Setting up an Offshore Fair Trade in the UK - Assignment Example

 Setting up an Offshore Fair Trade in the UK Executive Summary The purpose of this report was to evaluate UK as a location for establishing an off shore plant to produce a new range of fair trade chocolate by the Swiss manufacturer. The external business environment has been evaluated for the opportunities and risks based on the political, economic, social and technological factors. The report suggests that the opportunities for fair trade range of chocolates are very high in the UK. The political environment is supportive while the consumer spending has not been affected. The consumers are ethically conscious and the legal environment is conducive to the industry. The risks exist because of slave labor prevalent in the cocoa farms while the process of cocoa has increased manifold. Obesity and diabetic concerns may impact the confectionery market while free imports may impact the business. This report strongly recommends the UK as a location for setting up the manufacturing base because of the strong support for fare trade products. 1. Introduction A Swiss chocolate manufacturer is evaluating several locations to set up a manufacturing base for exports to the neighboring regions. This report evaluates UK as a location to serve European and other developing regions. The main criterion for evaluation of a location has been the fair-trade principle which would enable the manufacturer to decide on the location. This evaluation would be based on an assessment of the opportunities and risks presented by the political, economic, social and legal environments. Fair-trade has been prevalent in the UK confectionery market as the three market leaders (Cadbury’s, Nestle and Mars) have committed themselves to fair-trade. However, the political stability is impacted by the slave labor in cocoa farming which will be discussed at length in the report. The economic power rests with the market leaders in the confectionery industry which needs assessment. Socially, people have become conscious of fair-trade and it is believed that they are willing to pay a premium for fair-trade products. However, the market strength is important. Legal implications have led to better guidance to nutrition which can promote fair-trade. Each of these four factors is important to decide on the location for the manufacturing unit and hence the report evaluates the opportunities and risks associated with them. Based on the findings, the recommendations would be suggested and the limitations highlighted. 2. Discussions 2.1 Opportunities Fairtrade has been defined as a strategy for poverty alleviation and sustainable development. The purpose of implementing fair-trade is to create opportunities for producers and workers that have been economically disadvantaged (The FairTrade Foundation, 2010). Since its commitment and switch-over to fair-trade, Cadbury has sold 40m Fairtrade Dairy Milk bars (Wood, 2009). Sainsbury also converted all own-label roast and ground coffee to fair-trade (The Fairtrade Foundation, 2010a). Green & Black’s, the organic chocolate maker has decided to switch its entire worldwide food and beverage range to fair-trade by the end of 2011 (Smithers, 2010). This move along with the commitment of Cadbury’s suggests that chocolate is now a mainstream Fairtrade product along with bananas, tea and coffee. 2.1.1 Political Fair Trade Public Procurement has strong political support in the UK. The Fair Trade Movement has the support of the European Union institutions, the EU member states and local and regional authorities (Jeune, 2010). The purpose is to improve the lifestyles of the marginalized producers and workers through the right procurement policies. The European Parliament encourages the public authorities to use Fair-trade criteria even in their public tenders and purchasing policies. The fair-trade movement is also supported by the EU public procurement legislation. Constructive guidelines have been laid down for fair-trade procurement. 2.1.2 Economical Unemployment in the UK has increased in the last quarter and the current employment rate stands at 8.0% - up 0.2% over the quarter (HRM Guide, 2010). The economic policy is undergoing a change and higher unemployment with increases in redundancies is likely. There would be a fall in job vacancies and this sends out signals to the UK government. Labour market conditions are directly related to consumer spending behaviour as the demand and supply of labour affect the consumer earnings (Anagboso & McLaren (2009). The households face reduced earnings but this has to some extent been taken care off by lower tax structure. This suggests that consumer expenditure is supported because the tax rebates have a cushioning effect on the expenditure. Unemployment impacts consumer spending even if the spells are short. The largest proportion of people that have remained unemployed, have been for a maximum of six months and hence the consumer spending is affected for a maximum period of six months. Thus, retail and consumer spending has not been greatly affected due to reduced earnings or rising unemployment. This table demonstrates that the sale of confectionery at retail stores has not been