The search for added value

Exporters from Asia, Latin-America and Africa have often asked my help in introducing their finished, retail-packed food product to the European market. They argue that manufacturers of the finished product earn a much higher margin than suppliers of raw materials. As a facilitator of trade into Europe, I would like to help these exporters –and in some cases I have been able to do that. However, this is much more difficult than people think. I will outline the main hurdles and then indicate some situations with the best chances of success. But first, let us take a closer look on margins, income, and costs.

Getting real on margins

The gross margin is the difference between the sales price of a product and the cost of its raw materials. It is calculated as a percentage of the sales price, but it can also be expressed as a mark-up on the purchase price of raw materials. There are two pitfalls when using gross margins as an indicator for the profitability of a venture:

1. The gross margin does not tell you the gross income of the venture, unless you know the volume of goods traded. This means that a very high margin may result in a disappointing (gross) income if the volume is too small. Or, vice versa, a low margin may result in a high income if the volume is large enough.
2. The gross margin (or even the gross income) does not tell you about the total costs of the venture, as it only considers the cost of raw materials. If the costs of the venture are high enough, a large gross income can still result in a disappointing net income or a loss. Introducing a consumer food product requires substantial costs for sales, marketing, branding, distribution, product development and others.

So, appearances can be deceptive. Margins do not give you a complete picture of profitability unless you also consider volume of operation and costs. Do you have access to such data?

Competition in food retail products

The food sector is one of the largest sectors of the economy and it is very competitive. Many small and large companies compete for the favour of the consumer. Compared to other industries, entry barriers are average, but the food safety requirements are a big hurdle for foreign exporters. And so are the cultural differences and the many different languages spoken in Europe. Brands are often tailored to the culinary and cultural preferences of consumers in a specific country, but which country should you prioritise as a foreign exporter to Europe?

Retail power

Retail and distribution power is another factor limiting success, as the concentration of retailers is increasing everywhere in Europe. It is very different to get listed for the supermarket shelves, and if you gain a listing, nine out of ten new products to not survive for long. Technological innovation, finally, is rather limited in food compared to industries such as IT, but it does play a role. Research and development budgets are spent on things like improved recipes, healthier products, convenient solutions, sustainability, and on innovative packaging. Packaging formats, for one thing, are very different across countries and even more so continents. Environmental legislation also plays a big role in packaging, promoting circularity and adequate waste management.

Bottom-line

Meeting requirements and getting a listing is not easy, neither is keeping up with competitors in innovation. It is also difficult to adapt to cultural differences. Furthermore, there are thousands of competitors trying to get listed as well, often with considerable advantages like being closer to the consumer. Therefore, this can only work if you are truly unique, i.e. different in a relevant way. When targeting export markets, consider if you have any meaningful advantage compared to competitors.

A logo is not a brand

Developing a logo is relatively simple and many food companies have hired a designer to develop one. However, does such a logo constitute a brand? A consumer brand is much more than that. It is your company’s identity towards the customer (consumer) and the start for having a meaningful communication with him. It should be based on your values and communicate your unique benefits. Building a brand requires listening to the consumer and understanding his needs. It will take time and effort to gain a position in the mind of your customer. And it thus requires a budget for supporting your brand. By the way, have you thought of building a brand in your own country? Most famous brands have started in their own country or even region. You may think of Coca Cola,  or the Dutch coffee brand of Douwe Egberts (now part of multinational Jacobs Douwe Egberts).

So, are you ready to build your brand in the target country?

Is packing for private label easy?

No, it is not. It requires other capabilities, though, than branding. Private-label or toll packers are in a very different game than branded-product manufacturers. Instead of building a brand, they imitate the products and key innovations of the leading brands. PL packers therefore must excel in two things: speed of adaptation and cost of production. Speed, as their clients want to copy the innovations as soon as possible. For example, when Douwe Egberts and Philips in 2001 introduced a new coffee brewing system with pods, called Senseo, the PL packers could offer similar coffee pods within months of the market introduction. Cost, as the main reason retailers and other distributors turn to these companies is that they want to introduce a cheaper alternative to the A brands. Of course, the PL Packer can save on branding costs, as he does not do branding. But besides that, he needs to be competitive in scale of operation, so he can offer at the lowest possible price. As a result, PL Packers often operate large factories, with very tight margins.

When is exporting finished products viable?

All fine, but can we think more positively? Are there any cases when exporting consumer-packed and branded products is possible? Yes, there are, and we distinguish two scenarios.

Strong Brand

For this scenario, the following criteria apply:

• Your brand and product are truly unique and cannot easily be copied. You have specific technological knowhow or a special business setup that protects you from copy-cats.
• Your brand and product fill in a meaningful demand in the target market. Is there actually a gap in the market for your brand and product? To find out, you can organise a process of testing the acceptance of your brand. For example, using a focus group, a tasting panel or an online questionnaire.
• The budget is enough to introduce and support your brand for several years -and then you decide on the continuation of your effort.
• You are ready to adapt your brand and marketing effort to the target market, for example, you will adapt your label to the language and legal requirements that apply. You will do local promotion and advertising.

The underlying assumption for these criteria: do you know your export market with a sufficient level of detail to build your brand? Do you understand what moves the consumer there or are you able to gain this consumer intimacy? If not, better focus on other more interesting markets.

Low Cost

Producing a finished product in origin is also  possible if you have much lower production costs:

• Your company has decisive economies of scale, cost savings or technical advantages related to producing the finished product in origin. For example, the canning industry is always operating near the source of raw materials, to ensure freshness of produce and efficient logistics. This goes for canned fruit and vegetables, but also for canned fishery products, for example. Some companies pack fresh fruit and vegetables in origin for the consumer as well, rather than re-packing them in the target country.

In this low-cost scenario, both branding and PL packing are common options. If you pack for another brand, it is less important to understand the consumer in a detailed way.  On the other hand, many canners and packers in origin successfully promote their brand in export markets.