British Companies Tested By Fallout From Ukraine War

LEEDS, England – Europe has been hit hard by the aftermath of the war in Ukraine, putting its businesses on the front lines of an economic war of attrition between the West and Russia playing out alongside the real war in Ukraine.

Britain is suffering more than other major countries in Europe, economists say. Inflation is in the double digits, higher than any other industrialized country in the Group of Seven except Italy; Gross domestic product shrank 0.2% year-on-year in the third quarter, putting the UK on course for a likely recession. Other major economies like Germany and France are increasingly looking like they can avoid one. The UK economy is widely forecast to contract in 2023, underperforming every G-20 economy except Russia, says the Organization for Economic Co-operation and Development.

“We are in incredibly difficult times,” said John Kelly, founder of Kirkstall brewery in Leeds, where at least one other beer maker has gone bust in recent weeks. “Consumer confidence is zero. We are facing skyrocketing costs and there is no way we can pass even 50% of them on to our customers.”

The sense of turmoil was heightened by a political crisis this fall, culminating in a short-lived run on financial markets that toppled the government and prompted lingering concerns from international investors. The UK has fought its way through three prime ministers in less than two months. More recently, unions across all sectors have initiated strikes this winter that are expected to be their worst in decades.

Kirkstall Brewery operates in the northern English city of Leeds and suffers from high energy costs.

Record high energy bills are eating away at disposable income. As a result, UK consumers are expected to spend a quarter less on Christmas than last year, according to data provider Kantar. That challenges retailers in their most important trading period.

Some well-known retailers have already closed in the last two months. Online furniture retailer Made.com collapsed less than a year after its IPO at a valuation of nearly $900 million. This has contributed to the parade of small British businesses – including pubs, corner shops and fish and chip shops – which have reaped record numbers this year.

Once the melting pot of the Industrial Revolution, the northern English cities of Leeds and Bradford offer a particularly vivid picture of the country’s economic plight. Many business owners who until recently had profit and growth in mind said they are now focused on day-to-day survival.

Leeds retailers have said the holiday shopping season has been bleak so far.

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Demand for jewelry, traditionally popular around the holiday season, has largely collapsed, said Charlotte Evans, fourth-generation owner of Shaw Jewelers. Prices have risen significantly, she said, driven by a doubling in the cost of materials, particularly precious metals, in recent months, putting off potential customers.

“There’s an economic downturn, so people aren’t thinking about buying jewelry,” Ms Shaw said. Demand for her work repairing and remodeling items is better, she said.

Sales at Bradford carpet maker Melrose Interiors are down 30% this year, prompting the company to make big changes, said managing director Andy Murphy. Melrose used to supply UK retailers with carpets and mats priced at around £30, the equivalent of $37. Now it has brought the average price down to nearly £10 by switching to simpler goods, Mr Murphy said, reflecting consumers’ current willingness to pay.

Andy Murphy, chief executive of carpet maker Melrose Interiors, whose sales are down 30% this year.

“Margins have eroded at an alarming rate; It was very painful but we have to stay positive,” said Mr. Murphy, who employs about 50 people.

Melrose has recently been buying less machine-made rugs from long-time suppliers in Belgium whose costs have skyrocketed, turning instead to low-cost competitors in Turkey. It has also expanded its in-house operation, which makes carpet from recycled carpet, Mr. Murphy said.

Mr Kelly founded his brewery in 2011 in the Kirkstall area of Leeds, where monks were brewing beer in the local abbey almost a millennium ago. Today he employs around 100 people in the brewery and six pubs in and around the city. He has not fired anyone but plans for additional pubs and expanded brewery capacity have been abandoned. The company is now in “survival mode,” he said.

Additional red tape imposed on British companies after the UK’s exit from the European Union had already destroyed Kirkstall’s European export business, Mr Kelly said. But this year seemed ripe for domestic expansion until the UK economy – and its politics – spiraled out of control over the course of 2022, he said.

Electricity bills at the brewery, housed in a former milk distribution depot, have tripled recently, Mr Kelly said. “We’re very concerned about energy costs: we spend a lot of money to heat up liquid and then cool it down again,” he said.

Kirkstall Brewery in Leeds, England, is facing rising costs that cannot be passed on to customers, says founder John Kelly.

Barley and hop prices have also risen. Barley rose 60% once overnight this year and hops, which Kirkstall imports from the US, rose in value as the British pound weakened against the dollar during the political upheaval in the autumn.

Another cost increase was carbon dioxide, which is used to flush beer through the brewery’s pipes. The cost of carbon dioxide quadrupled earlier this year, Mr Kelly said, but has multiplied since then, making it difficult to assess whether it would be worth investing in an alternative nitrogen system. “There’s just not enough security to make decisions,” he said.

Kirkstall charges around £5 a pint in its pubs, although it should be charging £6 after this year’s cost increases, Mr Kelly said. But price increases could unsettle the brewery’s regular guests. “There is no easy answer,” he said. “We lose money either on this side or on that side.”

Write to Trefor Moss at [email protected]