The Irish food and beverage sector has an international reputation for innovation and high-quality research and development for many years. The value of food and drink exports from the Republic increased by 13 per cent in 2017 to €12.6 billion. Meanwhile Northern Ireland agribusiness supports over 70,000 jobs and is a vital part of the local economy.
However, there is no room for complacency. Changing consumer tastes, the universal impact of technology and the many unresolved issues relating to Brexit are just some of the issues on the agri agenda North and South. KPMG is working with leading producers across the island to manage the challenges and take advantage of the many opportunities.
Consumers are changing, not just their attitudes towards food at an astonishing rate, but it’s also clear that they are shopping differently, David Meagher, Head of Agribusiness at KPMG, says. “Affluence, digitisation, health, nutrition and sustainability are all informing consumer choices. For example – smartphones will become many customers’ primary shopping tool. Retailers who don’t get this right may struggle. If you’re a supplier to a retail organisation that gets left behind in this space – the implications are significant,” he says.
Meanwhile, the evolution of co-ops into global food and nutrition businesses illustrates the fact that they need to evolve in order to survive. He says they are unrecognisable from even a decade ago. “Your product mix needs to meet the changing needs and concerns of your customers. So for example, last year we saw Danone acquire WhiteWave for €12.3 billion to increase their exposure to plant-based alternatives and the organic food market.”
The impact of change will also be felt on the farm says Meagher; “The integration of digital technology into all aspects of agribusiness is fast evolving and will be necessary for it to improve sustainability. The collection of data and the use of algorithms will assist in the intuition that a farmer has for the land, helping inform decisions on improving yield while reducing the quantity of inputs applied to the farm. The collected data will ultimately go towards assuring the consumer – for example about the provenance of the products they purchase.”
“The first thing I’d say about R&D and innovation in the Irish food industry is that it is something the sector is very good at, but could be better of course,” says KPMG partner Ken Hardy. “I see a huge amount of hidden or unsung R&D going on in firms we work with. But that’s the right way to go about it, keep it under wraps until you’ve got something to bring to the market.” The R&D efforts he sees range from raw-material identification and substitution projects, process improvements, packaging innovations, initiatives to reduce salt, sugar and artificial food colourings in food products, and projects to extend their shelf life. “Our clients are also working on projects in areas like automation, “he adds. “They are using the technology for picking and sorting ingredients. This requires machines to handle precious and fragile products and is very complex. It is as much a mechanical and engineering and packaging challenge as it is a food technology challenge.”
There is a competitive driver at work in much of this, he notes. “Food companies face price-point issues. If someone is doing something similar for less the companies have to look at alternative raw materials, packaging, waste, energy consumption, automation, and so on. All of these can help reduce costs. But companies can only do this if they have an R&D focus. They know their products and processes better than anyone else. A third party really can’t do it for them.”
There are also other supports available through the tax system, according to Ken Hardy. These include the R&D tax credit which is worth 25 per cent of eligible expenditure and the Knowledge Development Box which lowers the corporation tax rate to 6.25 per cent on revenue streams arising out of R&D activity. “The state has done a good job of supporting and encouraging R&D and innovation,” he adds. “But just like the industry, it needs to continuously improve its offer as well.
Meanwhile the role of state bodies is well recognised. Courses, programmes and research activities will have a key role to play as the industry faces up to the challenge of issues such as Brexit, according to KPMG’s David Meagher. “Teagasc and SFI, the universities, and the institutes of technology are doing a very good job in supporting applied research that can help companies develop new products to help enter new markets.”
With the clock counting down towards March 2019 and the two sides seeking clarity in terms of the eventual post-Brexit trading relationship between the UK and the EU, Irish food exporters have little choice but to prepare for the worst while hoping for a better outcome. KPMG has produced its Brexit Navigator to help companies across the island assess their exposure to Brexit.
Johnny Hanna is Head of Tax with KPMG in Belfast office and works with a large number of businesses with operations on both sides of the border and indeed the Irish Sea. “A very significant number of EU nationals are employed on farms and by companies in logistics and in factories in Northern Ireland,” he notes. “While there have been some welcome statements in recent months, there is still a big question mark over companies’ ability to attract EU nationals in future. There is a big unknown in relation to immigration policy. Companies shouldn’t let their talent and workforce drift away because they are not talking to them. They will also have to adopt a more strategic workforce policy to deal with possible future restrictions.”
Hanna also makes the point which many exporters are not yet considering. “A big issue for SMEs will be VAT. At the moment, business-to-business sales within the EU are effectively VAT-free. After Brexit that is going to change and VAT rates of 20 per cent will have a very significant impact on cash flow. Companies need to do the analysis now of what that could mean for them.”
Meanwhile KPMG’s Head of Agribusiness David Meagher says currency volatility is already affecting exporters doing business in both the Euro and Sterling. “As soon as the vote happened, an immediate consequence was a very significant change in the exchange rate,” he says. “Exporters have battled through that and the exchange rate appears relatively stable at the moment. There is a significant danger that it could move again. Exporters should consider now whether it is opportune to cover forward if they can live with current rates.”
The next big area is trade barriers and tariffs and all that goes with them. “It is incredibly difficult to tell how that will play out,” Meagher adds. “There is no upside to a hard border. Exporters need to be clear in relation to their logistics arrangements, for example. In some cases, it will be simple, but in others they might be importing raw materials from the UK and then exporting product back to the UK and to the EU via the UK. They have to make sure they know exactly what the flows are.”
This commentary first appeared in Food Island – a supplement with The Irish Times.