Dealing or gambling with perishables?

London, 25 January - The UK Government’s decision to leave the EU will mean that handling perishables could radically change in the UK.

There are conflicting views about how Brexit will affect the perishable supply chain, especially following the stand taken by the UK Government to leave the Single Market.

Broadly speaking, one school of thought claims that the food trade and the associated logistics sector will ‘sort themselves out sooner or later’ and that nothing much will change in the long run. The market will find its balance according to the laws of supply and demand, presumably guided by some invisible hand, and hey presto, the world will be open to the ‘deal-makers’ here and abroad. New commercial realities will emerge for everyone, including for the leaders of the perishable supply chain.

The other school of thought argues that the risk of change resulting from future trade insecurity in Europe is too big a gamble for businesses, and that commercial realities will dictate that the UK is relegated to an economic backwater. The UK could become a much smaller economy in the future and be put at a considerable disadvantage even when trying to negotiate sector-by-sector trade deals.

By the same token, each sector, from the automotive sector to agriculture, is now lobbying the UK Government for special treatment. This could lead to protectionism, a winner takes all approach, and worst of all, a ‘beggar-my-neighbour’ policy.

Inflation is creeping up

If everything is still up in the air, one thing is clear at least: food price inflation in the UK is rising. The pound has come under inordinate pressure in the intervening months since the UK Referendum.

Initially, retailers have tried to shield consumers from the cost of imported inflation, but this is now coming to an end and some of them have publically warned that consumer prices will go up by the end of this year. The indications are that this could happen even sooner.

Analysts expect inflation to rise above the Bank of England’s 2% target within months, as the fall in the value of pound following the Brexit vote and the resulting higher cost of imports permeates through to consumers.

The UK is a net importer of food, both from mainland Europe and elsewhere. Over 40% of fresh produce, 80% of fresh meat and nearly 100% of prepared and processed foods are being imported either as finished or intermediate goods into the UK, according to EY Analysis.

According to the Department for Environment, Food & Rural Affairs, in the UK the food chain contributes £97bn per year to the economy (from production to retail). In 2014, £12.8bn of food and non-alcoholic drink was exported by the UK.

More than any other economy in Europe, the UK is reliant on imports, especially for fresh produce.

The question is who will absorb the cost: the food industry, the retail sector, or the consumer? And where does the logistics sector, especially the perishable logistics sector, fit into all of this?

The hallmark of the logistics sector has been to create more efficient solutions for its customers. The majority of fresh produce in the UK is pre-sold. As a result, inland logistics has been easier to plan than on the continent.

Fresh produce distribution on the continent is different: most imported food products are sold on arrival. This means that there is an element of uncertainty and opportunities for third parties to cut individual deals.

Brexit may change this.

Minting new deals?

For fresh produce traders and producers, currency is king. They will sell where they will get the best price. This may be the UK today and the EU tomorrow. Or possibly the other way round, although it looks far less likely. This will depend more on political factors than purely economic considerations. The withdrawal of current subsidies for the agricultural sector and the lack of certainty that future national subsidies could make up for the shortfall could have a big impact.

According to a recent study commissioned by the Confederation of British Industry (CBI), British farms rely on EU subsidies for between 50 and 60% of their income.

The UK’s agricultural businesses could be put at a real long-term competitive disadvantage if their products become subject to tariffs in their largest market — with an average tariff on dairy products of 36%, animal products of 20% and fruit and vegetables of 10%, the CBI warns.

Fresh produce importers do not enjoy any subsidies according to the Fresh Produce Consortium, which represents producers, importers and exporters.

What about the logistics sector?

As the UK is also a net importer of energy, fuel costs in the UK could significantly rise and add to inflation. Both intercontinental and transport costs are likely to be affected. But with the pound having lost 18% in value against the dollar and slightly less against the Euro, shipping and commodity cost differentials could potentially have a significant impact on trade routes. Shipping is priced in US dollars, as indeed are many perishable commodities.

The cold storage sector could also be affected, given that energy represents over 50% of the cost of operating cold stores. Operating a chill store is significantly higher than running a cold store with frozen pork, beef or pizzas. Controlling temperature in the chill range for different commodities above freezing, and up to 11 deg C in some cases, is more complex and complicated than keeping a uniform -18 deg C level throughout.

The CBI also argues that the practicalities of delivering Brexit without a transition period could be difficult.

‘It is important to maintain the smooth flow of goods through the ports. There are serious concerns that there will be delays on in-bound and/or out-bound movements of goods that will compromise the ability of the haulage sector to maintain the service levels that supply chain customers require. Many ports simply do not have the space required to introduce customs controls or immigration controls on movement of goods and people between the UK and EU’, the CBI says.

The invisible hand of logistics

Indeed logistics usually prides itself on going unnoticed. However, longer and more complex supply chain lead to greater trading risks.

This means that the workings of the ‘invisible hand of logistics’ is perhaps more important than ever. Luckily stock-out, missed pick-up and or delivery, and late ship arrivals are all situations that don’t happen too often.

Ironically, the price of efficiency has been increasing the fragmentation of the supply chain, which will ultimately limit what is possible in efficiency gains.

At the same time, there has been an explosion in claims amongst individual segments within the supply chain to create ‘customised deals’: many retailers, importers and logistics service providers today claim that they can ‘go direct’, ‘buy at source’ and then fashion separate logistics solutions. But can they really?

Logistics providers themselves often pride themselves that they too can ‘go direct to the customers’ and sell their ‘customer knowledge’ to those who they believe know less about them. But again, can they really?

Who in fact are the customers? Or, even more importantly: who is the consumer?

Balancing probabilities with E-commerce

That each customer is different is a lesson that even the retailers, the ‘kings of the perishable supply chain’ are still grappling with. Enter e-commerce, with even more promises of being able to match actual demand with actual supply and by-pass traditional retail outlets.

According to one equity analyst working with a Brexit think-tank, everybody will suffer initially but retailers will try to pass some of the rising cost of inflation back up the supply chain. Retail sales figures dipped markedly in December. Although some of the large British retailers have been able to produce passable results in the last quarter, much of this has been thanks to rising consumer debt in the UK and mainland Europeans attracted to shop in the UK before Christmas due to the favourable Euro-Sterling exchange rate.

The fact that retailers have to operate additional fresh produce supply chains (omni-channel) and also take on home delivery to compete with the likes of Amazon Fresh is a sign that all is not well in the traditional food retail sector.

A typical concern voiced by one fruit trader importing fresh produce from Chile and South Africa is that the supply chain has already been squeezed enough in recent years and that there isn’t much room left to create greater efficiencies.

When the hand of logistics becomes visible, it is often too late; the damage is either done or can only be rectified at considerable cost to reputation.

Producers will try to pass on rising production costs as much as possible. But there will be a limit.

Cool Logistics Resources provides top-quality business intelligence and networking for supply chain, logistics and transport professionals in the international perishables markets. The annual Cool LogisticsTM Global Conference in Europe connects perishable cargo owners with cold chain logistics and transport professionals from around the world. CLR publishes The Cool Logistician, a monthly curated collection of the best perishable trade and logistics news from across the worldwide web, including expert opinion, analysis and views from the Cool team and guest authors as published on the Cool Logistics blog.

Cool Logistics is running a seminar, ‘Brexit — the impact on perishable logistics’, on Wednesday 29 March 2017 at The Cavendish Hotel in London: Tickets:

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