{"id":23042,"date":"2017-11-14T23:02:36","date_gmt":"2017-11-15T04:02:36","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/general-mills-uk-and-the-potential-impact-of-brexit-on-the-dairy-industry\/"},"modified":"2017-11-14T23:05:13","modified_gmt":"2017-11-15T04:05:13","slug":"general-mills-uk-and-the-potential-impact-of-brexit-on-the-dairy-industry","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/general-mills-uk-and-the-potential-impact-of-brexit-on-the-dairy-industry\/","title":{"rendered":"General Mills UK and the Potential Impact of Brexit on the Dairy Industry"},"content":{"rendered":"

On 24 June 2016, the UK woke up to the news that 52% of voters had voted to leave the European Union (EU).\u00a0 A shock to many, this had profound effects on businesses and markets throughout the world: the pound dropped more than 8% against the dollar and markets lost approximately $2T.\u00a0 Almost a year and a half later, the UK still has many unanswered questions about how international trade will be conducted when the UK leaves the EU in 2019.<\/p>\n

On top of a weaker and more unstable pound, one of the key implications that businesses are keen to understand is that of potentially leaving the single market and what that means for the import and export of goods.\u00a0 Considering the current lack of progress in negotiations, of concern is whether there will be any trade agreements at all between the EU and the UK when the two-year negotiating period expires.\u00a0 If no trade agreements are in place, the UK will be forced to abide by World Trade Organisation (WTO) tariffs when trading with the EU.<\/p>\n

When looking at WTO tariffs, dairy products have some of the greatest tariff rates: 36-50% ad valorem[1]<\/a>.\u00a0 This is of concern to both the UK and EU. \u00a099% of UK dairy imports come from the EU and 90% of UK dairy exports go to the EU[2]<\/a> (see Figure 1<\/strong>).\u00a0 The value of EU dairy imports to the UK in 2016 was \u00a32.5B (c.f. \u00a3105M from non-EU countries), equating to ~20% of all non-UK EU exports[3]<\/a>, and \u00a3900M of dairy products were exported from the UK to the EU (c.f. \u00a3386M to non-EU countries)[4]<\/a>.\u00a0 French food trade association ANIA recognises the risks to the dairy industry: \u201csectors that could be most affected are naturally those that most significantly contribute to the French trade balance: wines and dairy products in particular\u201d[5]<\/a> with some analysts suggesting up to \u20ac400M could be lost in French exports between 2017-19[6]<\/a>.<\/p>\n

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Figure 1.<\/strong> \u00a0Source: HMRC.<\/em><\/p>\n

For companies like General Mills (GM), the UK moving to WTO tariff rates and continuing adverse currency fluctuations could cause substantial damage to their European operations.\u00a0 Of the nine brands that GM UK maintain (see Figure 2<\/strong>), two are dairy products produced in France: Yoplait (including Libert\u00e9) and H\u00e4agen-Dazs.\u00a0 Furthermore, the UK is GM\u2019s second largest global ice cream market in retail channels.\u00a0 However, overall operating profits in the year since the EU referendum were down $13M (18%)[7]<\/a> for the segment \u201cdriven by significant raw material inflation, especially dairy, which impacted both H\u00e4agen-Dazs and Yoplait, as well as currency-driven inflation on products imported into the UK\u201d[8]<\/a>.\u00a0 Overall net sales for the segment declined 9% \u201cprimarily reflecting unfavourable foreign currency exchange\u201d.[9]<\/a><\/p>\n

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Figure 2.<\/strong>\u00a0 Source: General Mills UK.<\/em><\/p>\n

With such uncertainty, it is hard to suggest what General Mills should do.\u00a0 After all, there are still many that hope the UK will be able to remain within the single market for some time and therefore continue as they did before the vote, however currency fluctuations are likely to remain for several years.<\/p>\n

It appears GM are continuing to innovate and invest in building the H\u00e4agen-Dazs brand, but Yoplait is struggling throughout Europe as local yoghurt producers take market share[10]<\/a>.\u00a0 It remains to be seen whether the isolationist feelings that led to a vote to leave the EU will extend to a \u2018British is Best\u2019 mentality for ice cream and yoghurts when consumers could be hit with price hikes on foreign dairy.\u00a0 The most common British yoghurts to be found in supermarkets tend to be high quality (e.g., Yeo Valley) and can compete with French produce, however there appear to be no direct competitors to the super premium H\u00e4agen-Dazs except for a few small brands that could put GM under some pressure if they achieved significant growth (e.g., Kelly\u2019s of Cornwall).<\/p>\n

Should it become likely that the UK will move to WTO tariffs for dairy, GM will be faced with a question of what to do with their UK distribution.\u00a0 If the political climate is such that WTO tariffs may only be temporary, then there could be good reason to continue distribution.\u00a0 If GM were able to absorb the tariffs (and not pass on to consumers), this could be economically viable for a short period.\u00a0 However, if the period on WTO rates is longer term, they may need to contemplate ceasing distribution in the UK.<\/p>\n

Open questions<\/h1>\n