From an industry whose growth was static, it is now one of the best performing sectors of the economy.
Food exports have more than doubled and the industry is now Scotland’s biggest employer. Sales of Scottish brands in the UK have risen over 40 per cent and the sector is worth £14 billion.
However, looming over all this success is the looming threat of a no-deal Brexit, which industry insiders say could be catastrophic.
James Withers, chief executive of industry body Scotland Food and Drink, says: “I can’t think of another sector that is as exposed to a no-deal Brexit, especially having built up such an excellent market in Europe over the past number of years.
“We have ambitions to double the size of the sector by 2030, and while that does mean developing markets outside Europe – and we are slightly less reliant on food exports to Europe than we were ten years ago – two thirds of all our food still goes to the European Union, over a billion pounds a year.
“If you add the whisky numbers into that, we are talking about two and a half billion pounds of trade.”
Withers points out that the problems of a no-deal Brexit will hit different parts of the sector with different problems.
“If you take our lamb and sheep sector, a quarter goes to the European Union so you face the potential of that market effectively closing, with a huge tariff suddenly payable on lamb,” says Withers.
“Even if you could increase the consumption in the UK we wouldn’t be able to absorb that amount, so the projections we see for lamb on the UK market is a reduction in the price of around 30 per cent, which would have a disastrous effect.
“It would have the same kind of impact economically as foot-and- mouth in 2001.”
Other parts of the industry would be hit hardest by supply hold-ups. Withers says: “In terms of perish-ability seafood is the obvious example. Every day that you lose in terms of the freshness means your price gets absolutely hammered.”
Most livestock industries work on a three-year breeding, rearing and harvesting cycle, whether it is meat or fish farming.
But Withers says: “If you are running a salmon farm on the West Coast for instance, what you can do is delay the harvesting of fish, but only by a matter of days. So the hope is that there will be only a very short disruption.”
However, the government’s own projections could see the capacity of some of the critical arterial routes such as the channel ports and the Channel Tunnel down to 20 per cent capacity.
Withers says: “For the first time we would need health certificates, you would need official vets to sign off livestock and products which we have never needed as part of the single market.”
George Frier, corporate partner and head of the food and drink group at Shepherd and Wedderburn, says: “If we crash out without a deal then we will cease to have the benefit of the automatic rights such as certification of food hygiene and animal passporting.
“There may be limited transitional measures put in place in time, but if not you could have a food product which, on the 30th of October, is completely compliant for importation into the EU, and although the next day it would still be compliant, you wouldn’t be able to demonstrate that it is.”
He also points to labelling laws as an issue which has to be addressed in advance. “The regime in place was introduced in 2011, adopted across Europe and for products sold in the EU, has to carry the address of a food business operator, with an address in the EU that is responsible for compliance with legislation. The labelling acts as a passport for the product.”
But Frier says that, in the event of no-deal, UK firms will need an EU-registered establishment to act as the importer, so that there is a party within the EU who is responsible for the safety and standards. This will need to be set up and clearly labelled from day one.
“Firms we are working with are in the process of setting up agencies or branches in Ireland or subcontracting the process to someone in France, for instance, and that will help in the event of a no-deal.”
“Large companies will have a Brexit task force. If they have an importer, say one based in France that is responsible for distribution throughout the EU, then that can be straightforward in terms of the logistics, but if a smaller firm’s distribution chains go out from the UK in individual lines to Spain, Germany, Belgium, France and Holland, then that is more complicated.
James Withers believes that the timing of the deadline has added another dimension.
He maintains: “The only thing worse than a no-deal Brexit in March is one in October, as the sector is gearing up for Black Friday in November, and Christmas when consumer demand is especially high and warehouses are already full.”
Even with that extra challenge in mind, organisations should do all they can to prepare, according to Withers.
“For individual producers, there are steps to take,” he says. “Look at other markets, the Scottish Government is looking at ways to get products on to the continent and avoid log-jams at ports. Ask are there other ways we can manage export health certificates and the added paperwork that might be needed.
“The reality is at best we can blunt the sharpest edges of a no-deal Brexit but it is not possible for our industry to fully prepare and mitigate the impact.”
How not to lose your bottle
Anthony McCallum owns an independent whisky bottling firm, House of McCallum, which is based in Glasgow and currently exports 90 per cent of its specialist malts and spirits to the EU.
As a relatively new business, its long-term plans are to expand into other markets, but McCallum says that this brings complications which cannot be overcome quickly.
