Market Reports

Bitter Brexit shocks coffee industry

While the opinion polls and months of often caustic debate suggested that the referendum across the water in Britain might be close, most of the participants at June’s World of Coffee event in Dublin were confident of the result. A gathering laid on by the Specialty Coffee Association of Europe in the Irish capital, it was an international affair that just happened to be on the same day as the momentous June 23 vote in the United Kingdom. One of Dublin’s highlights, the World Barista Championship, had been won by Berg Wu from Taiwan who was trailed by Yoshikazu Iwase of Japan and a global field of runners up from Canada, the US, France and the Netherlands. The delegates felt sure that a majority of Britons could not be in favour of reversing the country’s integration with the rest of Europe – not least with the Irish Republic itself, which would be on the wrong side of a hard border with Northern Ireland should the leave vote prevail. But, of course, it did. Jeffrey Young was in the Dublin throng on the June night and recalls the mood at the time as being “shellshocked”. The Founder and Managing Director of UK-based research consultants Allegra Strategies found himself, like so many other British businesspeople, struggling to explain to foreign counterparts what had just happened. “There was total shellshock across the industry,” he says. “If you had polled 100 people at the Dublin event you wouldn’t have gotten more than a few who would have predicted the outcome.”
“People were coming up to me, they could not understand how we had made this decision. Why was it necessary?” As the world woke to the surprise vote in favour of departure from the European Union (EU), the coffee industry was not alone in asking this question. The campaign had seen an overwhelming proportion of economists, investors, business owners, industry leaders and observers make the case for Britain remaining. The few business leaders, such as Tim Martin, Chairman of pub chain JD Wetherspoons, who did make the case for leaving, gained prominence precisely because they were so few. The Organization for Economic Co-operation and Development (OECD), an inter-governmental agency made up of the world’s wealthiest nations – warned before and after Brexit that it “would be akin to a tax on GDP, imposing a persistent and rising cost on the economy that would not be incurred if the UK remained in the EU.” Most informed commentary agreed that the economic argument would be decisive for a majority of Britons and alarm bells had only rung faintly when leading Brexiteer and former conservative government minister Michael Gove famously declared that “Britain has had enough of experts”. The outburst against experts is now seen as one of the turning points in the campaign where the emotional appeal of the leave argument to a cross section of voters concerned with identity and sovereignty was enough to swing the vote 51-49 against those who argued Britain would be poorer and more insular. Among the many divides set into relief by the Brexit result was the differing attitudes to the same forces of globalisation that created Britain’s booming coffee market. Once the results were dissected, there was a divide between the confident, internationalist capital and discontented and insecure provinces. “There’s no doubt that we are better in than out as far as the coffee industry is concerned,” says Young. “The negatives are going to be there in the short term and even more profoundly in the long term.” Oblivious to the political headwinds of Brexit, Britons consumed some 1.7 billion cups of coffee in 2015, served to them from 18,000 outlets, a total that Allegra Strategies predicted would rise to 21,000 by the end of this decade. Young, the co-author of the London and New York Coffee Guides, founder of charitable UK Coffee Week, and the London, Amsterdam and New York Coffee festivals, is no longer so confident. “This is much more than an inconvenience, it’s going to be a structural adjustment,” he warns. The first sign of this adjustment came within hours of the markets absorbing Brexit. The UK currency, pounds sterling, plunged by more than 10 per cent against major currencies moving from a relatively stable US$1.50 to a new low of $1.30 – a rate that many analysts believe is at least 10 cents above its eventual floor. The short term factors that Young identified are not just an increase in the cost of labour but a new shortage in its supply. “The percentage of non-UK workers in coffee shops in cities in Britain is well over 50 per cent,” he says. “Brexit means higher wages, higher costs and potentially an end to the free flow of labour.” While none of these factors are exclusive to the coffee business, the downsides to Brexit are particularly acute, while the potential upsides of a cheaper currency, such as a boost to exports, are practically irrelevant. “The coffee industry isn’t export led, it’s import led,” says Young. Some analysts, hard at work looking for a silver lining, have suggested that a depreciation in sterling could boost tourism in the UK. Even this upside would need to be balanced against the rising costs of machines to supply the UK’s glut of coffee