brexit and the implications for the consumer goods industry

BREXIT AND THE IMPLICATIONS FOR THE CONSUMER GOODS INDUSTRYMay 2016

As the UK heads towards its EU membership referendum, there remains much uncertainty over both the outcome and the implications of a vote to leave. In fact uncertainty is the key challenge in regard to Brexit, and this uncertainty will contribute to falls in business and consumer confidence as well as delays to investment decisions. The protracted nature of any exit negotiations will not help. There are also wider implications for the EU, both in terms of its economy and its very future.

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INTRODUCTION

THE MACRO PICTURE

THE ECONOMIC IMPACT

THE IMPACT ON CONSUMER MARKETS

CONCLUSION



© Euromonitor International PASSPORT 3PASSPORT ECONOMIES

DisclaimerMuch of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors.

Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies’ opinions, reader discretion is advised.

Brexit on the agendaINTRODUCTION

The UK referendum on June 23rd 2016 will pose the question: Should the United Kingdom remain a member of the European Union or leave the European Union?

Article 50 of the Treaty of the European Union provides for a two-year exit process. Negotiations would be needed on the technicalities of withdrawal and the future relationship of the EU and the UK.

The unprecedented nature of a member state leaving the European Union makes assessing its impact extremely difficult and open to interpretation. “Unknown unknowns” are a major challenge.



INTRODUCTION

THE MACRO PICTURE

THE ECONOMIC IMPACT


CONCLUSION




Three issues dominate much of the referendum debate: trade, investment and migration.Taken as a whole, the EU is the UK’s largest trade partner. Exports to the EU accounted for 48.8% of the UK’s total exports. On a country level however, the USA is the UK’s largest trade partner.

FDI is an important component of UK economic growth, although it has so far failed to regain pre-recession highs.

Migration is responsible for roughly half of population growth each year. Since 2010, around 40% of migration to the UK has been from EU countries.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0

5

10

FDI i

nflo

ws

as %

of G

DP

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

0

350

700

EU Non-EU

US

$ bi

llions

How much does the EU matter to the UK?THE MACRO PICTURE

UK Exports: 1980-2015

FDI Intensity in the UK: 2000-2014

Source: Euromonitor International from IMF/Eurostat/OECD/national statistics




The UK plays a significant role in the EU, both economically and demographically. In 2015:The UK was the EU’s 2nd largest economy – behind Germany. It is also out-performing the other large EU economies, contributing 35% of the EU’s economic growth between 2010 and 2015.

The UK was the EU’s largest consumer market, and was responsible for 1-in-5 $ spent in the EU; again it is fast-growing, responsible for 56% of growth in consumer expenditure since 2010.

The UK was the EU’s 5th largest exporter and also the destination for 7.4% of EU exports. Germany is the bloc’s chief exporter to the UK.

It was also home to 12.8% of the bloc’s population and was the destination for 11.5% of all EU migrants in 2013.

ExportsPopulation

GDPConsumer Expenditure

FDI Inflows

0 50 100

UK Rest of EU

% of total EU

2007 2008 2009 2010 2011 2012 2013 2014 201590

100

110

EU UK

2010

=100

How much does the UK matter to the EU?THE MACRO PICTURE

Real Consumer Expenditure Growth: 2007-2015

UK’s Contribution to the EU: 2015

Source: Euromonitor International from IMF/Eurostat/OECD/national statistics



INTRODUCTION

THE MACRO PICTURE

THE ECONOMIC IMPACT


CONCLUSION




Declining confidenceThe general uncertainty surrounding Brexit will damage consumer and business confidence.

Weakening InvestmentIncreased risk will lead to a fall in investment. It’s also possible that some global firms already present in the UK may switch their HQs to other EU countries.

Current AccountThe UK posts a large current account deficit, this would likely widen on the back of uncertainty.

Sterling DepreciationPressure on confidence,

investment and the current account would combine to

cause a weak currency.

Price PressuresThe UK would face price

pressures from increasing import prices, caused by the weak currency and potential

loss of access to the common market.

Consumer expenditureUncertainty and fears over

economic growth will dampen spending

Summary of economic risks THE ECONOMIC IMPACT




Relaxation of legislation

New trade agreements outside of the EU should be more straight-forward to negotiate

Savings made on transfers to the EU

Renewed demands for a Scottish referendum

Isolation on global stage and poor relations with European neighbours

Lower migration inflows leading to slower labour force growth

Political uncertainty within the UK – all major parties support the remain campaign

Opp

ortu

nitie

sThreats

Once the dust has settled the outcome for the UK would be uncertain

THE ECONOMIC IMPACT

The medium term outlook would depend very much on the terms of the exit negotiations, making it very difficult to quantify the economic impact. Depending on the “divorce” negotiations, an array of threats and opportunities would exist.




