The impact of Brexit on Kerry Group
The impact of Brexit on Kerry Group
Ireland has incredibly close geographic and economic ties to the UK, with Irish exports to the UK representing 35% of total Irish exports[1]. As such, Brexit was always going to have significant impact on the Irish economy and the food sector in particular, which accounts for 10.7% of total Irish exports[2].
Kerry Group is Ireland’s largest exporter, with €5.2billion exports annually[3], of which almost 30% is to the UK[4]. Their annual report cites three potential effects of Brexit which could impact their business, specifically, exchange rates, labour costs/availability and tariffs in relation to movements of goods and services[5]. Alongside this, there are two specific logistics and supply chain issues which Irish businesses, including Kerry Group, will need to manage as Britain exits in the EU.
Firstly, from a supply chain perspective, over 70%[6] of Irish exports are shipped through the UK, docking at a ‘UK landbridge’, for onward transport to the rest of the UK, Europe or beyond. In a post-Brexit world, the complexity associated with this could increase dramatically if customs regulations are imposed which could increase costs and potential delays. The resulting impact on competitiveness of Irish exports abroad could be significant. Kerry Group, with perishable dairy products, could be impacted by this as any risk of variability in timing of supply could create additional costs and customer issues relating to uncertain timelines.
Secondly, there is the issue of cross border trade between the Republic of Ireland and Northern Ireland. More than €5b products were traded across this border last year, with 30% of the milk produced in Northern Ireland subsequently processed in the Republic[7]. The level of border controls imposed in a post-Brexit world is one of many issues that will be the subject of debate, but in any case, change will be required adding complexity into the supply chain.
If Brexit imposes a ‘hard border’ between the UK and Ireland, this would add significant complexity to the supply chain for exported products. The Irish Maritime Development Office currently estimates an 18 hour advantage of the UK land-bridge over direct shipping to Europe[8]. However, this may be eroded if customs and other checks at UK ports become too onerous. It will be crucial that new shipping and air links directly to Europe and the rest of the world are established to ensure competitiveness of Irish food products abroad, particularly for perishable exports such as those of Kerry Group. In some cases, this is already underway, for example Maersk introduced a new route to ship directly from Ireland to Spain rather than via the UK, which is up to 10 days faster than existing routes, with further benefits to be potentially realised post Brexit[9]. But more is needed. Furthermore, significant investment would be required in Irish ports, with upgrades needed to establish and operate these routes.
In the short term, Kerry Group need to work with their logistics operator to establish plans for the various scenarios that could materialise as Brexit transpires, and particularly to ensure shipping routes suitable for their perishable products are established. Balancing the need for quality and reliable supply chain timings with incremental costs will be crucial. Quantifying these costs will undoubtedly be challenging in such uncertain times however, they need to estimate these costs to anticipate impact on their financials and potentially frame discussion with customers as to price increases or end to end planning to mitigate cost increases.
In the medium term, Kerry Group are mitigating their exposure through their well-established manufacturing footprint in the UK and in mainland Europe which means they are well positioned to meet customer requirements in the individual country markets[10]. They are also diversifying and restructuring their portfolio to enable greater focus on high growth emerging markets, to reduce their dependence on the UK.
Two key questions that are outstanding include:
- How should Kerry Group think about passing incremental costs on to customers and is there scope to do this in a low inflation environment?
- Should they consider shifting more manufacturing out of Ireland and into the UK or Europe in the medium term?
[785 words]
[1] Enterprise Ireland, Export Performance in Global Markets, 2016
[2] Bord Bia (Irish Food Board), www.bordbia.ie, Agri-Food Industry Factsheet
[3] Irish Exporters Association, Top 250 Irish Exporters 2015
[4] Kerry Group, Annual Report 2015
[5] Kerry Group, Annual Report 2016
[6] National Assembly for Wales, Inquiry into the implications of Brexit for Welsh ports, August 2017
[7] Irish Examiner, Brexit, ‘The Road ahead for Irish firms’, FitzGerald, Kryan, April 3, 2017
[8] National Assembly for Wales, Inquiry into the implications of Brexit for Welsh ports, August 2017
[9] Irish Exporters Association, The potential impact of Brexit on Irish Exports, March 2017.
[10] Kerry Group, Annual Report 2016
Fascinating article. While there are many shortcomings in the short-term, I wonder if it’s possible for Ireland to benefit from Brexit in the long run. For example, if Brexit causes an increased investment in building the infrastructure of Irish ports, is there the potential that this will bring additional dollars to Ireland in the future? Perhaps Ireland can profit from shipping, rather than passing those profits along to the UK? All-in-all, a world with fewer borders and free trade is optimal, but there may be a few benefits to the UK’s isolationist movement. Given the current political climate, I would encourage Kerry Group and other Irish companies to investigate these possibilities.
