Since its founding in 1998, the team at Innocent Drinks (“Innocent”), a UK smoothie and fruit drink company, can count amongst its successes, revenue growth of approximately 45% year on year to reach £303 million in 20161, growing to control a 72% share of the UK smoothie market2, expansion to 15 foreign markets and lastly, and perhaps most surprisingly, the successful use of the outrageously ordinary comic sans font in its product branding since inception. However, the company, like many other UK companies now has to deal with the looming threat and uncertain consequences of ‘Brexit’ i.e. the UK’s exit from the European Union (and its associated trading bloc).
Innocent makes and distributes its smoothies and fruit drinks in 14 European markets and Australia; its supply chain extends across the globe3. The fruit is imported into the UK, made into smoothies and drinks, and then shipped to customer markets. Innocent has committed to sourcing its fruit from areas in the world that are best suited (i.e. require very little input) for that particular variety to grow. This is part of the company’s efforts to ensure sustainability. Over half of its fruit comes from Europe. Tropical fruits like mangoes and bananas come from farther afield (e.g. Brazil and India). Innocent tends not to source fruit in the UK because fruit grown locally is usually grown for fresh market and is, therefore, more expensive. This fruit also has a different taste profile and is not suited for smoothie making4.
The company has not been successful in addressing the impacts of currency fluctuations on its business operations. Approximately sixty percent of its cost price is denominated in euros and dollars5, therefore any fall in the value of the pound, as was the case in 2008 and 2009, and most recently in 2016, leads to a large impact on its operations. Innocent, as part of its sustainability initiative, also gives long-term contracts to its suppliers, which means that if the pound’s value declines for a long time, it is locked into loss-making contracts until the trend reverses.
In April 2009, Coca-Cola acquired an 18% stake in Innocent6. Four years later, in 2013, Coca-Cola increased its stake to over 90%. Innocent might now have the advantage of Coca-Cola’s sophisticated hedging mechanisms to guard against some of the impacts of currency fluctuations on the costs of sourcing its raw materials. However, one other likely effect of Brexit that both Innocent and Coca-Cola will face is the introduction of tariffs or non-tariff barriers on trade between the EU and the UK in both directions. This will further raise the cost of raw materials from Europe and increase the costs of exporting smoothies out of the UK.
In the short and medium term, Innocent can do very little to address the issue Brexit raises for its business, as it is unclear what the terms of a deal between the UK and the EU will be and therefore unclear how the company’s business will be affected. Additionally, Innocent is locked into long-term contracts with suppliers, so the company will not be able to change its supply mechanics easily lest it incurs some cost of contract renegotiation.
I suggest the company take further advantage of the bargaining power its parent company has to lobby politicians for a favourable outcome from the Brexit negotiations. The Coca-Cola Company has significant operations in the UK (six manufacturing sites which employ four thousand people7) and it is already using its bargaining power to lobby elected representatives in both the EU and the UK8. Innocent might also consider piloting small-scale ‘pop-up’ production facilities in the EU, which could be dissolved, should Brexit negotiations prove favourable. Lastly, the company should consider experimenting with new product formulations using fruits sourced within the UK to test whether such formulations have any market potential. This process might also enable Innocent to begin to build relationships with fruit growers in the UK who would be useful allies to have should unfavourable Brexit terms come to pass.
Over the next two years, the UK will negotiate the terms of Brexit with the EU. The outcome of these negotiations, favourable or not, will have clear and measurable monetary and economic impacts on UK businesses. However, can we measure the extent of the impact the intervening period of uncertainty will have on them in a similar fashion? If so, how?
- “My First Million: Richard Reed of Innocent Drinks” https://www.ft.com/content/e13793d4-a0ba-11e0-b14e-00144feabdc0
- BMI Research: United Kingdom Food and Drink Report. Market Overview – Drink Q1 2018 (Accessed 11/15/17 via Factiva)
- Innocent Drinks Website www.innocentdrinks.co.uk (Accessed 11/15/17)
- Innocent Drinks Website, Sustainability FAQs http://www.innocentdrinks.co.uk/us/sustainability/faqs#faq9 (Accessed 11/15/17)
- “Overcoming forecast uncertainty and volatility at Innocent Drinks” http://insight.proximagroup.com/overcoming-forecast-uncertainty-and-volatility-at-innocent-drinks
- “Coca-Cola takes full control of Innocent” https://www.theguardian.com/business/2013/feb/22/coca-cola-full-control-innocent
- Coca-Cola Website, Our Business http://www.coca-cola.co.uk/about-us/our-business (Accessed 11/15/17)
- “Coca-Cola issues jobs warning over Brexit” https://www.thetimes.co.uk/article/coca-cola-issues-jobs-warning-over-brexit-rglqhc26z