affected. Source: Anagboso & McLaren (2009). The economic slowdown and the discounting policy of the retailers lead to a drop in the sale value. The sales in the overall confectionery sector may have contracted marginally in sale value in 2008 but sales of sugar confectionery demonstrate continuous growth. The wholesaler Hancocks Cash and Carry (Hodgson, 2010) endorse that the confectionery sector is expected to remain recession-proof. The shoppers may cut back on other purchases but sweets and chocolates remain a regular purchase. Price may be an important issue but because it is easy, cheap and affordable luxury, except for a few premium brands, the sector would not be affected (Key Note News, 2009). According to Mintel (Bainbridge, 2007) sales in the UK Confectionery market is posed to increase 9% to reach £1.3bn by 2012. Thus, the UK confectionery market is poised for growth. 2.1.3 Social Impulse buying is being encouraged through advertising and through product innovations. Continuous brand extensions including flavour and texture developments and limited editions of a new launch by Nestle and Mars, keeps the consumer interest sustained (Adwan, 2003). Despite obesity diabetic alarms, chocolate confectionery retains its image as an affordable pleasure which the consumers would not compromise with (Key Note News, 2009). Chocolates, a harmless, affordable indulgence is more popular with men (56%) than women (52.8%). The women still continue to be conscious of sugar and fat levels although overall the interest in health-eating concerns has reduced since 2006. The younger age group is more indulgent in the chocolate confectionery and less concerned about the healthy eating issues. Households with children are more likely to buy chocolate confectionery. One in every three chocolate consumers in Britain has concerns about the environment and the ethical issues (PR Newswire, 2010). The number of consumers that would prefer fair-trade chocolates are 14% and 22% of the British consumers are consumers of origin. Manufacturers such as Barry Callebaut, manufacturers of high-quality cocoa and chocolate products keep investing in the development of new and natural products which proves the goodness of the cocoa beans. They are also developing a ‘guilt-free’ chocolate with health benefits in which the sugar-content has been reduced by 40% by natural means. 2.1.4 Legal The confectionery sector in the UK is governed by the Biscuit, Cake, Chocolate and Confectionery Alliance (BCCCA), which is the principle UK trade association having a membership that covers over 90% of UK production (Food Standards Agency, 2003). There are regulations on the varieties and the amount of vegetable fats (5 percent) that can be contained in the chocolates. The Food Labelling Directive (FLD) has to be adhered to in the chocolate production. Exports of chocolates are freely allowed from the country and hence the Swiss chocolate manufacturer would be able to serve the neighbouring countries. This removes the existing barrier to competition between UK suppliers and those in other EU countries. 2.2 Risks 2.2.1 Political While cocoa is the main ingredient of chocolates, reports of slave labour on cocoa farms has been disturbing. The Ivory Coast is the world’s leading cocoa producer accountable for more than 40% of the cocoa supplied globally. Cocoa production employs more than 700 million people on 450,000 Ivorian farms (Schrage & Ewing, 2005) Slavery exists in as many as 90% of the Ivory Coast farms as documented by British Television. Children as young as 6 years are forced to put in labour of 80-100 hours per week without pay. The human rights issues and international standards prohibit child labour, forced labour and trafficking in persons. The Ivorian law allows children over 14 to work while as per ILO standards children below the age of 12 are prohibited from working. While the human rights issue and the international labour standards have been existing, no cocoa industry brand or processor had taken any initiatives before these conditions generated media attention. No company has been able to assure that their supply chain is free of child labour. The UK has set up a task force to combat slavery in cocoa production involving the West African states to sign a treaty establishing a legal framework. The cocoa industry has now committed itself to respond to the issues and to eliminate the use of the worst forms of child labour. It is essential to obtain reliable and credible information on local conditions before procuring cocoa. 