Brexit: Uncertainty puts investment on hold

More than a month has gone by since the British voted Brexit. Whilst new PM Theresa May is about to meet her European counterparts to evaluate the situation, no exit calendar has yet been established, and the future of the British economy and wine trade remain unclear.  

Right after the announcement of Brexit, the short term impact was a sharp fall of the Sterling. The currency fell to levels not seen since the mid-1980s ($1.35 vs the dollar) this was worse than even the most pessimistic economic forecasts.

Whilst most wine businesses have currency reserves to protect them for the coming months, the situation will probably become more difficult once those reserves will be finished and business will find themselves exposed to whatever level sterling finds itself then.

Whilst news of a lower pound would have probably been greeted by some producers in Europe, and even more so around the world as it would have made it cheaper to sell to the UK, it’s no longer  in anyone’s interests if that means that wine prices will skyrocket and consumers switch to other more affordable drinks instead.

However, such a situation might be good news for all UK-based producers, some of who already call for duty cuts on English wine to support Uk production.

When asked what they thought about the situations, most importers, distributors and on-trade wine and spirits buyers clearly expressed their worries.

The two topics they are most worried about are: falling Sterling and uncertainty over the direction of the UK relationship with the EU. They all agreed there will be no quick resolution. Even once the EU will have been notified that article 50 is to be exercised it will take two years to conclude negotiations over the trading relationship with the UK.

Several distributors said that they think the impact on the wine and spirits market will last for five or even ten years. This is bad for business. Another distributor with wine and spirits clients mentioned he had written to them all explaining that the terms of their contracts might change because of the fall in Sterling and the relative rise of the US dollar. This company has bought forward Euros and US dollars, but they only have cover for four months. They believe that some clients will insist on the terms and duration of their contracts. That means the distributor will either lose money…or clients….

Both distributors and importers believe Premium spirits and wines are likely to be less affected. London, in particular, is a Premium market and may be relatively untouched. Standard spirits brands and supermarket priced wines are likely to be under pressure if the fall in Sterling and the uncertainty continues. And it looks like it will; how can it be otherwise?

The result of uncertainty is that investment is on hold. Yet another distributor said it will slim down his portfolio of spirits brands, a process that has already started. One importer stated he had received enquiries from wine producers outside the EU, but it was too soon to act on them.

The initial biggest losers will most certainly be those buying the smallest amounts of wine:  independent merchants as well as restaurants buying directly from European producers. They will be faced with higher supply chain costs; costs bigger national importers will also be hit with, but will find easier to absorb. As a result Independent buying groups will most probably become stronger.

But after all, who knows with exit negotiations that have not even started yet in the end maybe new agreements between the UK and European governments won’t mean much change for the wine and spirits business at all.