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Brexit: How are CPG companies preparing?
With the terms of the UK’s exit from the EU still up in the air, and the chances of a ‘no-deal Brexit’ looking like a serious possibility, businesses across all sectors are struggling with how to plan for such an uncertain future.
Our multinational CPG clients are particularly worried about procurement and supply chain disruptions – encompassing suppliers, raw materials and commodity volatility – and we are working with them to help assess Brexit scenarios and identify mitigation strategies.
Options on the table: four strategies to mitigate Brexit risk
Faced with a range of potential outcomes, alongside continuing uncertainty for the foreseeable future, it is clear that many CPG companies are already taking definitive action. We have been tracking external developments within the sector to provide intelligence to our clients, and have identified four strategic approaches already being deployed:
- Product and pricing: Companies such as Nestlé, Pinnacle Foods and Unilever have increased product prices in the UK to mitigate the rising cost of imports, driven by a weakened pound, while other firms (such as Mars, Mondelēz International, PepsiCo and United Biscuits) have reduced product size keeping prices the same, in order to combat the rising cost of raw materials and currency fluctuations post Brexit.
- Workforce: Some EU-based companies are shifting parts of their workforce from the UK to the EU: according to a 2018 CIPS survey, 10% of EU-based companies have moved employees out of the UK since the Brexit referendum. Other CPG companies are reducing their headcount in the UK to offset Brexit-related costs.
- Supply chain: UK-based manufacturing companies that depend on EU suppliers are diversifying their supply base, by looking for alternative suppliers in the UK or non-EU countries. An alternative strategy is strengthening existing EU supplier relationships – a 2018 CIPS survey found 26% of UK supply chain managers are pursuing this option already.
- Operations: Research by the Food & Drink Federation last year found that 17% of FMCG companies are planning to shift their headquarters outside the UK; Unilever is among those planning to make this shift. Some manufacturing companies are also delaying their UK expansion plans, while others are putting more effort into expanding in the EU.
Scenario planning in an uncertain world
Looking forward, the key to planning for the various Brexit scenarios is having the right data and intelligence. Real-time monitoring of the external environment has become even more important, given the dynamic situation and the frequent shifts in political rhetoric, as well as more tangible factors such as currency fluctuations. Equally critical is having strong internal intelligence, including category and commodity spend, and supplier risk profiles.
Brexit-proofing your procurement strategy
Any CPG company with major operations in the UK will face higher costs on their imports from EU countries, and increased supply chain complexity due to some sort of customs border. Potential new trading barriers may also encourage businesses to look for alternative non-UK suppliers, which would subsequently impact demand and cash flow.
We’ve compiled three key recommendations for companies wanting to ‘Brexit-proof’ their procurement and supply chain operations and financial structures:
- Supply chain assessment: The first stage is to review the complete supply chain (including tier II suppliers), to understand your key dependencies and weaknesses. This should cover a risk analysis of your critical suppliers and their financial health given the impact of Brexit, to assess security of supply risks. This intelligence can identify for example where buffer stocks need to be maintained to minimise the risk of disruption in the flow of raw materials, or whether you need to create a backup supply chain in the UK – which despite loss of efficiency, would help avoid supply chain delays.
- Supply base restructuring: The next stage is to ensure you have the right suppliers on your books, with the right terms. To deal with currency fluctuations for example, you could look to renegotiate existing contracts with preferred suppliers to share some of the currency risks. To ensure you have contingency plans to replace the supply of raw materials and products from sources outside the UK, start by identifying new suppliers in the UK – and/or beyond the EU.
- Multiple scenario planning: It’s a tough fact for businesses that the political uncertainty leads to operational uncertainty, and this means it’s critical to plan for a range of scenarios. Create upper and lower ranges of potential outcomes and develop action plans to mitigate or reduce risks arising out of each scenario. This should be a rolling plan – reviewed regularly and with defined owners for each action.
At this point, no one knows quite how the Brexit negotiations are going to pan out. Will it be a ‘No Deal’ or will a compromise be found and agreed before 29 March 2019? Whatever happens, by understanding how suppliers are preparing for Brexit through their raw materials sourcing, and by assessing what competitors are doing to safeguard their procurement from the impact of Brexit, companies are better able to make informed business decisions and mitigate the risks.
To find out how The Smart Cube helps CPG businesses stay ahead, please read about our intelligence and analytics solutions or get in touch. We can help you understand and anticipate the forces and changes influencing your critical procurement categories today and beyond.
Vaibhav heads up the CPG sector for The Smart Cube, leading a team of close to 100 people. He is responsible for delivering customised research and analytics solutions and decision support to clients, and for developing and implementing the CPG strategy. He loves spending time with his young daughter (who he believes has taught him as much as his 12-years with The Smart Cube!) and enjoys watching cricket, tennis and football.