Damage to the post-war European Ideal

Political contagion – Brexit would set a precedent and if the UK economy is successful would increase impetus for further exits

Shift in the balance of power within EU institutions

Loss of major net contributor to the budget

Smaller voice on the global stage with the exit of its second-largest economy.

Damage to EU-UK trade could exert a negative impact on the UK’s major trading partners within the EU

Increased competition from the UK as a destination for FDI

The EU itself would also face political and economic risksTHE ECONOMIC IMPACT




If the UK were to vote to leave the EU in June, the country would likely stay in the EU for at least two years while the exit agreement is negotiated. Our main scenario assumptions are:Higher trade barriers, restrictions on immigrant labour and relocation of some financial services reduces long-term UK GDP by around 2%.

Lower growth expectations and higher uncertainty lead to a short-term slowdown.

Macro model Brexit scenarioTHE ECONOMIC IMPACT

Source: Euromonitor International Macro Model




Our assumptions show real GDP growth declining by a cumulative 2% over 5 years, with the biggest impact being felt in 2017.

Real GDP growth would not return to baseline rates of growth until 2023.

By 2021 unemployment would top 6%, against 5.7% if the UK were to remain in the EU. Even 10 years on from the referendum unemployment would remain higher than if the UK remained in the EU.

Inflation would spike at 2.7% in 2018 compared to 2.0% in the baseline scenario, before returning to within the Bank of England’s target of 2.0% by 2020

The Bank of England would loosen monetary policy and cut interest rates.

Key economic forecasts for the UKTHE ECONOMIC IMPACT





2017 2020 2023 20262.0

3.0

4.0

Brexit Baseline

% y

-on-

y gr

owth

Due to its close trade linkages, Ireland is likely to see the largest negative impact from a Brexit.

Several non-EU countries are also likely to feel pain, with China, Saudi Arabia and Egypt all expected to see a similar level of impact to Germany in 2017.

In 2017, none of the 57 countries in our macro model will see an uptick in growth in a Brexit scenario.

The impact of a Brexit on others will be broad but short-livedTHE ECONOMIC IMPACT

Difference from our Baseline Forecasts in a Brexit Scenario: 2016-2020

Ireland: Real GDP Growth: Q3 2016-Q4 2026





China

Slovakia

Estonia

Norway

Ireland

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Baseline Brexit

% growth

The depth of the impact will not be significantTHE ECONOMIC IMPACT

Baseline and Brexit Growth of 5 Most-Affected Countries in 2017

Even in the most-affected countries the impact on

economic growth will not be substantial




INTRODUCTION

THE MACRO PICTURE

THE ECONOMIC IMPACT


CONCLUSION




• In any downturn, staples are most insulated from weak consumer confidence and income shocks, whilst discretionary items are most at risk from consumers’ cutting back.

Consumer confidence

• Those with predominantly UK sales but inputs sourced overseas are most at risk from a weak currency.

• UK-based exporters could benefit.

Currency

• Restrictions to immigration law, particularly from EU countries, could lead to labour market shortages.

Labour force

• Some may consider relocating to, or increasing their presence in, countries within the EU and will face associated costs.

Relocation

• Depending on the outcome of exit negotiations , tariff-free access to the EU market may no longer be a possibility.

Access to EU markets

• Uncertainty will have a dual impact on consumer goods companies – it will dampen consumer confidence and business confidence, likely leading to delays in investment decisions.

Uncertainty

The main considerations for the consumer goods industryTHE IMPACT ON CONSUMER MARKETS




According to our Industry Forecast Model, looking at forecast volume growth, in a Brexit scenario, confectionery, ready meals and sweet and savoury snacks would be the most-affected packaged food sectors in the UK. Within this, volume sales of chilled lunch kits, gum and chocolate are most influenced.

The staples of rice, pasta and noodles show the least impact with our forecast barely altered.

These results are consistent with what we would expect – those that are more discretionary, and reliant on income will see the strongest impact.

There are some exceptions - sugar confectionery and dinner mixes should show more resilience to economic trends.

