What does Brexit mean for the tea industry? To answer that, we’d have to know what Brexit is. No one knows. EU-UK negotiations began in June 2017 but are no closer to addressing the truly big political issues, let alone the operational details of rights of residency by Britons in the EU and vice versa, shipping and tariffs, consumer protection, etc. The very first and overoptimistic British proposal for a Working Agreement with the EU was 585 pages.
With just over a week to go before Britain will/may/could/partially/completely/perhaps leave the EU with no deal, Prime Minister May’s “soft landing” latest compromise negotiated with Brussels was voted down by her own party. A follow-on Bill was also rejected, pointing towards a “hard” exit. Days later, a seemingly contradictory vote passed in favor of rejecting such a “no deal” option. Meanwhile, splinter groups of Members of Parliament (MPs) are floating the idea of rerunning the Referendum, and the UK even holding elections to select MPs as if the nation were still in the EU. PM May will make one last try this week to get Parliament’s support. Few commentators are optimistic.
It’s all a mess. No one, quite literally, can reliably predict the nature or date of the outcome. What we can be sure of, however, is what has already happened. There are several shifts over the past two years that seem irreversible regardless of the exact Brexit denouement. They reshape much of the global tea market.
The currency exchange rate
The pound-dollar exchange rate will in and of itself drive the UK import, domestic and re-export markets. It is an Economy Worry Index. Signs are not encouraging. The pound has fallen to its lowest against the dollar in 31 years. GDP growth in the first quarter of 2018 was 0.1 percent. It has been estimated as 1.6 percent for 2019. The UK slipped from fifth to seventh in economic strength, overtaken by France and India. The figure was revised downwards to 1.2 percent just a few weeks ago.
A drop in the value of the pound raises import costs directly and immediately. The impact is illustrated by the large fall in the pound/dollar rate following the Referendum. In March 2016, pre-Brexit, the UK imported 5.4 million kilograms. For the same month the next year, the figure was 3.1 million. EU buyers, most especially German, Polish and Dutch traders had begun to buy direct from Kenya and bypass the UK for the teas they process for re-exporting.
Food: no trucks, no goods so re-source and re-locate
Britain imports over 80 percent of its food. The initial negotiations centered on ensuring the continuity of trade, in both directions: imports of fresh foods and exports of packaged ones. One proposal, that in retrospect, might have led to a collaborative Brexit was for Britain to remain part of the EU Customs Union to avoid what just about every business otherwise sees as an inevitability: port congestion, long delays in handling re-introduced tariffs, and resulting shortages. The problem is compounded by most of the truck drivers being foreign and there is a shortage even today of Heavy Goods Vehicles (HGVs), most of them based in Central Europe. The supply chains of the leading supermarkets are tuned almost to the hour. Importers, wholesalers, distributors and retailers have been buying up all available freezer storage and most warehouse space. Most estimates are that prices will increase by around 8 percent. Retailers emphasize that there has not been a price raise for tea in a whole decade.
The tea industry has already taken many steps away from making “English” tea in England. Twinings blends and packages Earl Grey in Poland. Dubai has become the largest global tea re-exporter with Lipton’s factory there producing two million cups per hour, 20 billion a year. It is strategically positioned half way between the major tea growing nations and the tea consumer markets.
Unilever has reinforced the strongest signal about the general future of Britain post-Brexit: job losses and operations re-centering. Major banks and related firms have moved an estimated $1 trillion of funds out of London and into their new buildings in Paris, Frankfurt and Amsterdam. Airbus has announced the closing of its UK manufacturing facilities. The Dutch government has reported that it is in discussion with 250 firms concerning relocation to the Netherlands.
Unilever announced it was joining them but backed off under pressure from major shareholders. It would make Lipton an English tea produced in the United Arab Republic by a Dutch firm. It has always maintained its identity as an Anglo-Dutch company, with two separate legal arms: DV and PLC. Its plan, on hold rather than abandoned, merges them into a single entity, headquartered in Rotterdam, which has a strong claim to be the world’s most advanced cargo port.
Tea is a subset of the food supply agenda for multinationals like Unilever. Commodity tea for bags has a long storage and shelf life. But those bags still have to be shipped into the UK and they have to be paid for in US dollars and Euros. That reduces the incentives of tea producers to use UK firms as an intermediary in sourcing or the base for re-exporting.
Back to Brexit… The factors highlighted here seem likely to continue in force regardless of the final delay or deal. Currency + Supply chain + Sourcing translates for companies small and large into keeping alert to issues of financing and credit, price swings, supply chain reliability and relationships.
SOURCES UK Press, Mail, Guardian, Telegraph