Mitigating the Brexit risk: exploring the Onshoring dilemma
The impact of Brexit on the UK food and drink market is still shrouded in uncertainty. With half of the UK’s food supply imported and 30% coming from the EU, what can surely be said is that Brexit will have an enormous impact on UK food imports.
The working assumption that many in the industry have been making is that anything other than a Customs Union will result in tariffs and a slower supply chain.
With the risk of a No Deal Brexit mounting day by day, tariffs as high as 35% on some protected goods categories such as cheese and butter are looking more and more likely. Even outside of these categories protected by tariffs, the devaluation of sterling and the likely increase in regulatory checks will contribute to driving up units costs. While UK consumers have been warned grocery prices will rise, few can really contemplate how much of an impact Brexit is likely to really have on their weekly shop with many simply dismissing warnings as scaremongering.
What is clear though is that the retailers that manage to keep their prices as low as possible in a post-Brexit world where consumers are likely to be even more price sensitive will be the retailers that win. Therefore, food in these protected categories needs to be priced as keenly as possible to be competitive.
While perhaps less of an issue for established dairy brands with brand-loyal customers, for European manufacturers supplying own label and lower value products, higher costs represent a significant threat. This is leading many UK brands and retailers currently sourcing product from overseas to reconsider their options for UK production.
Putting in place your Plan B
With UK self-sufficiency on the decline for the past 30 years, there is simply not the existing capacity or capability to displace all European imports with domestic production. Therefore, engaging with potential co-packers as early as possible is key. Researching your options and putting in place a Plan B is the best way of mitigating the Brexit threat. Once the picture has become clearer on tariffs and import regulations, the job will be to evaluate the options available, balancing any cost savings and risk mitigation benefits with the time, cost and effort required to move production.
Evaluating the benefits of multiple co-packers
Of course, there is a point where scale means finding a single manufacturer is impossible. This leads to the question of whether to split production by SKU among more than one co-packer. While this can be a good way of saving costs in certain circumstances, for example where different parts of the range require completely different processing equipment, there is always the risk that quality, packaging or taste across the range will be inconsistent. For brands in particular this can be a real issue as quality consistency is key.
Ultimately, the cost benefits of onshoring the whole range need to be balanced with the significant associated costs of moving production to several new manufacturers.
The answer in these cases is often to look at building a production facility. In industries such as dairy, co-location is an option definitely worth considering. Locating a factory next door to an existing dairy processing asset brings with it benefits like sharing milk supply, services and logistics costs. Finding a suitable factory with the right synergies to benefit from is a task worth dedicating time to as this is a way of saving a great deal of time and money in the long term.
Be realistic about timescales
Moving production from one factory to another is a time-consuming process. Getting the production process right and completing the required production trials is something to not be underestimated.
While no one can predict what the right answer will ultimately be for brands currently manufactured overseas, it is important to consider all options available to edge out as much risk as possible from commercial decision making.
If you’d like to discuss your contract manufacturing options, feel free to get in touch with Hamish on [email protected].
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