What would a no-deal Brexit mean for retailing and distribution?

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The Economist is running a series of articles on the potential impact of a no-deal Brexit on everything from trade to the island of Ireland, the economy to immigration, cars to universities. This piece looks at the retail industry.

FRICTIONLESS TRADE has been one of the great success stories of Britain’s membership of the EU. According to the Road Haulage Association, 4.8m driver-accompanied lorries moved between Britain and Europe in 2017, 4m of them through Dover or the Channel Tunnel. The tax office says that 99% of these did not require any customs clearance at all. Any Brexit scenario would entail more checks. But a no-deal exit would abruptly and greatly increase friction. A report last year from the National Audit Office (NAO), a government watchdog, outlined just how many more procedures would be needed; customs declarations would increase from 55m to 255m; at least 145,000 traders would need to make customs declarations for the first time; new customs controls could apply to £423bn-worth of goods.

Retailers are particularly concerned about this prospect. Getting goods out of Britain and into export markets is one concern. If the country abruptly falls out of the EU, for example, and British licences are no longer recognised there, the only guaranteed access to Europe for British hauliers would be via European Conference of Ministers of Transport (ECMT) permits. The Road Haulage Association reckons that ECMT permits can meet only 10% of demand from British truckers.

The import of goods into the country would, if anything, be an even bigger headache. The government has advised businesses that trade with the EU to consider securing warehouses to stockpile goods. Sage stuff, except that there is precious little warehousing left to use. According to Savills, a property company, vacancy rates for warehousing have been falling steadily since 2014, and are now as low as 6% nationally and 3% in and around London and the south-east. E-commerce is largely to blame for the shortage of space. Britain has the highest proportion of online shopping of any big country. In the past few years e-retailers, Amazon foremost among them, have been hoovering up space for their distribution centres. There is some new speculative warehouse building, but in general, Britain remains relatively under-warehoused, according to Savills. America for instance, has about 39 square feet of warehousing per head, Britain just eight.

A no-deal Brexit would be a particular threat to retailers of perishable goods. The big supermarket chains stock only around 1.5 days’ worth of fresh food. Products such as tomatoes currently take between three and three and a half days to get from farms in southern Spain to supermarket warehouses. That is possible because lorries get through the border in minutes. With new checks and congestion at the border, the country could rapidly face a dearth of fresh food.

If no deal were to lead to shortages, might the government take control of the food chain, effectively introducing a form of rationing? A few in the industry are speculating that the government could take control, as the Labour government did in the face of blockades at oil refineries in 2000, working with the industry to allocate petrol to stations in areas with large populations. Industry leaders could work with the government to determine which areas should get priority for food deliveries and distribute products accordingly. In those circumstances some kind of rationing would be almost inevitable, reckons one big supermarket.

Such short-run difficulties aside, a no-deal Brexit would probably presage bigger, long-run changes. A no-deal Brexit risks breaking the extremely efficient food supply chain that Britain currently enjoys, argues Peter Gioertz-Carlsen, head of Europe for Arla Foods, a dairy company with a big presence in Britain. Britain currently produces 84% of the dairy products it needs. It gets most of the rest from Europe. In the long term, the country could increase its production but it would require significant investment and could take as long as ten years, reckons Mr Gioertz-Carlsen.

Labour is another issue. The supply of low-skilled cheap labour from the EU is central not only to Britain’s agrifood industry, but to other businesses too. Retailers would not have the staff to fulfil orders at the rate demanded by modern consumers, argues William Bain of the British Retail Consortium. The next-day-delivery shopping to which many Britons have grown accustomed could become harder.

Consumption habits might also change as a result of a no-deal Brexit. Take chicken, for example. Britons prefer to eat white breast meat over “dark” wings, legs and thighs; the profitability of the domestic poultry industry depends on finding a market for the 75% of the bird that Britons generally eschew—the “carcass balance”. Around 70% of these exports go to the EU, and to eastern European countries in particular.

The International Meat Trade Association reckons British farmers would need to increase production by 124% to meet local demand for breast meat given the likely impact of a no-deal Brexit on imports of white meat. That would leave a glut of 1.3m tonnes of dark meat. In a no-deal scenario, however, exporting that meat to EU countries would be harder because Britain would not be able to compete on price with producers inside the single market. If poultry producers make less money on dark-meat exports, they will charge more for white meat in Britain: the cost of breast meat could rise by as much as 27%, according to a study by ResPublica, a think-tank. That might lead to a two-tier market, ResPublica warns, in which better-off people can still afford to buy fresh meat and less affluent Britons are forced to eat cheaper, preserved chicken.

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