The Brexit debate was hotter than a steam boiler. Now, six years after the referendum, the conversation has cooled. And, like when cupping coffee, that makes it easier to grade. Here’s what Brexit has served up to the coffee community.
In a parallel universe there’s a different implementation of Brexit. In this imaginary outcome both coffee and coffee equipment are easily imported into Great Britain and dispatched around Europe. Young Europeans work in the United Kingdom for a period and Britons still have the opportunity to live on the Continent. With goods and people moving freely, inflation is lower. And with the greater certainty, people can plan for their future and business invests to improve productivity and profitability.
In reality, things are in a more difficult place. Great Britain is outside the single market. The future of the trading relationship with Europe is still being finalised. Parts of the agreement are yet to be fully implemented with a cloud hanging over others. The chaotic implementation has been expensive for business and fatiguing for people. Plus, the additional challenges and requirements have taken resources away from tackling Britain’s low growth and poor productivity.
Clearly the form of Brexit chosen by the Government has caused a bit of a mess. We’ve tried to be glass-half-full about it, but it’s been difficult when it feels like the Prime Minister has knocked you, spilt half your coffee onto the floor, then staggered off without apologising or sorting it out (c.f. the Dutch PM). So, as the new regime takes shape, United Baristas thought it timely to look past Westminster politics, take a practical look at how Brexit is going and identify ways the coffee community can move forward.
To understand the opportunities and challenges facing the coffee industry we’ve spoken with dozens of people including importers, business owners, baristas and brokers. There was a range of political opinion, but when it comes to the impacts and repercussions there was much in common.
The biggest differences largely depend on one’s role in the supply chain. The closer you are to coffee production or manufacturing, the more you have been impacted by the post-Brexit trading regime and sought to shelter your customers from the impacts. The closer you are to consumers the more you’ve been on the receiving end of cost increases as well as goods and staff shortages.
Another recurring theme is that in the context of the coronavirus pandemic, global supply chain issues and the Russian invasion of Ukraine, it’s important to correctly identify the drivers of issues facing the coffee industry. Good analysis will put ourselves in the best possible position to successfully tackle challenges and seize opportunities. To explore where the coffee industry can go next, we start by identifying the current situation and how that shapes the coffee community’s options.
No longer just in time
Britain imports more than it exports. So let’s start with the supply chains that allow coffee and equipment to enter Great Britain.
Bringing items into Great Britain from the EU is now both more complicated and more expensive. The current implementation requires items to be declared and import tariffs to be paid. Importing companies need to register to import goods and each shipment has specific customs and tariff paperwork.
The impact largely depends on the value and frequency of shipments. For higher value shipments, such as pallets of espresso machines, the additional administrative cost adds only several pounds to each machine’s landed cost explains Peter Garcia, who manages Victoria Arduino in the UK. This means that they have been able to maintain their weekly shipments from the factory in the Marche region of Italy to their UK warehouse.
Since there is a flat fee for each shipment, the situation is more complicated for lower value items. “Paying an additional £50 on a shipment with a value of £50,000 has little impact” explains Chris Austen of Conti Espresso UK, “however, it’s changed the way we order spares as it is now unviable to just courier several hundred pounds worth of parts from the factory in Monte Carlo to Hertfordshire”.
The additional clearance paperwork adds time and complexity so coffee businesses have had a wide range of experiences. While some businesses now have similar transit times, the majority of shipments now take several days extra compared to before Brexit with a number of businesses experiencing occasional delays of more than a week. Even larger businesses with established logistics competencies have had to adapt. For example, shipments from Oatly’s factory in southern Sweden to the UK now take longer, which shortens the shelf life of some products. A number of equipment importing companies also note that the longer a shipment is in transit, the more likely it is items will arrive damaged.
With European supply chains no longer being just in time, coffee companies are now typically importing larger shipments less frequently. This requires more money to fund imports. Consequently, the cost of European imports have gone up, with lower value items seeing relatively greater increases.
No coffee company reported cheaper or easier imports from EU countries following Brexit. And, whether or not businesses have successfully learnt to manage the new processes, all businesses would have preferred single market access.
Still a gateway to Europe?
The new arrangements have changed the way coffee businesses serve customers across the United Kingdom and Europe. As well as being more expensive to import goods from Europe, it’s also more difficult and expensive to service European customers from the UK – and visa versa.
Consider American, Japanese or Chinese manufactured coffee equipment, which previously could be bulk imported into a continental European warehouse and then a single item shipped directly to a UK customer. Now there would be non-refundable import tariffs and administration fees paid when the shipment enters the EU, plus further tariffs and fees when the item enters the UK. This makes this distribution route unviable as many items become prohibitively expensive. The situation is the same for global goods flowing in the opposite direction.
