If gin sales are booming, would you invest in a gin distillery? In 2017 alone, gin sales toppled 47 million bottles, which was almost a 15% increase compared to 2016 sales. For the smart entrepreneur with the benefit of intelligence into growth markets, the answer would surely be unequivocally affirmative. However, a wise entrepreneur may see beyond this and would also invest in tonic because tonic is to gin what Bonnie is to Clyde and what Robin is to Batman. I could go on... The point being that tonic complements gin. Also, a higher volume ratio of tonic to gin is needed to make the perfect drink which ultimately, with all things being equal, will translate to larger sales volumes and increased revenue and as such, tonic producers are able to capitalise on increased gin demand.
This analogy can be applied to the export market in the food and drink sector, which has experienced enormous growth in recent years. UK producers can apply the same 'horizon scanning' to benefit amidst the Brexit doom and gloom forecasts and capitalise on the significant growth of UK export markets.
The food and drink sector - a recipe for growth
Recent HMRC figures show that the UK can boast to 315 gin distilleries, which is more than double the number from 2013. If this growth trajectory continues, gin sales could overtake whisky sales by the end of the decade. Fever Tree, the premium tonic brand, has benefitted from this growth and reported a 65% increase in sales in the year to August 2017. However, consumer demand is not limited to the UK domestic market.
The export boom
Recent estimates show that over £22 billion worth of British goods were exported in 2017. As I discussed in an earlier blog, the food and drink sector is a rapidly evolving growth industry and according to figures from Food and Drink Federation, it has benefitted from 93% export growth in the ten-year period from 2007 to 2017 with annual growth rates of 7%. It also represents the largest manufacturing sector generating £28.8 billion annually to the UK economy.
Irrespective of political persuasions, it is an economic fact that the EU referendum result has triggered a dramatic increase in British exports. There are a number of arguable factors driving the increase in supply and demand for British exports. Clearly the devaluation of the British pound is an unavoidable factor. However, a number of initiatives such as the Government's 'Exporting is GREAT' and the more nuanced 'Love British Food' campaign have played a part in driving export growth. Interestingly, some of the largest export volumes in the food sector were to member states that would traditionally be regarded as specialist producers. For instance, a recent report by GS1 notes that £85 million in cheese exports were sent to France and £21 million in chocolate exports went to Belgium. Penetration of such highly competitive markets is surely reflective of the increased quality and diversity offered by British producers.
Know your market
Exports are booming but manufacturers must undertake appropriate diligence to understand the distribution channels as well as more broadly, the opportunities and pitfalls of the target market. More specifically, producers/ manufacturers should:
- Undertake due diligence to assess the expertise, resource and reputation of distributors;
- Understand their potential liability as a manufacturer/ producer in the local market;
- Consider payment protection terms and ensure appropriate contractual protection on issues such as currency fluctuation and payment dates. In addition, protection against non-payment and loss or damage of goods is extremely important. Insurance will help mitigate these risks;
- Invest in appropriate resources to better understand the regulatory nuances of the target market. For example: will product labels need to change; is product advertising compliant with local rules; and does the product offend against any cultural norms. Also, exporters should refrain from quoting prices until there is a full understanding of all additional costs such as additional labelling and packaging, transport and documentation costs;
- Ensure that the brand or trade mark is protected before product launch. In addition, it is important to conduct freedom to operate searches to ensure that the product/ brand will not infringe any third party IP rights in the targeted market(s);
- Ensure consistency on the enforcement of IP rights as well as the strategy for brand protection; and
- Consider your response in the event that a counterfeit product enters the market and is there regional support that can advise on appropriate jurisdictional specific enforcement measures?
What about Brexit?
Undoubtedly, uncertainties remain as to the modality of Brexit and our future trading relationship with the EU and third countries. As I discussed in an earlier blog, the UK is heavily dependent upon the EU as an export destination and it is estimated that approximately 60% of UK exports are shipped to the EU.
This is an important issue because a 'no deal' scenario would see the UK reverting to WTO 'Most Favoured Nation' tariffs, which are significantly higher compared to other products. For instance, tariffs on dairy products can peak at 96% and 127% for sugar and confectionary. In addition, the UK is heavily reliant on EU member states for sourcing raw materials with up to 30% of UK food imports coming from the EU. The Government has a delicate balancing exercise here because the potential threat of imposing import tariffs presents a major commercial risk to food business operators. Equally, abolishing import tariffs could serve to undermine the competitiveness of products manufactured in the UK.
Within the food and drink sector, there has always been a strong global demand for British products. This has been bolstered in recent years by a craft revolution that has provided enhanced market diversity and artisanship. Until a Brexit trade deal is reached, food and drink producers must continue to exploit export opportunities globally. The referendum result has indeed placed the UK's trading performance patterns firmly in the spotlight and perhaps a silver lining resulting from the devaluation to the pound has been intensified political efforts to promote UK exports. The food and drink industry is undoubtedly a booming sector and the opportunities for enhanced export relationships with EU member states and beyond are significant. The effective utilisation of export opportunities is a vital ingredient towards ensuring the continued success of the food and drink sector. However, before leaping into new markets, manufacturers must first take practical steps to understand the nuanced regulatory, legal and commercial opportunities (and pitfalls) that may exist in these new markets.