While many UK companies are scrambling to prepare for the consequences of Brexit, a few have benefitted. This list includes Diageo, the spirits behemoth that manufactures popular beverages including Guinness, Johnnie Walker, Smirnoff, and Bailey’s. Because the bulk of the company’s revenue is registered in dollars and has debt issued in GBP, the decline of the pound sterling has bolstered its FY 2017 sales by £1.4B[i]. In addition, current WTO rules will keep Diageo’s trade with the rest of the EU tariff-free, regardless of how Brexit negotiations play out[ii]. Nonetheless, trouble may be brewing for the company.
Diageo currently brews Guinness at a plant in Dublin, pumps the beer into tanker trucks, and then transports it 90 miles north to Belfast in Northern Island (part of the UK), where it is bottled and canned. The product is then shipped back down to Dublin for distribution[iii]. While the tankers currently pass back and forth across the border freely, experts generally concur that when the UK formally leaves the EU in 2019 there will be some border controls put into place[iv]. Diageo makes 13,000 beer-production border crossings between Ireland and Northern Ireland a year.[v] The company estimates that delays of 30-60 minutes at these border crossings would add 1.3M euros to the cost of beer production in Ireland[vi]. This could add to Diageo’s existing woes as the company struggles with organic growth and has seen Guinness earnings stagnate over the past several years[vii]. Furthermore, Diageo currently benefits from free trade agreements between the EU and other countries, most notably South Korea and South Africa. The company stands to lose if the UK is unable to negotiate independent deals with these countries.
Diageo has not publicly gone into depth on its plan to mitigate Brexit-related risks; its annual report simply states that the company is “develop[ing] its risk planning work around Brexit.[viii]” The company is also in close discussion with UK policymakers as Brexit negotiations continue; an industry publication reported earlier this year that Diageo’s CEO boasted of receiving “tremendous support” from Theresa May’s government on Brexit and other matters[ix].
Diageo has multiple options to mitigate these risks. In the short term, the company should continue its discussions with British and Irish governments to push for as soft a border as possible between Ireland and Northern Ireland, ensure that import costs of raw materials remains low, and push for trade agreements with other countries to reduce tariffs. Diageo should be in a favorable position for influence as it is the 7th largest company by market cap on the FTSE stock exchange and employs 5,000 people throughout the UK[x]. However, Brexit and trade negotiations are complex affairs and Diageo will naturally have minimal influence.
In the medium term, the company could pass any costs from Brexit onto consumers by raising the price of Guinness. A large price increase would likely be counterproductive, as large beer makers face increasing competition from craft breweries and Guinness has struggled with growth for the past several years. However, a minimal price increase of 0.5% on its European beer sales could potentially recover the additional transport costs[xi].
Another obvious mitigating step would be to close the Belfast, Northern Ireland bottling and canning factory and move that function to Ireland. However, there are political and other factors that make this option less desirable for Diageo. The Belfast factory has been operating for over 30 years and is a point of pride for the area[xii]. There was recently an outcry after Diageo announced it was laying off 100 workers in Scotland; the company announced that these layoffs were due to the shuttering of Diageo’s wine division, but a local union created negative press for the company and blamed the move on Brexit[xiii]. Further reducing its UK workforce by shutting down the Belfast plant could strain relationships with the UK government and damage its reputation in the country. In light of the costs associated with moving the bottling facility and the importance of maintaining a positive relationship with the UK government, Guinness would be better off maintaining production as is in the medium term. Diageo should re-evaluate in several years when the true costs of Brexit become clearer.
How should Diageo balance the tradeoffs between the reputational damage associated with shutting down a factory and operational efficiencies, particularly when the company’s relationship with the government is critical as new trade terms are negotiated? And what are the best ways in which companies can work with governments to protect their interests in times of political uncertainty?
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[i] Raisinghani, Vishesh. 2017. “Diageo: Does Brexit Make This Multinational Spirits Company Attractive?”. Seeking Alpha. https://seekingalpha.com/article/3984201-diageo-brexit-make-multinational-spirits-company-attractive. Accessed November 2017
[ii] “We Take Brexit In Our Stride, Says Diageo CEO”. 2017. Thespiritsbusiness.Com. https://www.thespiritsbusiness.com/2017/07/we-take-brexit-in-our-stride-says-diageo-ceo/. Accessed November 2017
[iii] Doyle, More. 2017. “Trouble Is Brewing For Guinness After Brexit”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-04-07/guinness-exposes-debate-over-a-hard-border-with-ireland-after-brexit.
[iv] “Border Tensions Between Ireland And Northern Ireland Could Rise As U.K. Leaves EU”. 2017. NPR.Org. https://www.npr.org/2017/11/08/562903218/border-tensions-between-ireland-and-northern-ireland-could-rise-as-u-k-leaves-e-. Accessed November 2017.
[v] Doyle, More. 2017. “Trouble Is Brewing For Guinness After Brexit”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-04-07/guinness-exposes-debate-over-a-hard-border-with-ireland-after-brexit.
[vi] “Guinness May Be Good For You But Borders Are Bad, Says Ireland Drinks Chief”. 2017. The Guardian. https://www.theguardian.com/world/2016/oct/20/guinness-may-be-good-for-you-but-borders-are-bad-says-ireland-drinks-chief?CMP=twt_gu. Accessed November 2017
[vii] Transcripts, SA. 2017. “Diageo’s (DEO) CEO Ivan Menezes On Interim 2017 Results – Earnings Call Transcript”. Seeking Alpha. https://seekingalpha.com/article/4039595-diageos-deo-ceo-ivan-menezes-interim-2017-results-earnings-call-transcript?part=single. Accessed November 2017
[viii] Diageo, 2017 Annual Report p. 19
[ix] “We Take Brexit In Our Stride, Says Diageo CEO”. 2017. Thespiritsbusiness.Com. https://www.thespiritsbusiness.com/2017/07/we-take-brexit-in-our-stride-says-diageo-ceo/. Accessed November 2017.
[x] News, PA. 2017. “Third Of Top Companies Paying Living Wage, As Diageo Commits To Higher Rate”. Uk.Finance.Yahoo.Com. https://uk.finance.yahoo.com/news/third-top-companies-paying-living-080001142.html. Accessed November 2017.
[xi] Calculated based on numbers from Diageo 2017 Annual Report
[xii] “Guinness-Maker Diageo Marks ‘Record Year’ In East Belfast”. 2017. The Irish News. http://www.irishnews.com/business/2015/12/30/news/guinness-maker-diageo-marks-record-year-in-east-belfast-366313/. Accessed November 2017.
[xiii] Rodionova, Zlata. 2017. “Diageo ‘Is Cutting More Than 100 Jobs Because Of Brexit'”. The Independent. http://www.independent.co.uk/news/business/news/diageo-brexit-cut-jobs-scotland-gmb-trade-union-alcoholic-drinks-company-scottish-employees-a7693511.html.