Guinness and Brexit: What’s it all A-stout?
While many UK companies are scrambling to prepare for the consequences of Brexit, a few have benefitted. This list includes Diageo, the spirits behemoth that manufactures popular beverages including Guinness, Johnnie Walker, Smirnoff, and Bailey’s. Because the bulk of the company’s revenue is registered in dollars and has debt issued in GBP, the decline of the pound sterling has bolstered its FY 2017 sales by £1.4B[i]. In addition, current WTO rules will keep Diageo’s trade with the rest of the EU tariff-free, regardless of how Brexit negotiations play out[ii]. Nonetheless, trouble may be brewing for the company.
Diageo currently brews Guinness at a plant in Dublin, pumps the beer into tanker trucks, and then transports it 90 miles north to Belfast in Northern Island (part of the UK), where it is bottled and canned. The product is then shipped back down to Dublin for distribution[iii]. While the tankers currently pass back and forth across the border freely, experts generally concur that when the UK formally leaves the EU in 2019 there will be some border controls put into place[iv]. Diageo makes 13,000 beer-production border crossings between Ireland and Northern Ireland a year.[v] The company estimates that delays of 30-60 minutes at these border crossings would add 1.3M euros to the cost of beer production in Ireland[vi]. This could add to Diageo’s existing woes as the company struggles with organic growth and has seen Guinness earnings stagnate over the past several years[vii]. Furthermore, Diageo currently benefits from free trade agreements between the EU and other countries, most notably South Korea and South Africa. The company stands to lose if the UK is unable to negotiate independent deals with these countries.
Diageo has not publicly gone into depth on its plan to mitigate Brexit-related risks; its annual report simply states that the company is “develop[ing] its risk planning work around Brexit.[viii]” The company is also in close discussion with UK policymakers as Brexit negotiations continue; an industry publication reported earlier this year that Diageo’s CEO boasted of receiving “tremendous support” from Theresa May’s government on Brexit and other matters[ix].
Diageo has multiple options to mitigate these risks. In the short term, the company should continue its discussions with British and Irish governments to push for as soft a border as possible between Ireland and Northern Ireland, ensure that import costs of raw materials remains low, and push for trade agreements with other countries to reduce tariffs. Diageo should be in a favorable position for influence as it is the 7th largest company by market cap on the FTSE stock exchange and employs 5,000 people throughout the UK[x]. However, Brexit and trade negotiations are complex affairs and Diageo will naturally have minimal influence.
In the medium term, the company could pass any costs from Brexit onto consumers by raising the price of Guinness. A large price increase would likely be counterproductive, as large beer makers face increasing competition from craft breweries and Guinness has struggled with growth for the past several years. However, a minimal price increase of 0.5% on its European beer sales could potentially recover the additional transport costs[xi].
Another obvious mitigating step would be to close the Belfast, Northern Ireland bottling and canning factory and move that function to Ireland. However, there are political and other factors that make this option less desirable for Diageo. The Belfast factory has been operating for over 30 years and is a point of pride for the area[xii]. There was recently an outcry after Diageo announced it was laying off 100 workers in Scotland; the company announced that these layoffs were due to the shuttering of Diageo’s wine division, but a local union created negative press for the company and blamed the move on Brexit[xiii]. Further reducing its UK workforce by shutting down the Belfast plant could strain relationships with the UK government and damage its reputation in the country. In light of the costs associated with moving the bottling facility and the importance of maintaining a positive relationship with the UK government, Guinness would be better off maintaining production as is in the medium term. Diageo should re-evaluate in several years when the true costs of Brexit become clearer.
How should Diageo balance the tradeoffs between the reputational damage associated with shutting down a factory and operational efficiencies, particularly when the company’s relationship with the government is critical as new trade terms are negotiated? And what are the best ways in which companies can work with governments to protect their interests in times of political uncertainty?
Word Count: 765
[i] Raisinghani, Vishesh. 2017. “Diageo: Does Brexit Make This Multinational Spirits Company Attractive?”. Seeking Alpha. https://seekingalpha.com/article/3984201-diageo-brexit-make-multinational-spirits-company-attractive. Accessed November 2017
[ii] “We Take Brexit In Our Stride, Says Diageo CEO”. 2017. Thespiritsbusiness.Com. https://www.thespiritsbusiness.com/2017/07/we-take-brexit-in-our-stride-says-diageo-ceo/. Accessed November 2017
[iii] Doyle, More. 2017. “Trouble Is Brewing For Guinness After Brexit”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-04-07/guinness-exposes-debate-over-a-hard-border-with-ireland-after-brexit.
