Just recently we have seen the dramatic influence politics can have on the economy. Soon after President Zuma’s midnight cabinet reshuffle and the firing of Finance Minister Pravin Gordhan, South Africa has seen its financial status go to the dreaded junk grading and the ZAR is as volatile as ever, reacting to the slightest speculation.
And this is not only true for a country with a smaller economy and a history of poor politics. Just about a year ago, Britain voted to leave the EU. After the initial shock (as with the US presidential election), it is almost a bit surreal when, initially, life continues as usual – the calm after the storm. But big decisions have big consequences.
While the UK is set to leave the EU by April 2019, there is a lot of uncertainty under those trading with the UK. No surprise then that two of the leading wine fairs decided to present debates on the issue. Vinexpo Bordeaux will look at the key issues facing the European market, while the debate at the London Wine Fair earlier this week focused on the UK wine market specifically.
Since Brexit, the UK has seen the weakening of the GBP, uncertainty and slow economic growth, but according to fresh analysis and studies, there are more concerns, especially when it comes to the wine trade.
- For wine markets, the impact of the UK leaving the Customs Union is likely to come not only from tariff changes but also from slowed growth of UK incomes and devaluation of the pound.
- Even if the UK were to sign new trade agreements with the EU27 and others, the time it would take to implement them and for markets to adjust ensures that the likely effects of Brexit on wine markets will be adverse over the next few years.
- In the main scenario considered, for consumers in the UK the price of wine in 2025 is 22% higher in local currency terms than it would be without Brexit, the volume of UK wine consumption is 28% lower, and the value of UK imports is 27% lower because of Brexit.
- Such a sales reduction in the UK would be a blow to participants in UK wine bottling, transporting, storing, wholesaling and retailing businesses, as well as restaurants and pubs.
Because the UK is a key player in global wine trade, accounting for a major share of the world’s wine imports, Brexit will also affect wine-exporting countries, with few if any gaining in the main scenario considered over the modelled projection period to 2025.
- The UK market, although very important to the South African wine industry, has always been a challenging place of trade. Duties and taxes are high, retailers are tough negotiators, sales are predominantly focused on the retail discount culture and brand loyalty is very hard to achieve. The possibility of big volumes, the EU trade agreement with duty free import quotas and the strength of the GBP have however ensured the UK to stay the most important export market for South African wine.
With these factors under threat, South African wine exports to Britain face some new challenges:
- “Exporters to Britain who have already been hit by a 20% fall in the value of sterling since the Brexit referendum, today learned that Hammond is going to raise the already onerous taxes on wine by a further £0.10. By my calculations, this means that to hit the average retail price of £5.44, a bottle would have to leave a New World cellar at a price of no more than $1.40”, says Robert Joseph in Meininger Online.
- If EU duty free agreements are not in place, the high duties and taxes will cut into already small margins and affect profitability.
“The volume of UK wine consumption would be 28% lower (16% because of slower UK economic growth, 7% because of real depreciation of the pound, and 5% because of the new tariffs)”, says Kym Anderson and Glyn Wittwer’ Briefing Paper.
- Exports benefit from a weaker local currency, but when it strengthens, it at least supports a healthier local cost structure and despite a lower exchange rate gain, might bring some balance to the calculation. If the trading currency is weak, however, it plainly cuts into profit.
Any positives? Suffering trade relations between the UK and EU might benefit other countries and ‘new world wines’. The uncertainty is the worst of it at the moment and while more time would have been better, we have about two years to analyse and strategise. And to again quote Robert Joseph: “Despite the current turmoil, Britain remains one of the world’s largest and most influential wine markets. There is little likelihood that many producers will decide to turn their back on it. They may, however, have to reduce their aspirations for the volumes of wine they ship to the UK.”