This article is the first in a series of Sightlines stories in which Good Beer Hunting will explore the impact of Brexit on the U.K. beer industry, including its industry, political, and economic fallout.
U.K. breweries are paralyzed by the lack of clarity around Brexit, despite three years of negotiations and the prospect that the U.K. could still crash out of the European Union in just a few weeks.
Experts warn that the weak pound, new export tariffs and regulations, increased ingredient costs, congestion at the border, and political unrest are just the front-of-mind challenges faced by British breweries staring down Brexit. However, brewers are unable to plan as negotiations and political mind-games play out, all while their margins feel the squeeze.
In the latest setback, Prime Minister Boris Johnson has been forced to request an extension of the Brexit deadline from October 31 to January 31, 2020 unless a trade deal is struck. Known as the Benn Bill, the legislation passed by Parliament was a last-gasp bid to stop the U.K. leaving the E.U. without any trade agreement and creating a controversial hard border between Ireland and Northern Ireland.
Despite the risks, Johnson is adamant the U.K. needs to leave the E.U. in order to get a better trade deal. Instead of finding a solution, Johnson is looking for a legal way around the Benn Bill to take the U.K. out without a deal in place. Without a Parliamentary majority, his options are limited, so he is also trying to force a general election before that deadline to gain more seats. Opposition parties have voted this down twice and say they will continue to until the January deadline is confirmed, but the Conservatives losing that election could put all options back on the table, including a second referendum and the cancellation of Brexit.
In a bid to reduce the chance that Members of Parliament (MPs) might find a way to guarantee the extension, last night Johnson closed this session of Parliament, which essentially cancels all debates and bills for the next five weeks. The move is standard before new governments come into power, but has no legal precedent in times like this, and means small businesses like craft brewers will get no further clarity in the interim.
To Darron Anley, founder of Berkshire’s Siren Craft Brew, this uncertainty is nothing new. The brewery underwent a major expansion in 2016 and relies on export to key European beer nations such as Germany, France and those in Scandanavia. With a lot at stake, he has sought clarity on changes to export laws and duty since the U.K. voted itself out of the E.U. that same year. Her Majesty’s Revenue and Customs (HMRC), which collects taxes, has proven unable to offer any. Anley says he’s yet to actually find any government employee who can tell him what’s going on.
“You can call multiple times and get different answers,” he says. “They don’t even know their own laws or their application. There’s conflicting information all over.”
Currently, the U.K. has a free trade agreement with the rest of the E.U., which allows free movement of goods and leaves an importer liable for any alcohol duty. Anley does not know whether this will continue in the event of a no-deal Brexit. While the U.K. government has promised there will be no additional tariffs for the first 12 months, it can’t guarantee the process will be the same—and the prospect of beer stuck in warehouses, unable to be sold, isn’t something a small brewer could likely endure. Siren produced 11,000 barrels (13,000 hectolitres) in 2018 and sent 14% abroad, representing a significant proportion of their annual revenue but significantly down on 2016 when 34% left the U.K.
Phil Brown, senior trade advisor at tax and consulting services firm PricewaterhouseCoopers, has helped businesses around the world prepare for Brexit. Given U.K. breweries’ reliance on imported ingredients and equipment, and exposure to the E.U. market, he’s worried many aren’t ready for a no-deal situation. Something as simple as transportation delays at borders could mean breweries struggle to fulfill orders and distribute fresh beer.
“Practical issues around making sure they have the right approvals and customs declarations, issues around labelings and duty and where it’s paid will have cost or operational implications,” Brown says. “There’s a potential to have a short-term impact which, for companies without a deep balance sheet, could be terminal.”
Whatever the outcome over the coming months, serious damage has already been done to most breweries’ bottom lines. The dramatic drop in the value of the pound—currently fluctuating between 15–20% down from just before the referendum—has caused the cost of imported goods to spike by the same percentage. Anley says this has been particularly damaging in cases where there have been significant time or developments between agreeing a price and payment.
For example, Anley signed a contract in 2016 for his 2019 supply of Citra hops with a locked-in price of €30.99 a kilogram in Euros, which translated to £23.13 (pounds). By the time he paid the contract this year, it had inflated to £28.45 due to Brexit uncertainty—and that’s just for his hops. Increases are happening for cardboard packaging, the ink used for labels, even British malt, and more.
“You’re kind of fucked from every angle, you know?” Anley says.
Combined with new duty and administration costs outlined by Brown, these additional costs are wiping out any potential benefit to export—initially considered one of the upsides to both Brexit and the currency issues.
“We might be able to export a bit more than we can now,” says Anley, “but for what we lose and the uncertainty we have already dealt with I’d trade that. For a very considerable period of time it’s just going to impact on us in every way, from administration and overheads.”
But there is a human impact to the uncertainty, too. Anley has always welcomed and even sponsored employees from around the world, having employed American and German head brewers. But confusion over the rights of immigrants in the U.K. meant he saw “hardly anyone” apply from the E.U. for his last production brewer vacancy, and he’s worried about the status of his current employees. In one example, a brewer from Italy has no idea if he will be able to stay in the country past Brexit, when the indefinite leave to stay that is granted to all E.U. citizens could be revoked.
“Initially there was talk about them all getting a two-year amnesty and other concessions based on length of service, but it’s not good and I know he’s worrying about it because he wants to stay here,” Anley says.
The fact that Anley has even considered the effects on his import and export business means he better placed than most breweries for the turmoil that Brexit is yet to unleash. With rising costs, reams of new laws, traffic jams at borders, and currently unknown trade tariffs in mind, Brown is advising his peers to be ready for a rough ride, whatever the next few months in politics hold.
“I think it’s that cumulative impact,” he says. “You’re looking at having to change your labeling for different markets, use extra bonded warehouses, and the currency issues. Then there might be consignment charges now too. It all eats into your margins. It’s small companies in a niche with a reliance on the E.U. market that are going to be most affected here.”
Part 1: “You’re Kind of Fucked from Every Angle” — How Brexit is Hurting British Craft Brewers Before it Even Happens