Tuesday 25 October 2016

Apocalypse now?: It's a rocky road - but where it will lead remains to be seen

With over 40pc of Irish food exports going to the UK, Ciara Jackson is in no doubt that there is a bumpy road ahead for this key sector

Ciara Jackson

Published 03/07/2016 | 02:30

Ciara Jackson is food and agri-business practice leader at Aon.
Ciara Jackson is food and agri-business practice leader at Aon.

The Irish food and agri-business sector is one of the key indigenous drivers of growth in our economy - but one which now faces many risks.

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It is a sector that is rapidly diversifying its export markets and moving up the value chain. It has proven extremely resilient in the face of past challenges and will apply this resilience going forward as it deals with the unexpected Brexit decision and the subsequent economic and political uncertainty.

Some 41pc of our exports in the food sector go to the UK and there can be no doubt that Brexit poses serious challenges for Ireland.

Even prior to the vote, in Aon's Food, Agribusiness and Beverage Risks Insight Survey 2016, exchange-rate fluctuation was identified by 58pc of companies as one of the top 10 risks companies face; that will be felt even more acutely now.

The collapse in the value of sterling (making Irish exports more expensive) could particularly hurt lower-margin food businesses, where profits can quickly swing to losses.

Post-Brexit, commentators are suggesting that Irish competitiveness will be challenged hugely. Scale, efficiency and good business information metrics are fundamental requirements to succeed in the new environment.

Insurance costs are often a significant business expense and robust peer benchmarking can help businesses keep insurance costs competitive.

Sustainability also has a big part to play and schemes like Bord Bia's Origin Green programme provide a strong basis for differentiation internationally.

Innovation and competition are inextricably linked - businesses with a culture of continuous innovation tend to differentiate themselves in the marketplace, which helps allay competitive threats.

Continuous innovation needs to be informed by deep and clear consumer insights, with both Glanbia (performance nutrition) and Kerry Group (healthy snacking - Cheesestrings) a good example of Irish companies putting this into practice.

The more Irish food companies can move up the value chain towards value-added products with pricing power, the better they will be able to cope with threats like Brexit and the margin pressure that it may impose.

Beyond Brexit, the number-one risk identified in the survey (selected by 83pc of respondents) was the huge volatility of commodity prices.

The removal of EU milk quotas in 2015 means that milk production levels across the EU have risen, with Ireland forecast to see a volume uplift of 50pc in the post-quota period.

However falling milk prices have created a very challenging environment for the dairy industry - an industry which accounted for over €3.2bn of Irish exports last year.

The second most important risk identified in the report is the possible damage to reputation and brand that food companies face from triggers as diverse as product contamination, data breaches, natural disasters and supply chain disruptions.

In the era of social media and 24/7 TV news channels, any problems are instantly highly visible to customers and suppliers and a carefully nurtured reputation for quality and safety can be destroyed in a matter of hours through supply chain disruption or a food-safety incident.

An example is Fonterra's suspected botulism scare in 2013, which resulted in China banning all New Zealand milk powder imports. The financial impact of this hit to reputation is speculated to have cost over €200m.

Another threat that food businesses face is the business-interruption impact of cyber-security issues - whether accidental or malicious.

In the food sector, cyber security isn't just about the security of customers' bank details, it is that a serious problem could stop a production line or halt a distribution system, making the day-to-day running of the business impossible and causing sales to dry up.

Food companies have to ensure that they have adequate breach response and business continuity plans in place, given that disruption could result in lost sales or a hit to reputation.

The survey's broader conclusion is that companies are poorly prepared for the risks they face.

At best, 50pc of respondents had prepared for the two of the most significant risks identified. Given the attention and scrutiny that risk-management practices have received from stakeholders since the financial crisis, this is a disturbing trend.

A key issue for food and agri-business businesses is the increasing inter-connectivity of risk, where a product-contamination issue can quickly evolve into a reputation-management and competitive challenge with escalating consequences for the business and profitability.

Strong risk management is fundamental to a smart balance sheet protection and for the progressive businesses in the sector, there are many options available to improve risk-readiness.

Ciara Jackson is food and agri-business practice leader at Aon.
The survey can be found at http://insight.aon.com/Aons2016FoodAgribusinessandBeverageFAB

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