After the United Kingdom voted on Thursday to exit the European Union, there has been considerable commentary on the long term economic implications for the global economy including the total beverage alcohol industry. Ultimately, for the beverage alcohol industry, Brexit’s largest effect is likely to be foreign exchange (FX) rate fluctuations in both the near and long term.
Since the vote to leave the European Union, the GBP has dropped in value against the US Dollar (USD). Conversely, the Euro to USD exchange rate has remained relatively stable over the past 18 months. While the majority of trading is speculative, it appears unlikely that the GBP/USD rates will revert to historical norms in the near term.
Presuming these rates signal a new normal, there are some general assumptions that can be made relevant to the beverage alcohol industry:
- Overall exports from the UK to the US will be more profitable for UK-based exporters.
- Scotch Whisky is the biggest potential beneficiary. However, many of the major Scotch brands are owned by international corporations and these companies will protect brand positioning so it is unlikely that pricing will be reduced to gain market share. That said, incremental margin may be used for marketing spend to drive greater consumer awareness.
- The UK is not a major exporter of Wine or Beer into the US so there are likely to be minimal impacts related to exchange rate fluctuations.
- The UK is a major importer of beverage alcohol and a weakening GBP against the local currencies of most major producing countries will make the UK a much less profitable market
- For US based producers, this means that either prices will necessarily increase in the UK market, or export margins will be reduced
- Regarding pricing specifically, the UK market has traditionally been resistant to price increases. However, these FX shifts may make it possible to protect exporter margins over the medium term.
- As the potential profitability of the UK export market declines, international producers are likely to look to other markets to achieve growth objectives, including the US.
- To the extent that the Euro shows on-going weakness against the USD, this will make it possible for Euro-denominated producers to increase more on price relative to US domestic producers.
Overall, for the US Beverage Alcohol market there are two points to be made:
- With a strong USD and a weak Euro, it is a good time to buy barrels and equipment from Europe.
- With a strong USD and a weak GBP it is a great time for a vacation to the United Kingdom; and, if you plan to make it a sales visit, be prepared for pricing discussions.
To be able to track Beverage Alcohol imports and exports on a monthly basis for volume, value in USD, and value in local currency for all major trading countries, please see the bw166 Import and Export reports for Beer, Wine, and Spirits.