bars, as well as any potential tariffs that arrive when the British government renegotiates its relationship with the single market. The average Briton consumes 2.8 kilograms of roasted coffee per year, compared with a European average of 4 kilograms and an EU high in Finland of more than 12 kilograms. In other words there is room for further growth outside of a total meltdown in the UK economy, an outcome that few observers expect. But there are some traceable effects that can already be seen: the price of green coffee in sterling terms has risen, so this is likely to lead to an increase in roasted coffee prices over time. However, given the percentage of the final price represented by the green coffee price and the underlying volatility of green coffee prices this may not mean much. “I do not foresee that this increase in price will be sufficient to have any significant negative impact on coffee consumption,” says a green coffee trader, who preferred not to be named. While the British are nowhere near the biggest consumers of coffee, their capital is one of the continent’s two main global coffee trading hubs – the other being Switzerland’s Geneva (which is not an EU member state). The same trader does not believe that Brexit will break the current trend which is for companies to leave Geneva and move to London: “The cost of a London-based trading company is significantly cheaper than Geneva, and the corporate tax regimes are increasingly aligning.” Some potential hiccups remain, especially while the meaning of Brexit, or the terms of the divorce, is still being negotiated. There may be some issues in ability to import organic coffee into Europe through the UK for free circulation within the EU, but this will depend on the outcome of exit negotiations with Brussels. Some traders even anticipate that any new restrictions on European workers may be compensated by easier employment terms for Indians or Chinese citizens. But there are few signs that the new British government, led by the tough-talking former Home Office Minister Theresa May, is planning to encourage any increase in immigration. “There those who are pessimistic, and some who are optimistic,” says Philip Schluter, an African green coffee expert and founder of the SCAE. “It all depends on your view of a post-Brexit Europe.”
More than three months after the referendum, the terms of Britain’s divorce settlement with the EU remain unclear. Young remains adamant that Britain “putting up walls that separate it from its main trading partner” cannot be good for the coffee business. “The disaster scenario is that this is the end of the Britain we know,” says the Chief Executive of Allegra. “If it’s a return to nationalism in the UK and there’s definitely a move towards a more nationalistic outlook, we don’t believe it will be good for the UK coffee industry. We preferred it open-minded and free-flowing.” The prospect of Brexit and its potential impact on the coffee business has stirred memories of the interwoven history of coffee and internationalism in London.
Coffee’s arrival in 17th-century London, first as a medicine and then according to Ottoman tradition as a social drink, was intricately connected to the city’s development as an outward-looking international trading hub. Coffee houses, nicknamed “penny universities” in London as the cost of the bitter brew usually included an education for patrons on everything from commerce to philosophy, were the driving force behind Britain’s mercantile expansion. When the London newspaper Tatler was founded in 1709, it used the names of renowned coffee-houses to categorise its articles into different subject areas. Among the most frequented of these was Edward Lloyd’s, a meeting place for the shipping business, awash with maritime news and host to auctions of ships and their cargo. Lloyd developed his own handwritten maritime business newsletter and his patrons eventually came to rent booths in his coffee house. By the 1730s he had created a journal better known today as Lloyd’s List. It is no surprise that some observers feel the fate of Britain’s coffee business might be tied to London’s status as a global city. And that this status is at least in question in the wake of a referendum result that suggested many Britons actively want a return to a less open and integrated past. “The longer term damage of Brexit could be that it drives away the internationalists, the creative professionals,” says a concerned Young. “It’s very hard to quantify these soft issues but it would be a major change from the open-minded philosophy of the UK and might affect the creative community there.” In the short term he is clear that the UK market is “robust” in or out of the EU. Some 60 per cent of Londoners voted to remain in the EU, while of course many hundreds of thousands of the city’s foreign residents had no right to participate. But the capital will have to follow the will of the rest of the country even if that means a retreat from the overt internationalism of recent decades. Even the pessimists see little reason for panic.
“What we’re expecting is not a meltdown but an ordered change rather than dramatic fluctuation,” says Young. GCR

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