The essay concludes on a very interesting point around how the Kerry Group should think about passing incremental costs on to customers as a result of the added complexity of rigid borders between Ireland and the UK. A more fundamental question that I am sure many participants along the supply chain are considering is how much will it cost to establish new shipping and air links directly to Europe and the rest of the world? When these new routes are factored in, do the products then suffer because of a lack of competitive advantage among substitutes? This competitive advantage links to the very good second question of the conclusion around ex-Ireland manufacturing. Does this create brand dissonance to be an Irish foods company producing in Wales, for example? The UK currently imports 50% of food and feed from abroad, and with little ability to substitute imports in the near and mid-term, security of the food supply chain may prove to be one of the first areas of cooperation in the exit talks, which may mitigate the need for ex-Ireland production in the Kerry Group.
Kerry Group should also look at the UK’s current dairy exports – what products are being shipped where? If EU tariff barriers deter the UK dairy industry from continuing exports to EU countries ( and potentially shift UK focus to non-EU countries), Ireland might have an opportunity to fill the dairy gap that could arise in certain European countries. I don’t know if it is realistic that the Brexit negotiations take this route, but if so, Ireland should proactively seek out new shipping routes that bypass the UK on the way to continental Europe.
Very interesting article, Rachel! Regarding your question about shifting manufacturing outside of Ireland – I do think that they should consider doing this if it will help them from having to pass on costs to their end consumers. The other potential suggestion I would have for them though is to consider ways that they can work with the regulatory bodies who are developing the legislation to see if they can have an advocate on behalf of the company. When I think about some of the government affairs officials that exist at airlines, it may make sense to create this type of role at Kerry so that there is a point person to deal with all of these issues as they come up.
I think the question you posed on considering manufacturing outside of the Ireland and into the UK/Europe is the right one. This growth would help them expand potentially without passing on any additional cost to customers. As you stated, over 30% of Kerry Group’s exports are to the UK; the impact of any supply chain disruptions could be substantial for Kerry Group’s customers. In addition, if they consider expansion outside of Ireland, this could be an excellent foundation for future growth in the long term for the company as they begin to set up infrastructure and their brand outside of Ireland. Perhaps in the next decade they can begin to consider expanding outside of Europe.
Brexit could certainly create some problems for Kerry if trade agreements are not favourable, but there may be some opportunities. If no relevant trade agreements are reached between the UK and the EU, World Trade Organisation tariffs come into play at ~36% for dairy produce. Kerry may be able to offer dairy to the rest of EU for cheaper than it would be able to from the UK and therefore increase it’s top line to help with investments required with the possible loss of the UK landbridge, which may go some way to preventing a need to increase prices. However, such tariffs would likely be short lived as all sides have an impetus to come to a more favourable agreement. Therefore Kerry would have to move fast if they wished to take advantage of it. This leads me to my next point to answer your second open question: Kerry should work on contingency plans to move manufacturing to mainland Europe. I do not recommend capital investments at this stage, but you are right to suggest it should be considered and teed up ready to go should the UK’s future trading in dairy products look bleak with post-Brexit Europe. Planning – in detail – will enable a speedy reaction to take advantage of the aforementioned opportunities. One consideration to have though, would be the impact on the Kerry brand if some of the manufacturing is moved out of Ireland considering their very Irish image…
Great article! If I was in Kerry’s shoes, I would see Brexit as much of a threat as it is an opportunity. Their ability to reach new consumers in Europe by having to further develop their European operations, is certainly a potential upside, despite the costs they will have to incur in doing so. However I do see the risk of a Hard Border having negative consequences on their ability to play in the UK as fairly as rivals who are already entrenched there. There is also the consideration of the Kerry brand which while strong in Ireland is also fairly strong and trusted in the UK. This would leave me relatively optimistic that UK consumers would still turn to Kerry even if the added costs of doing business in the UK were passed on to the via increased prices… up to a certain level, of course!
Very interesting article – fantastic microcosm of the larger impact of nationalism on free trade. Your question about expanding production outside of Ireland posed an interesting thought. Would it be possible to increase production in Northern Ireland to take advantage of local supply and retain access to similar import dynamics to Great Britain. That could be an attractive way to reduce risk in a core market while minimizing disruption of the upstream supply chain. More broadly, I think the critical task is to outline the best way to access other markets under a variety of tariff scenarios. Cost will obviously be critical, but so will implementation timing. To the extent implementation could take longer than the phase in of any regulatory / tariff changes, Kerry Group may be forced to act before all of the details are known in order to combat downside risk.
