The impact of Brexit on Kerry Group
Ireland has incredibly close geographic and economic ties to the UK, with Irish exports to the UK representing 35% of total Irish exports[1]. As such, Brexit was always going to have significant impact on the Irish economy and the food sector in particular, which accounts for 10.7% of total Irish exports[2].
Kerry Group is Ireland’s largest exporter, with €5.2billion exports annually[3], of which almost 30% is to the UK[4]. Their annual report cites three potential effects of Brexit which could impact their business, specifically, exchange rates, labour costs/availability and tariffs in relation to movements of goods and services[5]. Alongside this, there are two specific logistics and supply chain issues which Irish businesses, including Kerry Group, will need to manage as Britain exits in the EU.
Firstly, from a supply chain perspective, over 70%[6] of Irish exports are shipped through the UK, docking at a ‘UK landbridge’, for onward transport to the rest of the UK, Europe or beyond. In a post-Brexit world, the complexity associated with this could increase dramatically if customs regulations are imposed which could increase costs and potential delays. The resulting impact on competitiveness of Irish exports abroad could be significant. Kerry Group, with perishable dairy products, could be impacted by this as any risk of variability in timing of supply could create additional costs and customer issues relating to uncertain timelines.
Secondly, there is the issue of cross border trade between the Republic of Ireland and Northern Ireland. More than €5b products were traded across this border last year, with 30% of the milk produced in Northern Ireland subsequently processed in the Republic[7]. The level of border controls imposed in a post-Brexit world is one of many issues that will be the subject of debate, but in any case, change will be required adding complexity into the supply chain.
If Brexit imposes a ‘hard border’ between the UK and Ireland, this would add significant complexity to the supply chain for exported products. The Irish Maritime Development Office currently estimates an 18 hour advantage of the UK land-bridge over direct shipping to Europe[8]. However, this may be eroded if customs and other checks at UK ports become too onerous. It will be crucial that new shipping and air links directly to Europe and the rest of the world are established to ensure competitiveness of Irish food products abroad, particularly for perishable exports such as those of Kerry Group. In some cases, this is already underway, for example Maersk introduced a new route to ship directly from Ireland to Spain rather than via the UK, which is up to 10 days faster than existing routes, with further benefits to be potentially realised post Brexit[9]. But more is needed. Furthermore, significant investment would be required in Irish ports, with upgrades needed to establish and operate these routes.
In the short term, Kerry Group need to work with their logistics operator to establish plans for the various scenarios that could materialise as Brexit transpires, and particularly to ensure shipping routes suitable for their perishable products are established. Balancing the need for quality and reliable supply chain timings with incremental costs will be crucial. Quantifying these costs will undoubtedly be challenging in such uncertain times however, they need to estimate these costs to anticipate impact on their financials and potentially frame discussion with customers as to price increases or end to end planning to mitigate cost increases.
In the medium term, Kerry Group are mitigating their exposure through their well-established manufacturing footprint in the UK and in mainland Europe which means they are well positioned to meet customer requirements in the individual country markets[10]. They are also diversifying and restructuring their portfolio to enable greater focus on high growth emerging markets, to reduce their dependence on the UK.
Two key questions that are outstanding include:
- How should Kerry Group think about passing incremental costs on to customers and is there scope to do this in a low inflation environment?
- Should they consider shifting more manufacturing out of Ireland and into the UK or Europe in the medium term?
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[1] Enterprise Ireland, Export Performance in Global Markets, 2016
[2] Bord Bia (Irish Food Board), www.bordbia.ie, Agri-Food Industry Factsheet
[3] Irish Exporters Association, Top 250 Irish Exporters 2015
[4] Kerry Group, Annual Report 2015
[5] Kerry Group, Annual Report 2016
[6] National Assembly for Wales, Inquiry into the implications of Brexit for Welsh ports, August 2017
[7] Irish Examiner, Brexit, ‘The Road ahead for Irish firms’, FitzGerald, Kryan, April 3, 2017
[8] National Assembly for Wales, Inquiry into the implications of Brexit for Welsh ports, August 2017
[9] Irish Exporters Association, The potential impact of Brexit on Irish Exports, March 2017.
[10] Kerry Group, Annual Report 2016
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