Referendum

Unless you found yourself in a drunken stupor all of last week, you likely spent much of the week hearing, reading and wondering about Brexit – or the referendum put before British voters on whether to cause their country to exit the European Union.  By the slimmest of margins (roughly 52% to 48%), Britons voted to leave the EU.  And shortly after the polls closed, Google analytics showed that Britons in large numbers began typing in queries such as “what is the European Union” and “move to Gibraltar”.  These are interesting times.

I too spent some time on Friday pondering Brexit (well, Brexit and previous day’s passing of Ralph Stanley) while enjoying a dram of what I believe to be Islay’s best followed by some appropriately Appalachian corn whiskey of questionable parentage.  And as I sat and pondered (and felt the effects of the whiskey on my frailing hand), I began to wonder – what impact (if any) will Brexit have on the spirits industry?  This is, after all, a bit of a big deal – given that sales into the EU of single-malt Scotch whisky alone constituted almost £366 million in 2015.

In the discussion leading up to the Brexit vote, British Prime Minister David Cameron suggested that leaving the EU would be a blow to the British spirits industry.  While their country was part of the EU, British spirits producers could sell their products throughout EU member states without application of tariffs and with the benefit of a uniform set of regulatory requirements.  Outside of the EU, these same producers may (or may not) be subject to new tariffs which make their products more expensive to European consumers. However, it seems somewhat unlikely that the producers will be subject to new regulatory requirements – or that they will escape from existing requirements for selling onto the continent.  Rather, the EU and member governments will likely continue to require that British producers toe the line of EU regulations.

But what about the currency?  That’s where things begin to get particularly interesting.

Upon the announcement of the results of the referendum, the value of the British Pound relative to the US Dollar fell to a 31-year low (an 11.5% decline from the day prior to the referendum).  Is that a good thing?  Well it depends a bit on your perspective.  If you’ve got the perspective of a 40-something fellow sitting on his couch in the U.S. and enjoying a bit of Laphroaig, then it may not be too bad.  From a purely hypothetical standpoint, that peaty  concoction just got quite a bit cheaper.

But if you’re blessed (or perhaps cursed) with a somewhat broader perspective, you may be less excited about this change.  Sure, the weaker Pound means that our imports of their whisky should be less expensive, but it also means that their imports of our whiskey should be more expensive.  For small producers in the U.S. who are selling into the UK through purchase and sale agreements denominated in U.S. dollars, our hooch just got more expensive for UK buyers.   What does that mean?  In all likelihood it means that bourbon aficionados in London will buy less of our wares.  Could that quell the ongoing bourbon renaissance?  Perhaps not, but as the UK is the fifth largest economy in the world the currency hit (if long-lived) should have some effect on overall sales.

So where does this all leave us?   Uncertainty.  After all, it is the uncertainty of the Brexit vote itself that caused markets to swoon.  That uncertainty continues today (as do the challenges in the market).  And to compound things, it is unclear when the uncertainty will begin to abate.  For example, we don’t yet know when Britain will actually leave the EU.  Similarly, it isn’t clear whether Scotland will use the Brexit vote as a springboard to reconsider its independence from the United Kingdom.  And of course it isn’t certain whether and when other EU member states will follow their own path to EU departure (e.g., “Grexit”) – though it certainly appears that such a movement is underway.

All this uncertainty is enough to make a fellow want a drink.