glamorous mineral water brands: Last year, nearly 250m litres were imported from France alone. Any price rises on these imported waters will more than likely prompt a consumer shift to cheaper UK-sourced waters, and that would be a boost for the likes of Highland Spring and Harrogate Water.

Meanwhile, at the cheaper end of the CSD market, European private label producers selling into the UK will find it very challenging to match the prices of domestic producers. This will be music to the ears of Cott Corp's UK operations and other private label bottlers.

While the referendum has been proceeded by a sustained period of unpredictability, the UK's bigger soft drinks players have worked to come to terms with and adapt to the evolving trading environment. Both Britvic and AG Barr have since posted encouraging results, with Britvic's net sales in the 28 weeks to 16 April increasing by more than 10%. AG Barr meanwhile reported a 4.4% lift in profits for the 12 months to the end of January.

The companies' share prices have also settled down, after initially falling steeply following the vote. Britvic's share price is now 6% higher than it was on the day of the referendum, with AG Barr's up by around a quarter from the day before the vote.

Most in the industry have consistently viewed Brexit as a negative. The sky is yet to fall in, though, as some had warned.

The UK's soft drinks industry has had to navigate around the subsequent uncertainty and upheaval. This navigation will continue to define the category going forward.