This has encouraged global brands to treat the UK and EU as increasingly separate markets and to hold stock in both UK and EU warehouses, reducing flexibility and increasing cost.
A similar challenge applies to coffee imports. Importing coffee into the UK and then exporting it to EU-based companies is now largely unviable due to administrative and duty costs. Green bean importers Falcon Coffees opted to partner with a Belgium warehouse to serve European customers. This means that coffee for each of the two markets are now selected and separated at origin and sent to the respective warehouse explains Line Cosmidis. While functional for Falcon’s customers, this can curtail the range of coffees available.
UK coffee roasters have noticed, especially those that previously opted to purchased green coffee from European merchants before Brexit. One of the benefits of sourcing green coffee from European brokers was that “it largely doesn’t matter if other European roasters offer the same coffee as us”, explains Quarter Horse Coffee owner Nathan Ratnzer, “but it can dilute our proposition if local roasters start selling coffees we are known for”. With many UK roasters now buying from UK green distributors, a narrower selection of coffee is available, and it’s become more likely for UK roasters to share coffee lots. And with fewer coffees available overall, consumer choice has become more limited.
Open Freeports, fast
Freeports are import infrastructure where items can be warehoused free from UK tariffs and taxes. Items can then be imported into the UK or shipped onto Europe or around the world. The rollout of Freeports is already running late and should be implemented ASAP.
Exporting around the globe
The new regime also makes it more difficult for European companies and consumers to purchase coffee from UK roasters. In additional to postage costs, there are now additional duties, which are ultimately borne by the buyer, pushing up the price of UK-roasted coffee compared to coffee roasted in the EU.
All roasters reported having lower trade and consumer sales to the EU, especially since 2021 when the transition period ended. “Climpson & Sons was looking to grow EU sales as recently as 2020”, explains Nicole Ferris who is the Managing Director. “However, over the past 18 months there’s been a substantial reduction in our EU sales because of the additional costs and complexity for our European customers”. The challenge is double-sided. As well as UK roasters having additional costs and performing additional export paperwork, many smaller EU coffee companies are not set up to import goods, including coffee. These points of friction have been sufficient for many European coffee companies to opt to source coffee and coffee equipment from elsewhere in the EU single market.
It’s been difficult for UK roasteries to make up lost EU sales through exporting to other countries. Roast coffee is comparatively heavy for its value making it prohibitively expensive to air ship long distances. As a result, most of the coffee roasters we spoke with have been unable to tap other export markets to offset the reduction in EU sales and now have lower export sales revenue.
The steady flow of people back and forth from the continent helped put the UK, and especially London, at the centre of the European coffee community – despite its geographic position on the western edge.
It’s increasingly clear that the UK coffee’s soft power has been capped post-Brexit, with coffee people from Madrid to Marseilles and Paris to Prague increasingly looking for trends and inspiration from other continental European cities.
A sign that the optics, as well as the trade requirements, matter is displayed in Belfast at the coffee roasters Root and Branch. Northern Ireland remains inside the EU single market, which allows businesses to ship roasted coffee both to Great Britain and EU countries free from tariffs and customs clearance fees. In other words, the pre-Brexit arrangements largely remain in place. Despite these opportunities, Root and Branch’s export sales to both mainland Britain and continental Europe have decreased since Brexit. Over the same time, sales to the Republic of Ireland have grown – inhabitants of the Isle of Ireland have a better understanding of the Northern Ireland Protocol arrangements and share a cultural affinity.
It seems increasingly clear that the UK and the EU are starting to operate as two separate and distinct markets, with Europeans now finding a new coffee cultural independence.
In a further indicator of this development, Allegra Events recently sold their successful London Coffee Festival show to William Reed, a UK food and drink sector events and insights business. “The London Coffee Festival played a key role in supporting the growth of the UK’s coffee industry”, explains Jeffery Young, founder of the festival. “While we anticipate further growth for LCF, selling the festival now allows us to focus on the other festivals, each of which has their own local flavour.” The team continues to run festivals in Amsterdam, Milan and Paris, as well as North America and Brazil.
The mood matters
For the UK to grow exports, we also need to project influence. The manner in which the Government sought divorce from the EU has tarnished Britain’s reputation. Consequently cultural barriers now also need to be overcome and UK coffee businesses need to build and maintain trans-European relationships.
Much of the coffee industry finds itself with serious staff shortages. Over the past decade, coffee has benefitted from Europeans moving to work in the UK, bringing their ideas and traditions with them, enjoying life and work in the UK. Some made the UK their permanent home, but most return back to Europe with new skills and fresh ideas which in turn has benefited the broader coffee community.
