Capitalising on the export market
Corporate law firm William Fry offers its guidance on how companies can best take advantage of opportunities in the export market.
Last year marked the sixth consecutive year of growth in the value of food and beverage exports to a record €10.8 billion. With up to 90 per cent of Irish food products currently exported, the emphasis on international markets continues to grow at an exponential rate. 2016 presents further opportunities for growth and there is no doubt that the food industry has the capacity to respond.
Targeting new markets
The global rate of urbanisation is unprecedented, with over half of the world’s population living in cities. Densely populated urban markets typically have good retail facilities and strong infrastructure which facilitates an effective route to market for food companies. Further, as middle classes continue to grow worldwide (expected to double to well in excess of 3.2 billion by 2020), global income per head has risen. More and more people worldwide have the means and location to secure their food requirements, with provenance and quality of product being key to purchasing decisions. While the west has historically dominated global economics, by 2050, Asia is expected to be more densely populated than the rest of the world combined. The expanding middle classes in this region means the buying power of the world is shifting east. The combination of these factors underlies the importance for Irish food businesses to focus efforts on overseas development in order to capitalise on opportunities for growth.
Challenges
While market proximity ensures that expansion in the UK has traditionally been seen as a relatively easy progression for Irish food businesses, expansion further afield and, in particular in Asia, poses logistical and cultural challenges. Market volatility, seen through fluctuation in currency rates affecting the competitiveness of Irish export produce, also continues to be a challenge. In addition, several Irish companies cite the scale of competitors as a deterrent against international expansion.
Meeting the challenges
The agri-food strategy, Food Wise 2025, recently announced by the Department of Agriculture, Food and the Marine, has set out a comprehensive plan for the development of the sector over the next decade. In order to deliver on the ambitious projections outlined in the report, it is vital for Irish food businesses to maintain their success within the export sector by remaining innovative and reactive to market demands. It is incumbent on the government, industry bodies and advisers to the food sector to support food businesses in this endeavour. To achieve this, companies will need to benchmark their performance against competitors and identify areas of improvement, or alternatively, identify potential business partners from the pool of competitors.
• Business model
Choosing an appropriate business structure for a company’s venture on the export market is crucial. An effective business structure will provide a strong foundation for growth and development and maximise shareholder returns. Companies are strongly advised to engage early with local advisers to understand any nuances of the local business culture.
Smaller companies should give consideration to forming business alliances in order to access the larger international markets. Several avenues can be explored, including by partnering with local suppliers using effective agency, franchising or distribution agreements. Alternatively, businesses can look at establishing new operations in overseas territories, including by amalgamating with similar businesses to jointly target the market. While forming a joint venture (JV) with a foreign company or individual can involve a significant investment in the initial stages, the potential commercial advantages tend to be quickly visible. The specific local market knowledge of a local JV partner will be an invaluable source of information for any company establishing its brand abroad, which can be further exploited by having a “man on the ground” in the initial start-up phase.
Further, a JV can provide direct access to established distribution networks. One of the disadvantages of JVs is that conflicts of interest may occur between the parties on issues such as initial investment, profits share and business strategy. As with any type of venture, there are ways to minimise this risk by carefully selecting partners and tightly drafting legal agreements.
In contrast, setting up a wholly owned foreign entity may not provide the immediate synergies offered by a JV, however, it will provide more in the way of control and management.
As a balance between these options, strategic bolt-on acquisitions sometimes present an effective route to international market. Ornua, the former Irish Dairy Board, recently established its first manufacturing base in China with the acquisition of a small, Shanghai-based dairy producer, Ambrosia Dairy. The acquisition provides Ornua with a manufacturing centre abroad, but also importantly, brings on board a team with local knowledge and expertise. Commenting on the deal, Ornua stated that the purchase will provide an entry point for the supply of dairy ingredients to the rapidly-expanding Chinese food service sector and complement the existing range of Kerrygold milk products on sale there.
• Supply chain
efficiencies
Supply chain collaboration is becoming more and more important for success in global markets as a collaborative approach increases efficiencies and benefits processors and suppliers alikea good Irish example is the food chain alliance between Dairygold’s feed supply division and Keenans. Establishing and documenting clear commercial terms at the outset ensures that efficiencies can be realised and costly disputes avoided.
The integrity of the Irish food supply chain is key and there are a number of initiatives in place which can be capitalised on internationally, in particular the Origin Green sustainability programme. A unique feature of Origin Green is the practice that all participating farms be audited and carbon-footprinted once every 18 months which can be used as a key selling point on international markets.
• Technology and the
Online Market
Ireland has evolved steadily from exporting livestock and harvested crops to adding further value to food products with the use of technology. Irish food and beverage businesses who combine new product development with the latest technology have been reaping the rewards internationally over the last number of years. It is, however, important to ensure that the valuable intellectual property created is legally protected on an international scale prior to entry into new markets.
The online market also presents a powerful tool for Irish companies in reaching foreign consumers. In China, online shopping for food is becoming an increasingly important part of consumers’ purchasing habits. In the first three months of 2015, the value of Chinese online shopping transactions exceeded €108 billion. Online sales of food are expected to grow at a rate of 50 per cent annually, with imported food expected to account for some 13 per cent of this total.
A partnership recently signed between BordBia and SF Best, one of China’s leading e-commerce platforms for imported food, will see a concentrated online promotion and sale of premium Irish food and drink over the next 12 months. 2016 provides an excellent opportunity for Irish businesses to capitalise on this marketing platform and expand customer base.
Outlook
The global food and drink industry is expected to grow to $5,776 billion in 2017. The benefits to be gained by exporting are numerous – not least, it allows businesses to test their international strategic plans without great commitment. To capitalise on this opportunity, senior management and boards of directors must focus their efforts on understanding how best to engage with markets of the future. The importance of strategic and early planning for exporting cannot be understated.
Emily Comber, Partner, Food, Beverage & Agribusiness Group Paul White, Associate, Food, Beverage & Agribusiness Group
Tel: +353 1 639 5000
Web: www.williamfry.com
