Paul Brown is a partner at Anderson Strathern

As with other areas of the economy, the Food and Drink industry is assessing the majority vote to leave the European Union and the impact this will have on that sector.

The Food and Drink industry is unusual in that it covers a wide variety of businesses, from primary producers such as farming and fisheries to processors, distributors, retailers and restaurants. In essence, from “planting to plate”.

At present there is much debate over the future of the UK and Scotland’s position within the UK but what is inevitable is that the “leave” decision will have a direct impact on the Scottish food and drinks industry. What remains uncertain at this stage is just what that effect will be.

Scotland Food & Drink CEO, James Withers, has stressed that, as with other areas of the economy, now is the time for “calm heads and industry leadership”.

The Food and Drink sector has seen significant growth over recent years and continues to do so. It is fair to say that much of this growth is down to the support and coordination of the various interests of producers, manufacturers and retailers within the sector, coordinated by Scotland Food & Drink.

Whilst most people think of whisky when we talk of the food and drink sector, the sector itself is much broader than that. With annual sales of £14 billion, it is a central part of the Scottish economy. However, 80% of Scotland’s food & drink products are sold in the EU but what is not clear is how these will be affected by the changes which are taking place as a result of the referendum.

Agriculture & Farming

Farming is one of areas which is likely to be particularly affected by Brexit and the loss of the Common Agricultural Policy (CAP). The CAP would no longer apply to the farming sector and whilst some have suggested that agriculture would continue to be subsidised if the UK were to leave the EU no formal policy has been put forward by the UK government.

It is therefore not clear how this policy would be put into practice or how much funding would be set aside for a UK subsidy. Industry commentators have suggested that in their view, it is unlikely that a UK agricultural policy would be to the same level (£3.3bn) as CAP due to pressures on the government for funding elsewhere such as in the NHS or defence.

To read more on the effects of Brexit on the CAP, free movement and trade, please view our article on rural business.

Free Movement of Seasonal Workers

The agricultural and farming community will also be affected by any future restrictions on the free movement of workers between the EU and the UK. Currently, sectors within the agricultural industry such as fruit and vegetable growers rely heavily on seasonal workers from elsewhere within the EU, with those workers having the right to free movement across Europe and within the UK.

The UK has legislation in place for the licensing of ‘gangmasters’ who provide manual workers for the agricultural sector, many of whom are from the EU. On the basis of the leave campaign arguments, those workers would no longer be free to live and work in the UK.

Historically, the industry relied upon the Seasonal Agricultural Workers Scheme (SAWS) which was in place for more than 60 years and allowed nationals from a variety of countries such as Bulgaria and Romania (who joined the EU in 2007) to live in the UK for seasonal agricultural work.

This scheme ended in 2013 when restrictions on Bulgaria and Romania were lifted, allowing their nationals the same rights as other EU nationals. SAWS was no longer seen as being necessary. It may be that SAWS will be reintroduced. If the UK were to become a member of the EEA or the EFTA then the EU provisions on free movement of people would most likely apply as they do to current EEA/EFTA members.

If the UK opts to negotiate a separate trade deal then it is likely that some form of free movement between the EU and the UK will be agreed. At present, the politicians from the remaining EU countries are insisting that any future deal with the UK will require free movement of people.

Restaurants & Pubs

It is uncertain as to exactly how extensive the impact of Brexit will be on restaurants and pubs as they are primarily providing service to the domestic market. Rooney Anan, the Chief Executive of Greene King Plc announced this week record pre-tax profits for last year, but has warned that even in the run up to the Referendum, there has been a significant downturn in turnover due to the general uncertainty over the economy in advance of the Referendum.

Since the Referendum and the impact this has had on the financial and other markets, it seems inevitable that this uncertainty will continue to have a significant impact on restaurants and pubs. Restrictions on access to the single market may not have a direct effect but the indirect effect of a general downturn in the economy will be significant.

It has also been reported that the Revolution chain of bars has withdrawn from a proposed acquisition of four venues in Edinburgh as a result of market uncertainty following the Brexit vote. Whether that decision is reversed remains to be seen but the effect of Brexit has been immediate.

Trade & Tourism

Hospitality, restaurants and tourism businesses also rely heavily on non-UK workers and currently benefit from the free movement of workers between the EU and the UK. As with the farming industry, any restriction on free movement will impact on jobs and wages within that sector.

Retail experts Kantar World Panel reported a possible decline in grocery sales with currently 40% of food we currently consume being sourced outwith the UK. Changes in the exchange rates will make groceries more expensive and may ultimately lead to food inflation. They report that this could lead to the end of the supermarket price war where the big four supermarkets have been significantly discounting in order to compete with the discount retailers.

The extent of this will principally be based on the impact on exchange rates as a result of the Brexit vote but as time goes on if the markets calm down and Sterling bounces back, the impact on food retailers and grocers will not be as pronounced. As with everything else, it remains to be seen.

Distribution

The likely impact of those involved in distribution will be mostly felt in relation to the general economy and if there is an increase in cost of fuel and other supplies as a result of the economic impact on the Brexit vote. Some in the industry hope that an exit from the EU will reduce the impact and red tape of EU driving and other regulations which currently restrict working hours etc for drivers.

It seems unlikely that the UK will be able to abandon this entirely and certainly not while involved in any export to members of the EU. It seems unlikely that haulage companies will only have to deal with tachograph etc rules when travelling in the EU, especially if that journey commenced in the UK. It also seems unlikely that the now established principals of health and safety for driving will suddenly be abandoned or that insurers would risk any relaxation of those safety ideals.

Summary

At present, as with other areas of the economy, Scottish Food & Drink is not prevented from continuing with its existing access to the EU and its customers and trading partners. There is clearly a vast amount of debate ongoing at the moment between the UK and the EU but also Scottish government and the EU regarding what possible conditions there may be to a future trading relationship either between the UK and Europe including Scotland or Scotland and Europe on its own. These issues are not likely to be resolved overnight and what we need is to keep calm and clear leadership.

Inevitably the financial market’s uncertainty will have an impact on exchange rates and the finance which may be available to businesses in the food and drink sector but it is still one of Scotland’s significant success stories. Ironically, with the drop in value of the pound, exports of our food and drink products will be cheaper and tourism might feel the benefit of a weaker pound making travel to the UK more affordable.

Scotland Food & Drink have not yet managed to expand their global presence to the extent that it would replace any losses sustained from exiting the EU, but this is a work in progress and there are positive moves to continue with the development and growth of Scotland Food & Drink products throughout the world.

Whilst the Brexit vote will have an impact on the sector, Scotland Food and Drink have for quite some time been expanding the reputation of Scotland’s products throughout the world. Keeping calm and clear focus will help the sector survive and, hopefully, continue to thrive.