Brexit uncertainty forcing supermarket suppliers to stockpile to meet customer demands, says Duff & Phelps

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Despite the Brexit deadline looming ever closer, most of us are still in the dark as to how the UK will leave the European Union (EU). According to Duff & Phelps, the global advisor that protects, restores and maximises value for clients, the continued lack of clarity surrounding the nature of the UK’s future relationship with the EU is having a significant impact on manufacturers and suppliers of fast-moving consumer goods(FMCG), who are at the forefront of the supermarket supply chain. 

Jimmy Saunders, Director, Restructuring Advisory, Duff & Phelps, stated: “Manufacturers and suppliers of FMCG consider supermarkets as their core customers and particularly the ‘Big Four:’ Tesco, Asda, Sainsbury’s and Morrisons with Aldi and Lidl following closely behind. However, the uncertainty surrounding Brexit means many manufacturers have to stockpile both raw materials for production and finished goods to ensure product stays on shelves and they meet customer demand. This is placing a further burden on working capital which is locked up in stock at a time when investors are cautious about increasing lending.”

Saunders continued: “In the event of a no-deal Brexit, which is still very much on the table, suppliers will also have to deal with fluctuations in Forexand additional tariffs, which could impact raw materials coming in from Europe.”

The current climate of uncertainty is also having an impact at the very top, with company directors increasingly “waiting to see” what happens next, resulting in strategic business decisions such as CAPEX investment being placed on hold. Longer-term productivity levels have experienced a marked decline in growth in the UK since 2008 and with investment in future productivity on pause, companies may be creating problems for the future when UK PLC finds itself improperly equipped to compete in the post-Brexit world. 

Saunders added: “The Brexit ambiguity seems to have whipped up the perfect storm, with manufacturers and suppliers of FMCG currently facing several other challenges. Following an increase in supermarkets’ use ofdiscounting and double-up promotions, suppliershave found themselves increasinglyvulnerable and under pressure to fundtheir customers’ promotional activitythrough buyingpremium shelf space or funding discounted products. Although this may lead to a short-term spike in sales, the constant race to the bottom on pricing is predominantly funded out of the supplier’s pocket. 

“Navigating the uncertainty of Brexit and the commercial relationships with supermarkets aregoing to be challenging tasks for manufacturers and suppliers of FMCG. However, with clarity coming imminently on the nature of the UK’s future relationship with the EU, there is optimism that businesses should be able to start making plans for investments in driving productivity and adapting to the UK’s new business landscape,” Saunders concluded.