Analyst Insight: Crisping and a no-deal Brexit

Friday, 20 September 2019

While minimal volumes of fresh potatoes are exported for crisping the UK exports c.24Kt of crisps each season. For context this would be equivalent to approximately 17% of retail sales over the same period.

In all 88% of total crisp exports are destined for EU markets with the Republic of Ireland (ROI) making up c.13Kt (55%) of total export share. The majority of exports into Ireland are non-premium brands which compete on price point with locally produced products. Exports to the rest of Europe and the world tend to be of higher priced “premium products”.

Many crisping processors adopt a “high volume low margin” model which leaves them open to risk should there be significant rises in the price of raw materials. Around 95% of the crisps produced in the UK use locally produced potatoes with most of the area grown on fixed priced contracts.

Potatoes also make up one of the cheapest components in the manufacturing process with oils, flavourings and packaging making up a significant portion of the cost. Many of these materials are sourced from within the EU with sunflower oil in particular a product which is almost exclusively imported.

Aidan Wright

Analyst

Barriers to trade

  • Tariff barriers – UK potato crisps exports subject to a 14.1% tariff into the EU, assuming no trade deal is in place.

Day one impacts

Once the UK has left the EU the main difference will be the implementation of tariffs on crisped products. The full impact of these tariffs will likely only emerge in the longer term.

As well as the longer term trade friction costs there is a real risk of short term disruption around the borders as they tighten. This may disrupt both imports of inputs and exports of finished product until the new processes move smoothly.

Longer term impacts

For potato growers the immediate impact of leaving the EU is likely to be muted with agreed price contracts guaranteeing returns. For other imported products used within the manufacturing process the increased logistical delays and red tape around the border will likely lead to a rise in input costs for processors. For domestic consumers this could lead to some measure of inflation in the price of crisps.

Looking at exports the tariff on crisps will have to either be absorbed within the supply chain or result in increased costs for the consumer. Should prices rise then it may reduce sales in overseas markets due to competition with locally produced alternatives, particularly for non-premium brands competing on price point. There was talk when the Brexit process started that some manufacturers were looking at setting up facilities overseas to supply the European market.

While there could be some knock-on impacts into the crisping market for the grower there is likely to be minimal impact, at least for the time being. Those who are open to the most damage are the processors who will have to cope with rising input costs and a hard choice of reducing price competitiveness or lowering margins to unsustainable levels. As with many sectors, a reliance on European labour within factories could also cause further disruption moving forward.