Shippers alarmed at sliding sterling

Shippers are reporting a strong opening two months of the year in London’s on-trade, but in the provinces and the off-trade in general gloom abounds – especially at the lower end of the price point spectrum.

While there is a price war raging among supermarket groups and sales growth within the “big four” is at its lowest level for two years, according to Kantar till roll data, the real cause of gloom among importers and their suppliers is the slumping value of sterling and the prospect of excise duty and VAT rises.

Britain is stupid – being one of the countries, along with Spain, Turkey, UK, Portugal, Ireland and Dubai, whose debts are so large that investors have decided that along with Greece their economies are too frail to make their currencies worth holding.

The problem for the UK, however, is that Spain, Portugal, Greece and Ireland are in the eurozone and thus propped up by the stronger economies such as Germany; Dubai is being supported by the other (dollar funded) oil emirates and Turkey is a sideshow. Which leaves sterling exposed.

At the start of the year the markets were grudgingly willing to save judgement until after the forthcoming general election and then assess the new government’s policies for reducing the deficit. The potential for a “hung” Parliament unable to take decisive action has changed that.

On Monday the pound dropped below $1.50 for the first time in 10 months and fell to its lowest level against the euro this year. Analysts are openly talking of “the beginnings of sterling’s collapse” and predicting parity against the euro and a rate of $1.20 against the greenback later this year.

For wine and spirit importers and their foreign suppliers it is a further pressure to confront; for UK producers, especially of scotch, it is a source of opportunity.

At $1.50 against the dollar, sterling is where it was in the autumn of 2008, while at €1.10 against the euro it is bumping along at the bottom of a range experienced over the past year or so. But Britain’s currency is at a three-year low against the Australian dollar and has never been weaker against the New Zealand dollar. Against the rand it is at a three-year nadir.  

The prospect of further declines alarms many shippers. Most agree a working exchange rate with their suppliers at the beginning of the year and so will have to bear the pain if sterling slides. Supermarkets and other big retailers will not help to meet the shortfall. Nor will they be sympathetic if taxes on alcohol rise in the Budget later this month.

Experience shows that the Treasury regards alcohol as a soft touch. Darling’s existing escalator dictates that duty rates will go up by 5% (the rate of inflation plus two percentage points), and that is before the chancellor considers a higher general rate of VAT and any potential “luxury” rates on finer wines and Champagne. Nor does the Treasury understand that rarely are duty increases passed on in full to the consumer; there is always a squeeze in the middle.

So for the drinks sector, this month’s budget plus the possibility of a Tory version in June offers the prospect of a triple whammy – two bouts of extra duties (a new administration is likely to reverse any duties already announced) plus an exchange rate hit.

The only upside would be the currency markets deciding that overall Britain is getting its debt under control and sterling strengthening as a result. However, the sheer volume of short bets against the pound point the other way.

Finance on Friday, 05.03.2010