A realistic look at profit margins in the F&B sector across the Four Asian Tigers.
The drastically lower New Zealand dollar was a dark cloud over New Zealand in September 2015, but its wasn't all bad news. The silver lining was that our Food and Beverage (F&B) sector rapidly became much more competitive in the global market place.
This is especially so in the markets of South Korea, Singapore, Hong Kong and Taiwan, where price is king. Commonly referred to as the Four Asian Tigers, these markets have shown impressive economic growth with few barriers to entry when compared to their neighbours.
In this part of the world New Zealand goods are often criticised for their lofty prices. I speak with F&B distributors across Asia on a daily basis and I’ve lost count of the number of times I’ve heard them praise the quality of New Zealand produce only to bemoan the pricing and ultimately turn down an opportunity.
Now, with a significantly more favourable foreign exchange (FX) rate our value proposition is a lot more attractive.
Profit margin expectations in South Korea, Hong Kong, Taiwan and Singapore are high. Most distributors demand at least 25% - 35% gross profit (GP) and the leading players will often treat marketing and logistical costs such as warehousing and handling as separate margins, not to be extracted from GP.
When the price build is challenged the response is predictable; rising operational costs for such things as cold storage and manpower must be accounted for. In truth, distributors are accustomed to enjoying carte blanche when it comes to the price build and its appalling how often this results in pricing that is simply not competitive.
Understanding the price build from FOB to wholesale or retail pricing in your chosen market is the best way to counter this attitude. To do this, you must be armed with a realistic cost model that calculates actual landed costs and uses margins based on industry norms to determine final pricing and its viability against competitors.
This approach garners a paradigm shift in negotiations with your target distributor. Not only does it present the opportunity in a way that is clear and logical, it also demonstrates your market knowledge and instils confidence.
Here are some tips for creating your cost model:
- Get a DDP (delivery duty paid) quote from your freight forwarder. NB. Be certain you have optimised carton configurations and applicable FTA tariff savings are applied.
- Know how the local GST or sales tax equivalent is applied.
- Speak to a range of distributors or get expect advice to benchmark distributor and retailer margins. 4. Survey the competitors in market and compile price data to demonstrate that your price is viable. This exercise can absorb a great deal of time and resources, but as the foundation of any successful export plan it’s well worth the effort.