FDBusiness.com

By Ian Hunter, Senior Equity Analyst at Investec

Across our main businesses in Investec Ireland – Corporate Treasury, Corporate Finance and Wealth & Investment – we have been working with clients in the food and drink sector to address the many challenges and opportunities thrown up by ‘Brexit’.

Brexit has closed IPO markets for now, tightened debt markets and reduced Merger & Acquisition activity, but it is also throwing up potential opportunities for growth. More volatile investment markets prevail for both cash rich companies and high net worth individuals. And the exchange rate volatility has brought corporate treasury decisions to boardroom tables across Ireland.

The UK currently accounts for 41% of all Irish food and beverage exports, worth €4.4bn. For the prepared consumer foods (PCF) category in particular, the UK is the key market, accounting for 70% of its total trade at €1.75bn. While larger companies such as Kerry, Aryzta, Glanbia, Dawn Farm, Green Isle, Largo Foods, Kepak and Valeo Foods account for 50% of the sector’s output, in general, PCF companies tend to be small, employing less than 50 people. In markets where innovation, quality, brand and customer focus are key, the Irish PCF sector is seen as an enabler for the primary producers to add value and generate sales in export markets.

Period of Uncertainty

While a period of uncertainty post-Brexit is bound to impact investment decisions re business expansion both in Ireland and the UK, the immediate impact has been felt in the drop in sterling. Almost overnight, Irish exports into the UK have either become 13% more expensive and, therefore, less competitive against UK producers or 13% less profitable, if retail prices are maintained. The latter appears the more obvious scenario given the current deflationary environment in the UK food sector with retailers resistant to passing on higher currency costs. Indeed, Morrisons has already indicated that there will be no post-Brexit price increases.

And while exports into the UK have always been subject to the vagaries of exchange rates, the current concern is that the recent rate move proves to be a permanent structural change rather than the more usual temporary cyclical move. Many Irish Corporates have been reluctant to recognise this new reality and we are seeing less commitment from Irish exporters to place FX hedges for longer periods. While the hope is that the sterling rate will improve, the concern is that it will continue to weaken, leaving exporters further exposed.

Some Relief

Some relief for Irish corporates may come from the fact that the Post-Brexit currency moves have also impacted food manufacturers in the UK with the drop in sterling fuelling input cost inflation. Latest data from the UK Office for National Statistics shows a 4.1% rise in all food and drink production costs between June and July 2016 compared to a 1% rise between May and June 2016.

Coupled with this, the deflationary environment in the retail sector has presented a challenge to food and drink manufacturers for over two years. Consumers have reduced their spending on food/drink, actively shopping for lower prices without compromise on quality. This move to low cost quality products and a general reduction in waste has hit supermarket margins, which have been further exacerbated by the growth of discounters. For the food production industry, this pressure has been somewhat mitigated by the sustained low prices of raw material inputs. The challenge going forward, however, will be how efficiently food manufacturers will be able to pass through any increased costs.

Investec Track Record

Investec has a track record of supporting clients across the food and drinks sector. Recent transactions include the IPO of Fevertree, the investment by Spar SA in BWG Foods and the formation of Valeo Foods with the acquisition of Origin Foods, Batchelors and Jacobs Fruitfield. Through our Corporate Treasury division, we actively work to provide hedging solutions for foreign exchange, commodity and interest rates and cash management. And our Wealth & Investment business provides Investment advice to both private individuals and corporates, access to tax expertise and pre & post retirement planning. Our international presence coupled with a dedicated on-the-ground team is a unique proposition in the Irish market. We would be delighted to discuss any of the issues above in more detail.