2.2.2 Economic Sales in the global confectionery sector had decreased in 2001 by 2.5 percent (Adwan, 2003). This led to a dramatic decline in the UK market as well. The retailers in turn imposed downward price pressure which led to shrunken margins. Drop in sales in the UK has also attributed to falling distribution coverage. If this is not accounted for, it could lead to incorrect inferences about consumer demands, preferences and the basis for price sensitivity (Bruno & Vilcassim, 2008). The power in the confectionery market in the UK rests with three main competitors including Cadbury’s, Nestle and Mars. While Nestle is overhauling its core confectionery business by focusing on its core brands such as Kit Kat (Wiggins, 2008), the Mars Bars have been able to increase their market share in the fist six months of 2007 (Marketing Week, 2007). Cadbury’s sales have exceeded expectations in the UK market and it was worth £390m in 2007 (Financial Times, 2007). The size of the UK chocolate market is GBP 3.5 billion or US$ 6.2 billion (Bruno & Vilcassim, 2008). Approximately 45% of the preferred product formats are candy bars and the “countlines”. The industry is dominated by Cadbury’s, Nestle and Mars. In 2008, Cadbury’s had a share of 10.5% of the global confectionery market (Wood, 2009). Nestle’s UK confectionery market share was 15.5% in both 2006 and 2007 which has increased to 15.6% in the first half of 2008 (Reuters, 2008). In 2010, Nestle has decided to grow its market share in the UK confectionery market despite heavy competition (Jones, 2010). Consolidation has been taking place in the sector with Mars taking over Wrigley’s and the merger of Kraft and Cadbury’s. However, this has not impacted the number of brands available in the market. Cocoa prices have doubled over the last three years which has exerted pressure on the profit margins. The manufacturers can raise the prices to some extent but to sustain competition, it becomes difficult to absorb the cost increase (Jones, 2010). The price of cocoa is expected to remain high for some time. 2.2.3 Social Sedentary lifestyle and the quality of food and rinks consumed by the people in the UK are the basis for growing concerns of obesity in the UK. More than half the adults are heavier than recommended and this is particularly rising among the young adults (EMIS & PIP 2005). In addition, diabetic products and sugar-free are gaining popularity in the confectionery market. In fact, sugar-free products are more common and appear in the product range of many manufacturers. The sugar-free products are 20% more expensive than standards variant but they are gaining popularity (Adwan, 2002). 2.2.4 Legal The chocolate producers in the country are mainly large players. This is evident from the figures given by the FSA (2003) which states that out 140 producers, 39 firms produce about 90% of the confectionery. The remaining 10% comes from the 100 manufacturers, who can be concluded to fall under the small scale sector. This suggests that the barriers to entry are high in the UK confectionery market. The smaller manufacturers are also subject to examination of recipes and changing of labeling. Imports of chocolates and confectionery are freely allowed and they do not have to comply with the FSA guidelines (FDF, 2009). Reduced size portions and quantity of saturated fats have to be adhered to. The FSA is focusing on developing consumer education and developing awareness of nutrition information. 3. Conclusion The purpose of this report was to evaluate the oppurtunities and the risks in establishing a unit in the UK to produce a new range of fair trade chocolate. This report has been prepared after exhaustive study and analysis of the business environment based on the PEST. Oppurtunities 2.1 The oppurtunities for fair-trade chocolates is very high. 2.1.1 The political environment supports Fair-trade procurement policies. 2.1.2 A manufacturing unit could reduce the unemployment levels in the UK. Consumer spending remains unaffected due to downturn. 2.1.3 Impulse buying is high Obesity concerns have waned. Consumers are conscious of fair-trade chocolates. 2.1.4 Chocolate composition and food labeling norms have been laid down. Risks 2.2.1 Slave labour on cocoa farms has become a major issue. Reliable and credible information on cocoa sourcing is vital. 2.2.2 Cocoa prices have doubled. Size of the chocolate market is poised for growth despite recession and obesity concerns The power in the market is concentrated in three major manufacturers. 2.2.3 Health concerns like obesity and diabetes may impact the confectionery market and the demand for sugar-free products may be higher than normal confectionery. 2.2.4 Barriers to entry are high and the contribution of small manufacturers is negligible compared to the large players. Imports are free and consumer awareness is increasing. 4. Recommendation The four factors evaluated suggest that UK as a location is conducive to setting up a fair-trade manufacturing unit for chocolates. 5. Limitations The report may require further consideration in terms of the labour costs, costs of raw materials and the actual market for fair-trade products in the entire region. Hence to make the study exhaustive the following reports may still be generated: a. The size of the export market from the UK. b. The cost of procurement of cocoa through ethical and fair-trade methods. References Adwan, L. (2002). Diabetic confectionery overtaken by sugar-free. EUROMONITOR ARCHIVE. Retrieved online 24 May 2010 from http://www.euromonitor.com/Diabetic_confectionery_overtaken_by_sugar_free Adwan, L. (2003). Private label confectionery looks to chocolate. EUROMONITOR ARCHIVE. Retrieved online 24 May 2010 from http://www.euromonitor.com/Private_label_confectionery_looks_to_chocolate Anagboso, M., & McLaren, C. (2009). The impact of the recession on retail sales volumes. 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