The British food industry is booming – but is also facing the greatest uncertainty ever. With just over six months left before the official date Britain exits the EU and increasing uncertainty on whether a deal will be reached at all, the best thing British food producers can do is to act now in mitigating the inevitable devaluation in the British pound and rising food costs – and the best way to do that is by evaluating and reviewing the fine print around your supply chain contracts.
Even though there will be the transition period of nearly two years to follow, the strongest period for negotiating new terms is the present as far as managing currency risk is concerned. With Britain about to enter uncharted territory, working alongside an experienced solicitor who has a background in food business is highly recommended.
The pound is already weakening and with that devaluation will come three major consequences for small food businesses in the UK:
Foodpreneurs can begin to put in place measures now to manage these impacts in a more controlled way over a prolonged period of time. Here’s how:
If you have a good and long standing relationship with raw ingredient or material suppliers outside of the UK, consider negotiating forward contracts with them to lock in a certain amount of goods at a pre-agreed price to be converted at a time in the future (preferably before March 2019). This not only gives you the breathing room you will need to get to grips with other consequences of Brexit but also locks in pricing now with your supply chain secured for a predetermined period of time. From the supplier’s perspective, they are effectively getting pre-orders giving them security of sales and cashflow. These negotiations and implementation of agreements need to start now before any Brexit deal reduces any leverage you have as a British business. Forward contracts are a particularly good strategy if you rely on the EU for any part of your supply chain. If you are not sure about how this works in practice, investing in an experienced solicitor now could see real benefits later on.
For smaller businesses, if appropriate, seeking out British suppliers of ingredients that are made in the UK could be another way to manage this risk – although it is still advisable to have a well written contract in place.
If you pay suppliers abroad in a currency other than GBP or selling online subjects you to currency risk, you need to consider effective hedging strategies to manage further weakening of the pound which would in turn impact your bottom line.
Dependent on your cashflow situation, spot contracts or forward currency hedges are a smart way to offset any negative impact on Sterling.
There is always opportunity to be found – even in adversity – and for British food producers, the impact of Brexit is going to open up exciting new export opportunities. While there is added uncertainty over tariffs and the customs union, it is a good time to begin exploring and looking into markets outside of the EU, especially as anyone in the food industry knows, getting an export deal done can often take months.
Savvy distributors and retailers in North America, the Middle East and Asia will be looking for British products. That is not to say that British brands should be taken advantage of which is why careful negotiations of distributor agreements and commercial arrangements will be key in securing these opportunities. It will be essential that British companies have a robust and enforceable contract in place that allows them to mitigate risk when dealing with parties from outside the UK.
Of course, currency management is just one part of the much bigger puzzle presented by Brexit. If you already supply customers within the EU, there will likely be re-negotiations of those contracts, if you manufacture your products in the EU, those contracts will need to be reviewed. Perhaps product formulations need to be revised or new post Brexit products introduced to help balance the cost increases on existing lines. If your products are subject to certain EU rules such as organic certification, that could open up more challenges too and new internal policies may be required for certain aspects such as food safety or privacy. Even in the best case scenario, there is likely to be a myriad of legislation to negotiate to ensure your food business is compliant. Having a solicitor at your disposal with the flexibility and experience your business needs could prove to be a valuable tool in your arsenal.
If you’d like more support, ideas and help guiding your business through Brexit, come and join our Facebook Group: Brexit Step by Step for Food Entrepreneurs
For advice and support with any aspect of your food business or for help with getting your agreements in place, contact Trusha Patel at nexa.law now.