He explains: “You take somewhere like the American market and it is a different size of bottle and there are labelling issues, whereas in Europe at the moment everything is standardised.”
He is taking steps to mitigate problems caused by a possible no-deal Brexit on 31 October, but says: “I already had complications from the first deadline in March. Big distributors were trying to fulfil European orders before the date so took priority for supplies, and as a result there was a shortage of glass bottles and we had to delay the launch of one of our products.”
Planning for these deadlines – both the date announced for March and now late October – has had knock-on effects on McCallum’s cash flow as the company sought to build up extra stock.
McCallum says: “I’ve had to bring forward production and buy in extra dry goods such as packaging.
“As a new business I already had the objective to try and source everything locally anyway – from the North of England or Scotland, so I’m less exposed, and that has helped mitigate the effects of Brexit, but my suppliers may be affected if they import from Europe.”
He goes on to observe, however, that not every essential item for his business can be sourced in the UK.
“Cork isn’t produced here, because the climate isn’t right, so I’ve had to increase purchases of those,” he says.
“I’m sitting on a lot of stock but fortunately they aren’t the most high-value items.”
The biggest worry for McCallum and his firm is staring down a no-deal Brexit when he has buyers on the continent looking for his products, and stock waiting to be distributed, but without the means to do so.
“With a hard Brexit looming, I’m trying to deliver the maximum amount of stock before the date, but that does involve having to offer longer payment terms to clients for instance,” notes McCallum.
“Some may accept, if they have their own warehousing, but if there are cost implications of renting more storage space, that might not be enough, but I am in daily discussions to try and negotiate terms.
“In the last 12 months, all of this has hit the bottom line and it is a worrying time for a new business in particular.
“I am not taking on extra staff to build the business, and not investing too much until we know what the real impact will be.”
Harrowing Halloween scenarios loom large in the near future for business
Stuart Mackinnon, the external affairs manager for Scotland at the Federation of Small Businesses (FSB), says that there are steps that firms should be taking now to try to minimise disruption from a cliff-edge Brexit.
However, he says: “Our last survey suggested that only 14 per cent of businesses had carried out any planning for a no-deal Brexit, and while we would expect more to have addressed it in the interim, we know that only a minority of smaller firms have taken action.”
In terms of what businesses can do, he says: “Scottish Enterprise has set up a useful web resource, which allows firms to identify where they may be exposed to risk.”
The Scottish Enterprise site can be found at www.scottish-enterprise.com/prepare-for-brexit.
Commercial organisations that export to the European market will be required to have new HMRC paperwork put in order post-Brexit, but it appears that so far only a fraction of businesses have looked into this requirement.
The FSB is urging HMRC to take a more proactive approach in the administration of this, but nevertheless individual firms are ultimately responsible for finding out specifically what is needed in their sector.
Communication with existing clients is another preparation which the FSB advises businesses to make. Mackinnon says: “A number of our members have been speaking to suppliers and customers about contingency plans.
“There is a misconception that it is only businesses taking trade abroad that are exposed, but all sorts of businesses will be affected, possibly by knock-on effects.”
Generally speaking, smaller firms have fewer resources, and dealing with things such as regulatory changes could well get left to the last minute.
Such firms will be unlikely to have the benefits of compliance teams and business specialists to put forward a strategy for their boards years in advance, as is commonplace in larger companies – so many of these smaller concerns may not be used to in-depth forward planning.
Some businesses will make the judgment call that it isn’t worth spending resources planning for an eventuality that may not even happen, or it may simply be something that they cannot afford. But nonetheless the FSB – among other organisations – is lobbying hard for the government to issue vouchers to smaller businesses to assist them to make adequate preparations.
Mackinnon says: “There are some who don’t know how to prepare, whereas others are trying but finding difficulties, for instance, with large companies disrupting supplies of raw materials by stockpiling, and warehouse space being extremely limited.”
In terms of finances, businesses should look to give themselves as much flexibility as possible where they can.
Banks have advised that they are prepared to give financial help to counter any short-term economic turbulence, but it is still best for smaller outfits to get such facilities established sooner rather than later.
Mackinnon says that part of the problem is that the businesses who prepared themselves for the last deadline may have felt that they spent money and effort unnecessarily.
“There may be a resistance, and that isn’t particularly helped by mixed messages from ministers about how likely a no-deal Brexit is.”
This article first appeared in The Scotsman’s Food and Drink 2019 supplement. A digital version can be found here.