An export crisis?

It was bound to happen. When recession hit Britain in 2008, the government and fmcg companies pinned their hopes on British exports to offset flagging domestic demand.

At first, their confidence looked well placed. Exports continued to soar amid the economic gloom the Royal Wedding of 2011 and Queen’s Diamond Jubilee and the Olympics last year provided perfect platforms to showcase British goods abroad and the launch of The Exports Action Plan by the government and the Food and Drink Federation in January last year looked more of a nice-to-have than a need-to-have.

Unfortunately, that was then. Exports were hit as the euro fell in value against the pound by almost 10% to £0.78 in the first half of 2012 and the latest HMRC export data, released in January, showed food and drink exports fell in two consecutive quarters to the end of September 2012. While they fell less than 1%, it was the first such fall since 2004 - not good news as Britain teeters on the brink of a triple-dip recession.

“India is going to make distribution easier and allow food and drink companies to sell more sophisticated products”

Rahul Kale, Typhoo head of export

The question is: will this prove to be a blip or have British food and drink export ambitions hit a more serious roadblock? And if there is still growth to be had, is it confined to emerging markets as the architects of the action plan suggest - or does Western Europe still hold some potential?

Although exports pale in comparison with imports (see box) and have been hurt by macro-economic trends such as currency fluctuations, there is reason to be optimistic based on their historic performance. Between 2002 and 2011, the value of food and drink exports more than doubled, to £12.1bn, and even since the recession hit in 2008, they have risen by more than 30% [HMRC].

Over the last few years, well-known British brands have realised major successes abroad. Tyrrells predicts nearly 50% of its 2013 sales will come from overseas markets and just this week announced it had signed a mega-deal with Publix (the leading supermarket in the US Southern States) for full distribution in nearly 850 stores. Burton’s Biscuit Company has also ramped up its export business, extending its presence in North America by securing a deal to supply 11 Cadbury biscuit lines to Canadian supermarket chain Loblaws last January, having already begun supplying the majority of Walmart’s US stores with Cadbury Fingers in 2011.

However, while Tyrrells is currently more focused on developed markets, Burton’s is also eyeing emerging markets - it is on track to make sales of £4m to £5m in Russia this financial year from two Wagon Wheels lines, one year after returning to the country following an absence of 15 years, for instance.

Emerging markets are also where much of the government action plan’s attention is focused and it’s not hard to see why. The combined value of UK agrifood exports to Brazil, Russia, China, India and Mexico was less than the value of exports to Belgium last January, despite those five countries accounting for 44% of the world’s population [Defra].

Opportunities in the East

Exporters are certainly viewing India with greater interest in the wake of the Indian government’s decision last year to allow foreign supermarkets to partner with local retailers. “It is going to make distribution easier and allow food and drink companies to sell more sophisticated products,” says Rahul Kale, Typhoo’s head of export.

You need look no further than David Cameron’s recent trade visit (see box, below) to see how keen the UK government is on fostering stronger trade relations in the country. Among the delegates, which numbered more than 100, were representatives from Cobra beer Partnership, East End Foods, Veetee Foods and Diageo.

Diageo, in particular, is ‘one to watch’ after its open offer last November to buy a majority stake - potentially worth around £1.3bn - in India’s United Spirits company. The deal is still subject to regulatory approval, but if it goes through, experts believe it could give Diageo muscle power to negotiate import duties down on imported goods.

Diageo’s - and the UK food and drink industry’s - importance in building ties with emerging markets such as India was also acknowledged last July when CEO Paul Walsh was appointed the first UK business ambassador for UK food and drink manufacturing with a remit to help foster relations and grow trade, particularly for SMEs.

India is not the only market boasting a growing middle class with an appetite for Western brands that UK exporters are keen to tap. China is also attracting a lot of interest. At last year’s Food and Hospitality China trade show in Shanghai, there were 39 British exhibitors compared with 15 in 2011. “At FHC, we took three coachloads on a whistlestop tour of retail stores and foodservice outlets. The year before all we needed was a minibus,” says Elsa Fairbanks, director of the Food & Drink Exporters Association.

“At Food and Hospitality China, we took three coachloads on a tour of retail outlets”

Elsa Fairbanks, Food & Drink Exporters Association

And no wonder interest is burgeoning when Burton’s, which won FDF Export Success of the Year in 2012, says it is now breaking even in China just two years after entering the market.

As well as the appetite for Western brands, another major plus as far as the Chinese market goes is that it is an inexpensive destination to export to, as Britain is such a big importer of Chinese goods that many containers return to China almost empty, so there is plenty of spare capacity for goods.

One sector that is taking increased advantage of the opportunities offered by emerging markets - and the help available from the UK government and food and drink industry if they choose to export to them - is the meat industry.

