The key ingredients of a fry-up could cost nearly 13% more if WTO rules come into effect. Orange juice and olive oil are among the items noting the biggest increase in customs tariff. Retailers need to understand their supply chains at a granular level
If the UK were to leave the EU without a trade deal or transitional agreement, British consumers could incur price increases of more than four times the rate of inflation* (12.8%) for the key ingredients of a fry-up, according to KPMG UK.
It was estimated that the total cost of a typical family-sized shopping list for the key ingredients for a fry-up – including items ranging from bacon and sausages to olive oil and brown sauce – would increase from £23.59 to £26.61 – an increase of 12.8 %.
The UK would likely default to the World Trade Organisation’s (WTO) customs rules, if the UK were to leave the EU with no transitional agreement or trade deal on or before March 2019, and imported goods – particularly food and drink items – would be among those hardest hit by increased tariffs.
Bob Jones, Director and Brexit Customs and Indirect Tax Lead at KPMG UK, said:
“WTO tariffs could have a significant impact on both consumers and retailers alike – totting up consumer price tags and further squeezing retail margins. It’s important to remember that our analysis does not even reflect the steep costs consumers and retailers are already facing as a result of the pound sterling’s devaluation or the costs of any new non-tariff barriers.
“If the UK leaves the EU without a trade deal or transitional agreement, we can expect both higher prices and a huge spike in red tape at the borders. As such, the top priority for businesses is to fully understand their own supply chains: the volumes and values of the goods they ship back and forth and which countries they’re importing to and from. Only then can businesses obtain a degree of insight into their own operations and exposure to risk.”
To illustrate the impact of defaulting to WTO rules, KPMG UK analysed the cost of mid-range ingredients of a fry-up from a leading UK supermarket, and applied the current EU external customs tariffs to each, whilst also taking into account the grocer’s mark-up.
Pure orange juice (from Spain but bottled in Ireland) and olive oil (from Italy and Spain) were among the items set to incur the biggest increase, at 34% and 30% respectively.
Milk, free range eggs and sliced white bread were all sourced from the UK in the analysis, however the other items were intentionally imported for demonstrative purposes.
Paul Martin, UK Head of Retail at KPMG, added:
“Most retailers underestimate the potential cost of customs tariffs, however not only do they need to understand their immediate supply chain better, but the supply chains of their supplier’s supplier too, as all will have an impact.
“The British consumer has become accustomed to seasonal produce all year round and has binged on a diet of discounts for some time. With that in mind, our analysis, which focussing mainly on imported goods, isn’t too unrealistic.
“Shoppers could be forgiven for overlooking the significant impact customs will have on the prices they pay at the till. However, against a backdrop of increasingly squeezed margins, it is unlikely retailers will be able to hold the flood on higher costs indefinitely.”
Notes to editor:
You can find more information on customs tariff exposure and a more detailed Q&A with Bob Jones and Paul Martin here.
For further information please contact:
Simon Wilson, KPMG Corporate Communications
T: +44 (0) 207 311 6651
M: +44 (0) 778 537 3397
KPMG Press office
Tel: +44 (0) 207 694 8773
• In order to demonstrate the potential impact of defaulting to WTO rules on consumer pricing, KPMG UK analysed the impact of the tariffs on key ingredients of the Great British fry-up (as sourced from a leading UK supermarket).
• For illustrative purposes, the majority of ingredients were sourced from overseas, however British equivalents are of course available. The prices shown are based on mid-range items of a UK grocer and are purchased in typical quantities (as at 30 May 2017).
• We have applied the tariff to only 30% of the retail value of the item, with the remaining 70% intended to take account of costs such as transport, labour, warehousing and margin (all of which are incurred in the UK and therefore would not be subject to tariffs).
*The comparison to the rate of inflation refers to Consumer Price Inflation (CPI) figures sourced in May 2017.
Paul Martin, UK Head of Retail, provides the following points of consideration for retailers:
1) Make sure you have a granular understanding of where your products come from and how those products reach you.
2) Consider joining forces with other retailers and suppliers in order to deliver collaborative solutions to the challenges that may arise from customs changes.
3) Consider the possibility of sourcing more products locally.
4) Explore both pricing and supply chain options fully.
5) Always consider the customer’s perspective.
Table of ingredients:
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 13,500 partners and staff. The UK firm recorded a revenue of £2.07 billion in the year ended 30 September 2016. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 189,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.