Brexit risks, convenience food, volume, material sourcing, labour availability, viability statement

Greencore Group plc – Annual report – 25 September 2020

Industry: food and drink

Chairman’s statement (extract)

Brexit

While clarity on the nature of the UK’s exit from the EU remains elusive as I write, the Board and I continue to monitor closely the potential implications on our business, including, in particular, any potential changes to the supply chain and the availability and cost of labour as well as any operational and legislative impacts. There will be Brexit related challenges for everyone involved in the UK food industry, but we are confident that we are well positioned to manage through prospective challenges and work with customers to take advantage of the opportunities that may arise.

Risks and risk management (extract)

Brexit

Brexit and other political pressures are creating uncertainty which is affecting a number of our key business drivers including material sourcing, inflation, labour availability, operational complexity and legislative change. The Group has a Brexit taskforce in place which is responsible for planning for the UK’s exit from the EU at the end of the transition period. The Brexit taskforce consists of representatives from various Group functions who convene on a regular basis to assess Brexit related risks, build mitigation plans, test alternative scenarios and support dialogue with suppliers, customers, the UK Government, the wider industry and other stakeholders. The Board receives regular updates from the taskforce on its planning, preparedness and its progress against risk mitigation action plans.

The Brexit taskforce, and management, continue to focus on the areas that may have the most direct impact on our ability to continue to supply customers at the end of the Brexit transition period. These areas include maintaining effective customer service levels, the efficient movement of goods, managing the impact of potential tariffs and quota restrictions and ensuring compliance with regulatory frameworks.

Our post-Brexit transition planning has assisted the Group in our response to COVID-19. By way of example, as part of our Brexit preparation, we mapped all of our inbound supply chains in order to understand the origin of various components to establish exposure to supply, as well as Brexit related commercial risks. We were able to use this data in the context of COVID-19 supply risk. In addition, as part of our Brexit preparedness, we reduced our reliance on imports, established contingency supply relationships and increased capacity in certain areas which also helped mitigate certain COVID-19 related risks.

We continue to take a number of actions to prepare for the end of the Brexit transition period, including reviewing stock holding within the supply chain, maintaining very close day-to-day contact with our suppliers, and providing guidance and support to them as required.

COVID-19 related risks have been incorporated into the Group’s principal risks as appropriate.

Further information in relation to the impact of COVID-19 from a risk perspective is set out on pages 56 and 57.

The Group has identified the following primary areas of potential Brexit related risks:

Material sourcing and inflation

We estimate that we source approximately 80% of our raw materials from UK based suppliers. When taking into account raw materials which are in turn sourced from outside the UK by our suppliers, we estimate that less than one third of our raw materials are imported from EU-27 countries. For these materials, we have made alternative sourcing arrangements and have a well-developed contingency plan, which includes forward buying, qualification of alternative suppliers, the storage of raw materials, and flexibility in recipes. We remain confident in our ability to largely pass on 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.

Labour availability

There has been increased pressure on the availability of certain areas of labour in recent years and the associated reduction in migration from EU-27 countries since the Brexit referendum. It is anticipated that this trend will continue, however, we have implemented, and continue to implement, a number of initiatives to adapt our labour model to mitigate the risks associated with migration and labour availability.

Operational complexity and legislative changes

It is possible that following the end of the transition period, there will be a disruption to the movement of goods at UK borders leading to operational complexity, which may have an impact on how we do business and increase costs, and potentially, continuity of supply. An orderly exit from the EU will allow for more effective planning to address the consequences of change, however, the type of deal and change required is still unclear. This may impact our ability to implement necessary measures in a timely manner. We continue to work collaboratively with our suppliers and customers to ensure we limit the risks associated with the current Brexit uncertainty, specifically in the context of operational disruption.

The various legislative and regulatory consequences associated with Brexit are wide ranging and span across areas such as food safety, environmental standards, data protection, intellectual property and tax. The Group has always been committed to acting with integrity and upholding the highest standards, whilst also complying with all of its relevant legal requirements and this is an area of focus for the Brexit taskforce.

Brexit related risks have been incorporated into the Group’s principal risks as appropriate.