[iv] “Border Tensions Between Ireland And Northern Ireland Could Rise As U.K. Leaves EU”. 2017. NPR.Org. https://www.npr.org/2017/11/08/562903218/border-tensions-between-ireland-and-northern-ireland-could-rise-as-u-k-leaves-e-. Accessed November 2017.
[v] Doyle, More. 2017. “Trouble Is Brewing For Guinness After Brexit”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-04-07/guinness-exposes-debate-over-a-hard-border-with-ireland-after-brexit.
[vi] “Guinness May Be Good For You But Borders Are Bad, Says Ireland Drinks Chief”. 2017. The Guardian. https://www.theguardian.com/world/2016/oct/20/guinness-may-be-good-for-you-but-borders-are-bad-says-ireland-drinks-chief?CMP=twt_gu. Accessed November 2017
[vii] Transcripts, SA. 2017. “Diageo’s (DEO) CEO Ivan Menezes On Interim 2017 Results – Earnings Call Transcript”. Seeking Alpha. https://seekingalpha.com/article/4039595-diageos-deo-ceo-ivan-menezes-interim-2017-results-earnings-call-transcript?part=single. Accessed November 2017
[viii] Diageo, 2017 Annual Report p. 19
[ix] “We Take Brexit In Our Stride, Says Diageo CEO”. 2017. Thespiritsbusiness.Com. https://www.thespiritsbusiness.com/2017/07/we-take-brexit-in-our-stride-says-diageo-ceo/. Accessed November 2017.
[x] News, PA. 2017. “Third Of Top Companies Paying Living Wage, As Diageo Commits To Higher Rate”. Uk.Finance.Yahoo.Com. https://uk.finance.yahoo.com/news/third-top-companies-paying-living-080001142.html. Accessed November 2017.
[xi] Calculated based on numbers from Diageo 2017 Annual Report
[xii] “Guinness-Maker Diageo Marks ‘Record Year’ In East Belfast”. 2017. The Irish News. http://www.irishnews.com/business/2015/12/30/news/guinness-maker-diageo-marks-record-year-in-east-belfast-366313/. Accessed November 2017.
[xiii] Rodionova, Zlata. 2017. “Diageo ‘Is Cutting More Than 100 Jobs Because Of Brexit'”. The Independent. http://www.independent.co.uk/news/business/news/diageo-brexit-cut-jobs-scotland-gmb-trade-union-alcoholic-drinks-company-scottish-employees-a7693511.html.
I thought this was a fascinating read. I agree with your point that dealing with increased costs due to Brexit by simply passing them onto Guinness consumers isn’t tenable, given increased competition in the beer space from high-quality craft brews. I also imagine there would also be significant public outrage in Ireland to price hikes, given that the Guinness still the most consumed brand of beer in the country, and given the national pride attached to the brand.
With this context in mind, could Diageo focus its efforts on expanding the non-Guinness portions of its business, instead? Johnnie Walker, Smirnoff, and Bailey’s, while all major brands of alcoholic beverages, do not carry the same ties to national identity that Guinness does. I also imagine that they do not face the same type of small-scale craft-brew competition that Guinness does. Could Diageo then play around with some of the levers you’ve raised earlier (relocating factories to avoid Brexit-driven logistical issues, or raising prices to provide a cushion for Brexit-related costs) on these brands?
First of all, you’re making me thirsty. But more importantly, what an interesting read! I would hate to see such a timeless (and delicious) beer go to waste because of political turmoil in the region. I think @MJ makes an interesting point about pursuing other product lines, though I’d rather not allow such a historic brand to falter under the effects of Brexit (even if the business as a whole could protect its economic health with the growth of its other brands alone).
