How Will Brexit Impact the Tobacco Product Wholesaling Industry?
What Is Brexit?
Brexit is an abbreviation for “British exit,” referring to the U.K.’s decision in a June 23, 2016 referendum to leave the European Union (EU). The vote’s result defied expectations and roiled global markets, causing the British pound to fall to its lowest level against the dollar in 30 years. Former Prime Minister David Cameron, who called the referendum and campaigned for Britain to remain in the EU, announced his resignation the following day. Theresa May, who replaced Cameron as leader of the Conservative Party and prime minister, stepped down as party leader voluntarily on June 7, 2019, after facing severe pressure to resign and failing three times to get the deal she negotiated with the EU approved by the House of Commons. The following month, Boris Johnson, a former Mayor of London, foreign minister, and editor of The Spectator newspaper was elected prime minister.
Johnson, a hardline Brexit supporter, campaigned on a platform to leave the EU by the October deadline “do or die” and said he is prepared to leave the EU without a deal. British and EU negotiators agreed on a new divorce deal on Oct. 17. The main difference from May’s deal is the Irish backstop clause has been replaced with a new arrangement. The revised protocol on Ireland and Northern Ireland is available to read here. In a stunning victory, the Conservative Party won 364 of the 650 seats in the House of Commons in Britain’s third general election in less than five years.
Brexit is slated to take place before the Jan. 31, 2020 deadline. Britain was expected to leave the EU by Oct. 31, 2019, but the U.K. Parliament voted to force the government to seek an extension to the deadline and also delayed a vote on the new deal. The government has so far extended the negotiating period three times to avoid leaving without ratifying a deal with the EU or a “hard Brexit.”
Following the EU referendum on 23 June 2016, IBISWorld has analyzed the potential effects of the UK’s exit on more than 400 industries in our library. On 29 March 2017, Article 50 was triggered, beginning the process of leaving the European Union. On 14 March 2019, MPs voted to extend Article 50. Following an initial extension to 12 April, a further extension to 31 October was agreed after MPs voted against leaving the European Union without a deal. Although the relationship between the United Kingdom and the European Union following this date remains unclear, some industries have already been affected by the result of the EU referendum.
– Almost all tobacco products consumed in the United Kingdom in 2019-20 will be manufactured outside the United Kingdom after the last major manufacturer exited the UK market. This is expected to increase the industry’s dependence on imports.
– The weak pound following the EU referendum has increased import costs and weighed on industry margins.
– Depending on the agreements reached with the European Union, the United Kingdom could be charged tariffs on its imports, further increasing imports.
Upstream conditions
The largest upstream domestic tobacco product manufacturer, Gallaher, has attempted to limit production costs by moving its operations to Eastern Europe, where regulations are less restrictive. The majority of the move had been completed by October 2017. As a result of the offshoring of tobacco product manufacturing, the industry has become largely dependent on imports, which in turn has left the industry exposed to currency risks and exchange-rate fluctuations. The depreciation of the pound following the EU referendum is expected to have weighed on wholesalers’ profit margins, with higher import costs making it difficult for operators to pass the full extent of cost increases on to retailers.
Tobacco tariffs
The United Kingdom relies heavily on imports of tobacco products to meet domestic demand. The majority of these originate from the European Union. Therefore, the industry benefits considerably from being in the European Union. Depending on the agreements reached once the United Kingdom leaves the European Union, it could be charged tariffs on its imports. Following Gallaher’s full exit from the United Kingdom, industry operators have been left with little choice but to pay the premium of importing all of their products. Barriers to trade would compound the pressure on margins caused by the depreciation of the pound and would prove problematic to industry operators over the long term. However, the degree to which the UK’s exit from the European Union will affect tobacco wholesalers over the next five years remains unclear.
The Tobacco Product Wholesaling industry has long been threatened by declining tobacco consumption. Increased awareness of the health risks associated with smoking, such as cardiovascular disease and cancer, has led to falling levels of tobacco consumption among the UK population. In line with this, increasing levels of health consciousness have intensified external competition from alternative products such as e-cigarettes and vapes. Increasingly stringent legislation, such as laws prohibiting the promotion and display of tobacco products and packaging requirements, alongside the imposition of rising taxes and duties on tobacco sales has contributed to the decline in smoking rates.
As the second-largest tobacco company in the world, British American tobacco is headquartered in London. It is unclear whether the formal Brexit will have a certain impact on its global business.
In general, Brexit has advantages and disadvantages for the tobacco industry in the UK and even the world. At present, all kinds of analysis are speculation, what impact will Brexit bring to the tobacco industry? Let’s pay attention to it!