United Baristas has already noted the reduced number of young Europeans coming for a tour of service in the UK coffee industry following the Brexit referendum. Before lockdown, many coffee companies were already struggling to recruit staff and hospitality businesses were addressing increasing wage bills. The coronavirus pandemic hastened the return home for young Europeans, compounding the impacts of Brexit. The latest Office for National Statistics release of employment data in the UK notes that food service job vacancies have doubled compared to just before the pandemic in March 2020. It’s also one of a few sectors seeing worsening recruiting conditions so far in 2022.
As staff shortages are primarily a consequence of the hard-Brexit implementation, staff shortages are likely to remain for the foreseeable future, until there’s a change in immigration policy or a significant economic downturn. Coffee businesses must adapt to the new recruitment environment and work to make careers in coffee comparatively more attractive that other sectors.
Working holiday visas for young EU citizens
Introduce working-holiday visas for EU citizens under 35 years to be able to live and work in the UK for up to five years. And offer a route for those that want to make the UK their permanent home.
Fallen down, can we get back up again?
Following the Brexit referendum in June 2016, the British pound lost significant value against both the Euro and the United States Dollar.
This increases the cost of most things the coffee industry regularly buys from espresso machines (often purchased in Euros) to green coffee (typically purchased in USD).
The declining worth of GBP is a reflection of the diminished long-term prospects of the UK economy post-Brexit. When foreign investors think companies are likely to have less good future financial performance, they will pay less to acquire shares or opt to invest elsewhere. This lowers demand for purchasing Sterling and lowers the currency’s value against other currencies, such as the USD and euro.
Sterling will appreciate against other currencies if British businesses become more productive and profitable. This is a policy and economic challenge compounded by Brexit. The London-based think-tank Centre for European Reform calculated that Britain’s GDP was 5.2% smaller at the end of last year than it would have been if Brexit hadn’t taken place.
There’s no quick fixes to strengthen the pound. Companies need to become more productive and the UK a more attractive investment destination for Sterling to increase in value.
The consequences of the new trading regimes have been most clearly witnessed by those closest to importing and manufacturing. Despite those businesses upstream attempting to shelter their customers from the impacts, the repercussions are felt throughout the industry. This creates a multi-layered challenge for baristas and coffee business managers.
In the context of coronavirus and the subsequent supply chain disruptions and global downturn it can be tricky to identify Brexit specific impacts. The UK’s Office for National Statistics warns that direct comparisons in overall trade statistics is tricky due to the pandemic as well as a change to how the statistics themselves are compiled.
This lack of clarity is compounded by a reluctance from business to publicly attribute Brexit for delays and cost increases clearly attributable to the post-Brexit trading regimes, presumably due to the ongoing political sensitivity and the perceived risk of alienating customers who feel strongly about Brexit. In private conversations, the vast majority of managers moan. However, for a number of businesses talking about Brexit on the record is seen as a no-win issue. They’d rather stay quiet, keep their heads down and soldier on.
But without a clear identification of the issues, it’s difficult to tackle the situation and create viable business strategies for the future. Baristas and business managers need to think carefully about whether situations have been created by passing trends such as supply chain issues out of China; medium-term issues such as the Russian invasion of Ukraine; or structural changes such as the UK’s relationship with the EU.
The benefits of talking through the situation and sharing experiences was clearly exampled in a conversion with Sam Mason, the owner of Association Coffee, who has two shops in the City of London. The discussion initially focused on the negative impact Brexit was having on the City as a financial hub and how it was difficult to disentangle current consumer trends from the covid pandemic. However, within a day Sam followed up by email with a comprehensive list of issues facing his business, from staffing to sourcing crockery, that were all shaped by Brexit. By seeing these issues in the broader context, Sam is now able to identify new ways to work through the challenges and identify new opportunities.
To get through the next chapter, the coffee community needs to have frank discussions about where the UK coffee community is at in a post-Brexit world and where we want to go – hopefully this article will kickstart that process.
Another recurring theme is that larger businesses are generally better positioned to manage the new trading regimes and forthcoming regulatory environment. From importing to investments and reporting to regulatory requirements, the cost structures typically advantage businesses that can buy in bulk, have the internal expertise to navigate the new regimes and cheaper access to finance. It seems increasingly clear that medium and large businesses are going to dominate the parts of the supply chain that have import, export competencies or require regulatory certification. Tiny and small businesses (let’s say, businesses with less than £2 million revenue) are positioning themselves to focus on the domestic market.
The Government is poorly positioned to take practical next steps
As well as operating in new economic and regulatory environments, coffee businesses must also manage ongoing political uncertainty.