“Working together, the food industry and government have already opened up new markets for British pork in China, and beef and lamb in Russia worth around £230m,” says a Defra spokeswoman.

The allure of such potentially huge but relatively untapped markets may explain why other seemingly obvious opportunities are being overlooked. Thousands attended Gulfood in Dubai last month, but UK exhibitors were reportedly conspicuous by their absence. “Apart from the odd showing mainly from export agents that sell multiple product brands, there was nothing,” claims Simon Mathers, MD of SJM Retail International. “It was disappointing and an opportunity lost this year for British companies to do business outside the EU.”

“The challenges relating to shelf life of products and the time it takes to ship can limit the potential product offer”

Andrew Cooper-Blake, Waitrose

That’s not to say that exporting to such far-flung destinations is always plain sailing. Import duty charged on food brands selling in countries such as China and India is high and there are other restrictions too. Supermarkets in China, for example, tend to only stock a handful of foreign brands because under Chinese law, 95% of their stock has to be made in China.

There are ways to get around this, however. Local manufacture is one option. Typhoo opened a factory in Calcutta four years ago, which Kale says has enabled it to build its Indian business from nothing in 2007 to sales of about £5m now. And Unilever has also recently pledged major investment in India

But local manufacture involves a considerable investment that only larger suppliers can make smaller suppliers must continue to battle through red tape - and a lot of it. In China last autumn the government required exporters to register on a website that was initially only in Chinese and frequently offline for maintenance. Thankfully the site has now been translated.

And in Quebec, Canada, labelling has to be in English and French, and, curiously, the same number of words must be used in each language.

The shelf life challenge

Yet another major potential obstacle is the short shelf life of some products, which can effectively limit the geographical scope of where they’re exported to. Warburtons thought it had got around the problem by changing its bread recipes to extend shelf life when it started selling to Tesco stores in the Czech Republic, Slovakia, Hungary and Poland in 2011. However, it ended the venture just over a year later because of the high costs involved in making the longer shelf life bread and labelling and transporting it.

Waitrose - which exports to more than 30 countries, including Australia and South Korea - says shelf life is the biggest hurdle it faces with exports. “Waitrose is well known and loved for fresh, quality food. The inherent challenges relating to shelf life and the time it takes to ship can limit the potential product offer,” says Andrew Cooper-Blake, Waitrose’s international brand communications manager, although in some cases it has been able to mitigate this by supplying retailers directly instead of going through a third party.

Of course, the very markets that a short shelf life is less of an issue with are also those that the action plan claims “provide limited growth opportunities” for UK exports. Exporters themselves, however, are not quite so quick to overlook Western Europe with its additional promise of lower distribution costs, fewer trade barriers and bureaucracy, and greater familiarity.

“Exports to new markets is still a very small percentage of what we export overall, particularly to markets such as France and Ireland,” says Steve Barnes, director of economic & commercial services at the FDF. “These more mature markets continue to offer opportunities on a significant scale.”

It’s a message that will resonate with Warburtons, which may have pulled out of eastern Europe but has won a listing last summer to supply 270 branches of French supermarket chain Monoprix.

Crisp success story

Premium crisps are also doing well in Europe. Indeed, Tyrrells owes much of the 70% growth in its international business last year to the region, with sales soaring 300% in Germany and the Netherlands and 50% in its biggest market, France. It has ratcheted up sales of about €10m in France alone since it started to supply the country in 2005.

“The only European market that has troubled us is Greece,” says Tyrrells CEO David Milner. “Apart from that, we are doing extremely well. Most European economies are doing no worse than the UK and we have the added advantage of being in a high-growth category.”

Rival crisp brand Kettle Chips has also built a strong business in Europe. “It is a very important part of our business and we’re doing very nicely in countries such as Sweden and Holland,” says Kettle MD Dominic Lowe. “Once people get in there and try the brand, they embrace it.”

“Most European economies are doing no worse than the UK and we have the advantage of being in a high-growth category”

David Milner, Tyrrells CEO

So looking ahead, while much of the noise will continue to surround emerging markets, a good deal of the action will remain focused on markets closer to home. And the good news is that whatever overseas markets suppliers are eyeing, there is plenty of help now on offer. Not only has UK Trade & Investment (UKTI) signed up Walsh as business ambassador, it has also set up an online forum called Open to Export to give exporters advice and help put foreign buyers in touch with British suppliers.

Better still - at least as far as exports go - the pound has weakened in value in recent months. If the euro remains relatively strong against it, one of the biggest barriers facing exporters - namely the affordability of their goods in Europe - will be less of an issue.

Other challenges of course remain - notably the highly volatile global economy - but brands are succeeding even in countries where the economy isn’t booming and with emerging markets offering a host of opportunities still to be tapped, there is no reason to think UK food and drink exports won’t grow 20% by 2020, as the FDF hopes. They certainly will if British brands get their way.