Now, our ultimate goal is not to manage TO Brexit, but to manage THROUGH Brexit – and of course, easier said than done, given that we’re still not exactly sure how the legislation will end up. That said, there might be a Goldilocks solution here, in the case that legislation does not turn in our favor. I would propose we keep the Belfast, Northern Ireland bottling and canning factory, but reduce the about of production that takes place there, in turn changing the factory to more of a “tourist destination” (and perhaps local brewpub?). In this way, we can still bottle and can in Belfast (so that people can still tour the facility, and provide regions on that side of the border with the product). Moreover, we’d be able to protect some of the workforce (as well as the historical site), while relocating most of the product to the UK, thus avoiding the Brexit-related costs you’ve mentioned above. Sure, it’s not a perfect solution, but at least it might mitigate some of the backlash from fully shutting down the plant (if that’s what it comes down to). I’ll keep my fingers crossed for Belfast and Guinness!
Great post! A bartender in Ireland was sharing some of these potential concerns with me a few years ago well before Brexit became a reality. We were simply discussing hypotheticals, but it’s fascinating to see his concerns having to be dealt with now. As of this morning, Theresa May seems to be facing rising pressure to avoid “hard borders” between the UK and Ireland [1], which may mean no big changes are necessary for Diageo. In either case, I would suggest delaying any large investments until more details are known. If negotiations turn out to be unfavorable, it seems that Diageo’s only choice is to begin limiting production in their Belfast plant. In which case, I love Alison’s point above to convert it to a low-production local brewhouse and tourist destination!
If hard borders are enacted, I wonder if it would be possible to lobby for a special “Fast-Pass” for Guinness-related border crossings in order to limit the amount of extra time spent at the border?
[1] http://www.cnn.com/2017/11/26/europe/brexit-ireland-border-theresa-may/index.html
I appreciated the read and am certain that due to its UK headquarters and global manufacturing and commercial presence, that Brexit is something that is very much on the top of Diageo management’s minds. Similar to your suggestion, I think it’s too early to pursue large cross-border movements of factories until more of the details are worked out. Additionally, I doubt that the 1.3M euros additional cost associated with longer border crossings between Ireland and Northern Ireland is the highest concern for Diageo right now, given their massive revenue base of 12B pounds. Beer is such a high margin business (at least in aggregate through the whole supply chain of producers, distributors, and retailers) that I have no concern that this 0.5% cost increase could be passed on and never noticed by the consumer. Ultimately, as a multinational British company, Diageo would be remiss to not consider every possible impact that Brexit might have to their business, but I think their analysis here that concluded that a 30-60 minute delay would cost them 1.3M euros would likely have been a gigantic relief.
The case of Guiness in the context of the currently ongoing Brexit negotiations clearly illustrates the significant implications re-negotiated trade and border agreements can have for the operational set-up of multi-national corporations.
At the same time, the specific case of Brexit-driven operational disruptions at Guiness, associated inefficiencies and potentially resulting lay-offs/plant shutdowns provides considerable leverage for the company to demand governmental support in upcoming trade negotiations. From my perspective, this leverage represents the most effective way for a company to protect its interest under high uncertainty, as shown by Nissan UK which has successfully secured a £100m government Brexit support package. In light of a potential plant shutdown in Northern Ireland, the Irish government has a clear `quid-pro-quo´ opportunity it can utilize vs. the UK government as the main fallout of a production relocation would be in the UK. The fact that the UK government has already stepped back from its hard border rhetoric, now suggesting a “light touch” [1] border underlines the positive impact rational argumentation around the business impact of Brexit already has.
________________
[1] Geoghegan, P., “Brexit’s Northern Ireland Problem,” The Wall Street Journal (Apr 16, 2017)
This is so intriguing – case in point for Brexit’s far-reaching impact on trade and how high the stakes are for Ireland given the UK is their biggest export market – it is interesting to learn that just a simple addition of border controls could have such a huge impact on cost and supply chain efficiency. Seeing how this is so damaging even for a global and diversified company like Diageo, I could only imagine the number of small manufacturers and traders that would easily go out of business as a result of the “hard border”.
If I were Diageo’s management, I would prioritize mitigation measures that minimize the disruption to current operations given the huge uncertainty of how the border negotiations will play out, and not assume the worst-case scenario for now. For instance, I would work with logistics providers to find options to optimize like consolidating shipments or using larger trucks to reduce the frequency and costs of crossings. They could also initiate risk mitigation discussions with competitors and other consumer goods players in the same boat to further consolidate and jointly lobby for exemptions from customs rules. I also like your idea of passing the cost on to customers given the relatively low price sensitivity and Guinness’ strong brand value.