When we started talking to coffee businesses about the impacts and opportunities associated with Brexit, Boris Johnson was Prime Minister. As we publish, Johnson has been ousted as leader by his peers and the Conservative party is running an election for a new leader, who will also become the Prime Minister. While both candidates, the former Chancellor Rishi Sunak and current frontrunner Liz Truss, are playing to the party membership and the right flank of the Conservative parliamentary party, the Brexit policies they will pursue in office are less than clear.
This creates a scenario where the future PM may double-down on the current hard Brexit implementation that ideologically focuses on national sovereignty over trade and economic considerations (advocated by Professor Patrick Minford, and pursued by Boris Johnson and Lord David Frost amongst others).
Alternatively the future PM has the opportunity to pursue a pragmatic Brexit that both respects the outcome of the 2016 referendum, is closer to the commitments made by those campaigning to leave the EU and enhances the prospects of British citizens (an approach preferred by the centre of the Conservative Party, the Labour Party and much of the British public). At present it’s clear to see what practical improvements could be made but more difficult to see how sufficient political consensus can be built for its implementation this side of a general election.
Compounding the ongoing uncertainty at Westminster is that the immediate political relationship between the United Kingdom and the European Union is likely to be challenging, and even fractious. While the United Kingdom is unlikely to rejoin the single market or the Schengen area and even less likely to rejoin the European Union (re-entry would likely require adopting the Euro, which there is currently little public appetite for); practical steps now need to be made for the freer flow of both people, services and goods across Great Britain, Northern Ireland and the European Union.
With more limited trading options and reduced access to labour, the United Kingdom’s prosperity is now even more dependent on higher productivity. This means using technology to enable people to produce more with the same amount of time and effort. We need to work smarter, not harder.
In practical terms for the coffee industry, this means making more per person employed. For example, if a team of five baristas can be reduced to four people with the aid of new coffee equipment, the business can both be more profitable and pay higher wages.
Many coffee businesses have been forced to become more productive with the current barista shortage, but opportunities remain. In coffee shops there are options for self-ordering, streamlining coffee production and increasing coffee-making automation to increase the productivity of baristas. In roasteries, coffee can be roasted in larger batches and packing equipment can reduce the amount of labour required.
Many of these productivity gains require capital investment in equipment. To encourage businesses to invest, “the Government has introduced a super-deduction scheme on qualifying plant purchased before the end of March 2023” explains Rob Fiford from DJCA, a London-based accountancy practice with a number of specialty coffee clients. “Items such as espresso machines, grinders, automatic tampers, milk dispensers and steamers as well as customer ordering systems all qualify.”
The scheme provides a 130% capital allowance, so companies can reduce their tax on profits by up to 25p on every £1 they invest (instead of the standard 19p, the current corporation tax rate). For example, if a business purchases an item with a value of £1,000 ex VAT, a £250 deduction can be made when they file their year end accounts with HMRC: a £60 benefit.
The scheme makes sense for coffee companies “when they invest in plant to increase profitability” cautions Fiford, “if they are not profitable or don’t have a clear route to profitability, the super-deduction has no benefit”.
A variety of coffee businesses have been using the super-deduction scheme to invest in productivity or expand their operations. In many cases they’ve used the opportunity to bring forward medium-term investments into the current financial year.
Invest in productivity
Coffee businesses need to have a greater focus on increasing productivity, rather than just scaling existing operations, to enhance profitability.
If United Baristas ruled the Kingdom
The incoming Prime Minster has a full in-tray of issues to attend to, from healthcare to helipads, global warming to social care. However, they can help business play a constructive role by respecting their innate focus on efficiency (something Westminster political types now seem to lack) and not expecting companies to zig and zag with their political whims.
Business requires a predictable course and a level playing field to know where to focus our energies and what to invest in. The forthcoming government must have more respect for business and our need to plan ahead than the make-it-up-as-you-go-along, freewheeling, “fuck business” and messy approach taken by the Johnson administration.
If United Baristas held a magic wand we’d help coffee businesses by:
• introducing visas for young people from EU and Commonwealth countries to come and work for a period of time, with a viable route to citizenship
• create freeports to simplify warehousing and logistics for UK businesses operating Europe-wide
• re-open the Canada-plus-plus-plus negotiation with the EU
• continue the harmonisation of food standards with the EU to ensure a ready supply of food and provide export opportunities for UK food and beverage businesses
• sort out the Northern Ireland protocol
• provide medium-term incentives and longer-term clarity on the regulatory environment so businesses can plan and invest
Let’s face it, if United Baristas can figure this stuff out, it’s not that difficult. We need better policy and action from Government. In the meantime, baristas and coffee businesses need to keep using common sense to navigate the challenges, tap support and advice to explore growth opportunities and continue to invest in productivity to ensure the industry’s ongoing viability. Something that can only be achieved with a clear understanding of Brexit’s issues and options.
What’s your experience of Brexit?
Let us know, we’re on all the usual channels.