Greencore Group plc – Annual report – 28 September 2018
Industry: food and drink
CHAIRMAN’S STATEMENT (extract)
As I write the exact nature of the UK’s exit from the EU is unclear. As a Board, we continue to monitor closely its potential implications on the business, including, in particular, any potential changes to costs in the supply chain and the availability and cost of labour. Whilst there will be Brexit related challenges for everyone involved in the UK food industry, the dynamic nature of the UK consumer will also continue to provide opportunities and we are confident that we are well placed to work with our customers to take advantage of these as they arise.
CHIEF EXECUTIVE’S REVIEW (extract)
Despite some uncertainty on the UK economic outlook in light of Brexit, we believe we are largely insulated from some of the most widely cited potential negative effects – we are in most respects a ‘domestic’ UK business producing almost exclusively for the UK market and sourcing most of our ingredients from within the UK. We also know from the experience of the most recent recession in the UK that convenience food volumes held relatively firm even in times of economic pressure. Ultimately, we will continue to operate in a market of 67 million relatively high-income consumers, with a sustained underlying demand for convenient, fresh, locally-sourced food.
OPERATING AND FINANCIAL REVIEW (extract)
Greencore continues to monitor closely the potential implications of Brexit on its business, particularly in the areas of volume, material sourcing and labour availability. The Group has been engaged in Brexit planning since the result of the referendum was first announced. A multi-functional team meets on an ongoing basis to assess Brexit-related risks, build mitigation plans, test alternative scenarios and support dialogue with our customers, government, the wider industry and other stakeholders. Although the Group believes the risks from Brexit are manageable in the medium-term, the near-term challenges associated with ‘no withdrawal agreement being reached’ remain uncertain.
RISKS AND RISK MANAGEMENT (extract)
We have been engaged in planning for the UK’s exit from the EU since the result of the referendum was first announced. Our Brexit taskforce brings together a multi-functional team on an ongoing basis to assess Brexit-related risks, build mitigation plans, test alternative scenarios and support dialogue with our customers, the government, the wider industry and other stakeholders.
We have identified three primary areas of potential risk, in particular if the UK leaves the EU without a withdrawal agreement:
We are largely a ‘domestic UK’ business from a production and commercial standpoint, as the vast majority of the consumer products we produce in the UK are sold in the UK. We also believe, based on our experience from the last UK recession, that volumes in the categories in which we operate would be relatively resilient to any headwinds to the UK economy following Brexit. We therefore anticipate limited risk to our volumes post-Brexit.
We estimate that we source approximately 80% of our raw materials from UK-based suppliers. Even taking account of raw materials which are in turn sourced from outside the UK by our suppliers, we estimate that less than a third of our raw materials are imported from the EU-27. For these materials, we are actively making alternative sourcing arrangements and contingency planning, including forward buying, qualification of alternative suppliers, storage of raw materials, and flexibility in recipes. We are also confident in our ability to largely pass through any associated cost increases, given our track record of inflation management with our customers, and the heightened attention on continuity of supply during the transition period.
We note the increased pressure on the availability of lower skilled labour in recent years, and the reduction in migration from EU-27 countries since the Brexit referendum. While we anticipate that these trends will continue, we expect this to play out over a period of years, and are adapting our labour model accordingly. The UK government has stated that EU citizens would be allowed to remain in the UK until at least the end of 2020 even in the absence of a withdrawal agreement.
We are engaged in ongoing dialogue with our customers, the government and with the wider food industry to help coordinate Brexit preparations and mitigate negative consequences, including being a member of the Brexit advisory boards of a number of our larger customers and participation in multiple industry forums. Consideration of these risks has been incorporated into the Group’s principal risks as appropriate.