Packaged FoodTHE IMPACT ON CONSUMER MARKETS

Source: Euromonitor International Industry Forecast Model




Brexit would have a muted impact on sales of beauty and personal care products. In total value terms by 2020 the UK market would be US$205 million smaller (at 2015 prices) in a Brexit scenario, than it otherwise would be.

There is less variation across product categories in the downgrades to our forecasts of beauty and personal care products. Sun care and men’s grooming are most-affected – particularly adult sun care and men’s toiletries. Bath and shower products least.

Again this is consistent with what we would expect in terms of the income effect.

One slight outlier is deodorants, where income is not a major driver but the category is mid-range in terms of the impact of Brexit.

Beauty and Personal CareTHE IMPACT ON CONSUMER MARKETS





The impact of Brexit will be stronger on soft drinks than either beauty and personal care or packaged foods. Overall the sector would see cumulative growth of 1.4 percentage points less in a Brexit scenario between 2015 and 2020. This corresponds with “lost” sales of 475 million litres over this period.

The variation across product categories is also relatively stark, from bottled water, RTD tea and sports and energy drinks being the most-affected; through to juice and Asian specialty drinks, which according to our model, will be least affected. Again this is driven by these sectors reliance on income growth.

Soft DrinksTHE IMPACT ON CONSUMER MARKETS





The impact of Brexit on the hot drink sector is likely to be broad-based. In volume terms in a Brexit scenario we expect period growth of the sector to be 9.8% to 2020, compared to 10.5% without Brexit.

With the exception of the fast-growing market for fresh ground coffee pods, Brexit would have a similar impact across all hot drink categories. The high unit price and reliance on income growth as a driver of the market explain the exposure of this category. Nevertheless it will remain overwhelmingly the strongest-growing category of hot drinks.

The hot drinks sector in the UK is largely reliant on imports of key ingredients. Therefore the chief impact would be the effect on unit prices and margins.

Hot DrinksTHE IMPACT ON CONSUMER MARKETS





In home care the impact of Brexit will be limited. Real value growth in home care between 2015 and 2020 will be 1.0 percentage point lower in a Brexit scenario, coming in at 9.5%.

Toilet care will be the most affected category, with the market in 2020 US$5 million (in 2015 prices) smaller than it otherwise would be. In-cistern devices are the biggest loser overall.

At the other end of the spectrum home insecticides will be barely touched.

Overall a Brexit scenario would result in US$161 million in lost sales in home care over 2016-2020. Equivalent to 2.6% of the market in 2020.

Home CareTHE IMPACT ON CONSUMER MARKETS





The impact of Brexit on tissue and hygiene is broadly inline with the impact on home care. Between 2015 and 2020 growth in real value terms will be 1.0 percentage point lower in a Brexit scenario, coming in at 2.8%. This translates as US$148 million in lost sales to 2020 (in 2015 prices) or 2.6% of the total market in 2020.

Kitchen towels are likely to be the most affected category, with period growth of 7.7% in a Brexit scenario, compared to 9.5% if the UK were to vote to remain in the EU. This translates to a market size of US$662 million (in 2015 prices) compared to US$673 million if the UK were to remain in the EU.

Incontinence products will be the least-affected sector due to the strength of habit persistence as a forecast driver.

Tissue and HygieneTHE IMPACT ON CONSUMER MARKETS




INTRODUCTION

THE MACRO PICTURE

THE ECONOMIC IMPACT


CONCLUSION




Uncertainty is the key challenge with Brexit. It has a dual impact in that it creates problems in effectively assessing the outlook, and also because uncertainty is a key adversary of economic growth itself.

Our macro model shows the impact on the UK economy to be a reduction in growth of 2 percentage points over five years.

Due to its importance as a consumer market and its key political role in the UK there are wider implications for the EU both in terms of its economy and its future as an organisation. The economic impact however will not be severe.

Looking at consumers – although it will be dampened, spending might not be the main challenge for the consumer goods industry. The foremost issues could be operational and strategic – for instance to absorb or to pass on price increases? Relocate or re-focus resources or not?

With an ageing population, the strength of the labour market, depending on policy decisions over migration, could pose a longer term challenge across all sectors.

All-in-all, UK economic growth will be dampened by a Brexit but not to the same extent as the financial crisis. A lot would depend on exit negotiations and the UK’s ability to negotiate trade deals in a timely manner.

Uncertainty is the key wordCONCLUSION



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