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Cost of Brexit Will Fall on UK Consumers

August 2016
 
by Peter Mitham
 
 
British Pub
 
The United Kingdom is a popular export market for North American wineries, though consumers may reject the idea of paying more for wine from California and other regions after currency fluctuations.

San Rafael, Calif.—The fallout from what’s known as Brexit—Britain’s exit from the economic union of 28 European countries—has unleashed the greatest upheaval since Greece threatened to default on its obligations to the EU. The market where exchange rates and product prices will bite most is the United Kingdom, where the pound plummeted versus the dollar on June 24.

The European Union traditionally has been the largest export market for U.S. wines. According to the Wine Institute, the 28 member countries imported $622 million worth of California wine in 2015. Wine drinkers in the United Kingdom consumed 366.33 million gallons of wine in 2014, according to Trade Data and Analysis.

“The people in what is effectively a small island country have to wake to the notion that their pound sterling doesn’t go as far in their purchasing, but that’s what they voted for,” said Rob McMillan, executive vice president of Silicon Valley Bank and founder of its wine division.

According to Al Portney, vice president of international sales with Ste. Michelle Wine Estates, British wine drinkers are not going to like what imported wines will cost.

“Just based on current exchange rates, the cost of goods is going to go up on average 30% to 35%, because if the exchange rate drops 15% to 20%, the taxation that’s built into the process—when you multiply that on top of the higher cost of goods—a product that costs 10 pounds on the shelf today is going to cost close to 14 or 15 pounds when you roll it all out. And consumers will not accept that kind of out-of-pocket expense,” Portney said. “They’ll find alternatives.”

It’s also bad news for producers and distributors such as Ste. Michelle, based in Woodinville, Wash.

We “have to cut margins to try and mitigate some of the loss in the exchange rate, and prices will go up,” Portney said. “Profits will decrease and prices will go up. That’s not a very good formula.”

The good news is that equilibrium will return to the market. Despite the pain that accompanies the divorce negotiations, Portney is optimistic that the UK, a key market for the U.S., and Europe will reward those vintners that keep the wine flowing.

“In the short-term we take a haircut, but in the long term we will build market and gain share and hopefully the good times will be ahead of us,” Portney said. “The cost of trying to establish yourself with the right importers, getting the right listings in the hotels and restaurants; it takes years to build those relationships up. Yes, it’s costly to weather the storm, but it’s far more costly to retreat then try to re-enter at a later date.”

 
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