I wouldn’t consider moving the Belfast factory at this stage. In this sensitive period of time, any rumors and speculations of shutting down Belfast could be very damaging to employee morale and government relationship. Right now, the Northern Ireland border issue is one of the key roadblocks hindering the progress of Brexit negotiations and there is pressure on Theresa May to provide more clarity on the plan in the next few weeks. Diageo should stay close to policymakers to monitor latest developments, have a beer and hope for the best.
Passing on the cost of lost time at the border to the Guiness consumer? That would certainly vex me.
What are the implications of dismantling the Belfast bottling facility to build it in Ireland, instead of Northern Ireland. This would be my first course of actions. It seems that there are inherently operational improvements to be made by ceasing to haul the beer 90 miles back and forth. As your article mentioned, this back and forth would be compounded by border waits. A good line to take would be to communicate the potential for the bottling facility to leave the UK to UK officials. This would certainly cause an uproar amongst workers and government officials, alike. The company would have to seek a favorable trade deal to remain in the UK.
As far as the debt being in pound sterling and revenue being in dollars, is there any value in further leveraging the firm?
I agree with your proposal to maintain production in the medium term and re-evaluate closing the Belfast bottling and canning factory after the Brexit details are finalized. As you mentioned, Diageo currently holds a favorable position as the 7th largest company by market capitalization on the FTSE. It would be in the UK’s best interest to support Diageo during upcoming trade and tariff regulations. In advance of these negotiations, Diageo should take the necessary actions to preserve its relationship with the UK government – shutting down the Belfast factory is not worth the reputational risk. Furthermore, Diageo should consider the additional costs of shutting down the Northern Ireland factory and opening another factory in Ireland that might offset the favorable savings on transport costs, such as increased labor costs, complex union dynamics, upfront capital outlay, additional government regulations etc. I’d encourage Diageo to consider other actions to encourage the UK government to negotiate a “soft border” between Ireland and Northern Ireland on its behalf. Diageo should complete a full assessment of its current supply chain and identify areas of improvement. I’d imagine cost savings might result if Diageo streamlined production and transportation among its Guinness plant in Dublin, its bottling and canning factory and its distribution center. Finally, are there alternative ways to transport materials and/or finished goods to eliminate costly delays at the border? I like Dave Anderson’s proposal to lobby for a “Fast-Pass” for Guinness border crossings.
Great article and fascinating comments! I concur with Patrick’s assessment that Diageo is probably breathing a sigh of relief when they look at these numbers. The short and medium term financial impact on their total bottom line doesn’t seem particularly severe as a percent of total revenue, and the average consumer would likely be able to tolerate a modest 0.5% increase for a well-regarded brand.
However, the potential disruption to their process flow of shipping is more concerning. While average wait times of 30 to 60 minutes at the North Irish border aren’t egregious, this seems likely to add an element of variability that Diageo could be underestimating. Additionally, the distribution following bottling, where the beer is shipped to countries across the U.K. will increase variability, potentially damaging relationships with wholesalers.
Great article, KTR! I really liked your analysis of Diageo. I thought you gave a very comprehensive overview of the company and the impact of Brexit on it. The fact that Diageo would be impacted by trade tariffs as a result of delays, despite continuing to trade under WTO rules is especially interesting. I am particularly interested by the role of business and whether it is correct for business to lobby government, which is at the heart of your argument.
In terms of passing on costs to the UK consumer – it is very difficult for Diageo to do so, as it relies on large part on retailers in its off-trade business. These retailers (e.g., Tesco) have enormous scale and enormous bargaining power, that allows them to pressure Diageo to bear the brunt of cost inflation.
To answer your questions – reputation is critical to Diageo in the UK. It operates in a highly branded industry (alcoholic beverages) and must protect its brands. It must therefore protect its reputation. On the other hand, while Diageo should protect itself by speaking to the British government – from a social perspective, I don’t believe that lobbying the government is the best way to achieve the best social outcomes for UK citizens. Therefore, Diageo’s best interest may not align with the British public.