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No-deal Brexit would hurt UK consumer firms, raise prices of food, drink, cars

The U.K.'s chaotic plunge toward a potential no-deal Brexit raises the specter of increased operating costs for food, drink and auto companies while hitting consumers by way of higher prices for groceries, household goods and cars.

The possibility of a no-deal Brexit has grown thanks to the unresolved divorce negotiations between the U.K. and the European Union. If the U.K. crashes out without a deal, its trade dealings with the EU would automatically revert to World Trade Organization tariff rules. That would mean tariffs, extensive border and regulatory delays, and product shortages that disrupt the finely tuned global supply chains of consumer companies. The pound is expected to weaken against the euro. Higher costs will likely be passed on to consumers.

"We expect the cost of imported products to go up, and at the same time there will be a decline in economic growth in the U.K.," said Harry Smit, senior analyst at Dutch financial services company Rabobank, in an interview with S&P Global Market Intelligence. "Both will have a negative impact on consumption."

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Rabobank says a no-deal scenario could cause the pound to slide about 10% to 15% to reach parity with the euro, which means an increase in the cost of EU imports by the same amount. Higher costs could prompt consumers to trade down and replace pricier meats such as beef with cheaper alternatives such as pork, or delay the purchase of expensive items, such as cars.

The U.K. government wants to minimize any such impact. In March, it revealed plans to temporarily remove tariffs on 87% of imports by value, with the exception of certain "protected industries" such as finished cars (though not car parts, which would be exempt), beef, lamb, dairy and some textiles.

Nonetheless, big food and drink retailers, which constitute the U.K.'s largest manufacturing sector, are anxious about the disruption from a disorderly Brexit. Switzerland's Nestlé SA, a major producer in the U.K., has said any such outcome would hurt its ability to bring in skilled employees from the EU. Mondelez International Inc. is increasing inventories and renting more trucks. Unilever PLC frets that border delays would affect its supply chain flexibility and working capital. In January, the Anglo-Dutch company disclosed that it was building up U.K. stocks of Magnum ice cream, which is made in mainland Europe, to ensure a steady supply.

British supermarket chains such as Tesco PLC, J Sainsbury PLC and Marks and Spencer Group PLC are similarly stockpiling packaged and tinned food products. However, the large amounts of perishable meat, dairy, fruit and vegetables brought in from mainland Europe cannot be stored beyond a few days without refrigeration. The result could be emptier grocery shelves for many common products. A hard Brexit "will become a significant operational challenge not just for us but for the whole industry and for retail in general and, I suspect, for the country overall," said Mike Coupe, CEO of Sainsbury's, on a Jan. 9 earnings call.

Nonfood retailers are also preparing. Luxury group LVMH Moët Hennessy Louis Vuitton SE, cigarette maker Imperial Brands PLC, beauty giant L'Oréal SA and drinks company Pernod Ricard SA have stockpiled products. Without a negotiated deal, consumer confidence would likely fall, food prices would rise and many shoppers would cut back on nonfood items. All told, that could wipe out £2.3 billion from the U.K. nonfood retail market in 2019, according to GlobalData. The research firm said nonessential big-ticket items would be hit particularly hard, including DIY and gardening tools, electricals, and furniture.

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Car sales are especially vulnerable. It explains why the U.K.'s £82 billion automotive industry — which operates complex, geographically dispersed supply chains under lengthy planning cycles — has aggressively opposed Brexit. More than 80% of cars on U.K. roads are imported, most of them from mainland Europe. Under a no-deal scenario and a 10% tariff, sticker prices would increase. Britain also exports 80% of the cars it makes, half of which are destined for mainland Europe. A 10% tariff could hurt exports to Europe, too.

"I think the impact of a no deal will be a collapse in investment in the U.K. automotive industry," said Peter Wells, a professor and head of the logistics and operations management section at Cardiff Business School, in an interview. "In the end, the industry will adjust, but it is likely to mean a significant change in the size and scope of the industry in the U.K. It would be smaller, but the type of cars we build would have to change as well."

Mike Hawes, CEO of the Society of Motor Manufacturers and Traders, has suggested that automakers would struggle to absorb an average tariff-related price increase of £1,500 per vehicle, since manufacturing a car yields only a few hundred pounds in profit. Volkswagen AG-controlled Porsche has said cost increases due to tariffs would inevitably be passed on to consumers.

Carmakers have had to make other adjustments, such as rescheduling planned shutdowns for maintenance. Bayerische Motoren Werke AG, Honda Motor Co. Ltd. and Toyota Motor Corp. have reset the timing of U.K. factory shutdowns for early April to better work out their responses to a no-deal divorce. Others are storing more car parts to counter supply-chain disruptions that could stem from lengthy customs inspections. Aston Martin Lagonda Global Holdings PLC has said it may fly parts into the U.K. to avoid delays at ports.

Other consumer industries could also be hit hard. For example, if Britain departs Europe without a fisheries agreement, EU vessels will lose access to U.K. waters, resulting in a loss of more than £500 million in seafood they can no longer catch from British seas. At the same time, tariffs and other costs would mean that U.K. vessels would find it much harder to export to the EU — the destination of 70% of all U.K. seafood exports. "This would cause significant damage," said Smit of Rabobank. "Both sides have an interest in striking a deal to ensure access to U.K. waters and to the EU market."