For Scottish shortbread maker, sterling crunch pushes up Brexit costs

By Elisabeth O'Leary

HUNTLY, Scotland (Reuters) - Sterling's plunge since Britain voted to leave the European Union has pushed up costs so much for Scottish shortbread maker Bill Dean that he may have to lift prices to balance the books.

Already Dean, who employs 150 people at his factory in the rural northeastern county of Aberdeenshire, has a 3 million pound ($3.7 million) investment plan on hold and says he may eventually have to shrink his business - and his workforce - if costs keep rising.

Dean's family business, born in his mother's kitchen in the 1970s, imports the chief ingredients of the rich traditional Scottish biscuit: butter, flour and sugar. However, only eight percent of his sales are abroad, so for him the weak pound brings few benefits and a lot of headaches.

Sterling's 17 percent dive against both the dollar and euro since Britons opted for "Brexit" on June 23 - signaling a break with more than 40 years of stable trade within Europe - has come on top of another problem that is eroding profitability for the factory in his home town of Huntly.

Prices for butter - and shortbread needs a lot of it - have jumped 75 percent since the referendum, inflated not only by the weak pound but also by volatile prices of its raw material, milk, on European commodity markets.

"After a while with higher costs and hemorrhaging cash to keep up, your margin gets eaten away and your (profit) has taken a pasting," Dean, who turns 52 on Monday, told Reuters.

"No business is capable of absorbing those kind of price increases for any length of time," Dean said at his factory. "We'd be looking at a reduced business model with fewer people if this cost trend continues in the coming years."

Brexit may well push up prices for British shoppers, and it has already cast doubt on job prospects. At the other end of the corporate scale from Dean, Japanese giant Nissan has said it may scrap potential investment in Britain's biggest car plant unless the government compensates it for any new tax barriers erected post-Brexit by the EU.

However, some British-based businesses will benefit from the weaker pound, which makes their exports more competitive - as long as they still have tariff-free access to the single European market.

The FTSE 100 stock index, which comprises the biggest London-listed corporations, has soared 20 percent since referendum day to near record levels. Overall, these groups earn the bulk of their money abroad, so the currency slide raises the profits that they report in sterling.

"MOVING SITUATION"

Dean, whose business began when his mother's shortbread recipe became a favorite with his father's bagpipe band, has no such buffer due to his low level of exports.

Scots voted to stay in the EU but were outweighed by a strong "leave" result in England and Wales, so Dean has to deal with the uncertainties of Brexit. That has meant freezing the three million pound expansion plan to make a bigger variety of cakes and biscuits, including gluten-free products for customers who are intolerant to ingredients such as wheat.

"It's a big investment for us but it's come slap bang in the middle of a moving situation which we have no control over, so it's not a comfortable place to be," the former metalworker said.

Even for a business that has doubled annual turnover to 8.5 million pounds in the past 10 years, the combination of higher costs and continued uncertainty is damaging.

"We've not got such a big cushion to ride it out with both of those barrels coming at us," he said, adding that transport costs have also risen three to four percent.

DOUBTS FOR EU WORKERS

A short distance away in the town of Aberlour, a larger family-owned producer of shortbread, cakes and traditional savory oatcakes exports about 40 percent of sales, which reached 137 million pounds in 2013, helping it to withstand the hit from weaker sterling.

But, like his smaller rival, proprietor Jim Walker has an additional worry: keeping his large number of foreign employees. With sterling at a five-year low against the euro, some EU workers might find work paid in sterling less attractive and this combines with doubts over whether they can stay in Britain after Brexit.

Food producers employ about 110,000 foreign EU citizens in Britain, about 30 percent of the industry's total, but Prime Minister Theresa May has promised to impose controls on immigration from the bloc after Britain leaves.

In this rural outpost, a four-hour drive from the Scottish capital of Edinburgh and 1,000 km (600 miles) north of London, employees are hard to find and costly to train. "Foreign nationals may well drift home if there is a persistent negative sentiment in this country," Walker told Reuters.

"(They) make up about 300 or 400 of our 1,700 staff and they have been a real asset to the company," said Walker, the third generation of his family to run the firm. "Many food manufacturers in this part of the world in particular, which has a small population, are very dependent on them."

Businesses are also worried by recent comments from May which have convinced some investors that by limiting immigration, Britain could end up without preferential access to the single European market in which goods and services move freely.

Packed in red-tartan boxes, many of Walkers' biscuits and cakes are high-margin gift foods that sell well abroad. For that reason he describes single market access as fundamental and hopes "common sense" will prevail.

"Britain is a much bigger customer for the rest of Europe than it is a supplier so (single market membership) is as much in their interest as much as it is in ours."

($1 = 0.8045 pounds)

(Editing by Guy Faulconbridge and David Stamp)

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