Nice article! It seems like in the short-term, the Kerry Group will have to pass on some expenses to various stakeholders throughout the supply chain, particularly if ultimately we experience a “hard” Brexit. However, should the hard Brexit be the case, it seems to me that the Kerry Group should explore alternative suppliers and locations in the EU. While the CapEx initially would be high, eventually this figure would be dwarfed by the amount that the Kerry Group would pay in tariffs imposed both by the UK and the EU. It’s also interesting to consider just how proactive the Kerry Group can actually even be in this scenario; as they don’t yet know the policy implications of Brexit, it’s hard to take concerted steps to preempt it. However, it seems like that should work to map out a set of most likely scenarios and a corresponding plan of action for each. That way, the Kerry Group can hit the ground running once the details are finalized to minimize supply chain disruption caused by Brexit.
Incredible article and unique in a way that it is focusing on a product which is a necessity vs. a luxury item. You have highlighted the impact on both UK and Ireland as well as Norther Island, and I agree with both of the questions you pose at the end. It would be intriguing to follow this up in a year or so after post Brexit agreements have been put in place and its impact. Recently, there has been some articles in the news about the shortage of Butter in France and hence the huge burden on the backing good industry. I would be interested to find out if this shortage is in any way related to Kerry Group. Also, what is the short & long term impact on the tax systems as well as social programs in Ireland, if the Federal Government has to make massive capital investments to upgrade the ports.
Fantastic article! Wow, what a rough outcome for Ireland and the Kerry Group in particular. The Brexit impact on exchange rates, labour costs, and tariffs bring a host of expenses for Kerry Group. If in response to these new regulations, the Kerry Group does move manufacturing to the UK or Europe, then Ireland loses a huge source of jobs and exports.
From a supply chain perspective, I think it makes sense for Kerry to change the “UK landbridge” strategy. Docking at the UK before going into Europe sounds like it will be prohibitively expensive. Since the UK is 30% of their exports, Kerry should definitely evaluate the option of manufacturing in the UK to support the local customers there.
For Kerry’s European customers, I would evaluate the costs of shipping straight to Europe before moving all my manufacturing to Europe. With perishable dairy products, a short shelf life means on time delivery is of the utmost importance and delays are destructive. This makes shipping straight to Europe challenging. However, I wonder if there is some investment in technology and transportation that can allow Kerry to ship reliably over land and sea with high quality. Are there more effective refridgerated contrainers that they can invest in? Are there quicker modes of transportation that they can take advantage of? Are logistics companies opening up new routes from Ireland to mainland Europe as a result of Brexit? Hopefully the Kerry dairy empire is big enough that logistics and transportation companies will cater to their new supply chain needs!
Great article. It’s fascinating to see a hard example of how the Brexit decision is affecting companies in Ireland/UK. A key decision for Kerry management is just how much these additional costs should be passed on to the consumer or rather should be absorbed in their own cost structure for a period of time. Depending on the elasticity of demand, consumers willingness-to-pay, and Kerry’s competitive positioning, it may be more advantageous for Kerry to take a hit on margins in the short-run, rather than losing customers in the long-run due to higher prices.
Thanks, RKR, for sharing these thoughts. As we’ve seen in the news over the last year or so, the uncertainty surrounding Brexit has already had ripple effects across Europe and the global economy. Thus, I was surprised to find that despite the threats to Irish manufacturing outlined in your post, Irish manufacturing is surging. A Reuters headline today reads, “Irish manufacturing growth surges to 18-year high.” In fact, the boom is the steepest measure of growth in the referenced survey’s history. My question is, what is driving this counter intuitive trend? Is it temporary? Are other macroeconomic trends, for example strengthening global growth, overpowering any Brexit-related headwinds facing the sector? Or, do the opportunities associated with Brexit for a country like Ireland outweigh the potential downsides? For example, will manufacturing capacity move to Ireland to remain inside the EU? With a long slog of Brexit negotiations ahead, only time will tell.
[1] “Irish manufacturing growth surges to 18-year high,” Reuters, Dec 1 2017 (https://www.reuters.com/article/us-ireland-economy-pmi/irish-manufacturing-growth-surges-to-18-year-high-pmi-idUSKBN1DV41H?il=0)
Wow! Very interesting read. This really brought home the complexity of Brexit and how, if not handled with extreme care, it could lead to serious issues for companies across the UK and Europe. In the short term, passing on extra costs to consumers in the UK seems fair as companies learn how to operate efficiently in a post-Brexit world considering that Britain voted wholeheartedly for the measure. In the long term, I think this provides a great opportunity for Ireland to develop infrastructure and renegotiate trade deals that could possibly benefit them in the long term.