On 7th June the Department for International Trade announced a new mentorship programme in partnership with the Agriculture and Horticulture Development Board and the National Farmers Union, to help UK farmers and food producers boost their exports.
According to the UK government, the UK exported £21.7 billion worth of food and drink in 2020 and within the next decade “two-thirds of the world’s middle classes will be in Asia, creating new export opportunities for British farming”. By pairing farmers and other food producers with experienced exporters, it is hoped this will lead to an increase in sales for UK agricultural businesses and the chance to open up new customer bases abroad.
For many businesses seeking to take advantage of this scheme, this could be the first time they have exported their goods abroad. With this in mind, we have set out our top 10 commercial tips to consider when exporting your goods abroad.
First of all, where do you want to export your goods to? You will need to do a considerable amount of market research to identify:
- in which countries/regions there is a particular demand for your goods;
- what opportunities recent post-Brexit trade deals may have created for UK businesses;
- which countries/regions it is cheaper to export to;
- whether you have existing contacts in any territories that could help get you an initial foothold quicker than you otherwise could achieve.
- Agent or Distributor?
You will need to appoint someone based in your chosen territory with all the local knowledge, networks and commercial standing to help you market and sell your goods. Who you pick to carry out this task will play a massive part in the success of your goods abroad, so due diligence is key.
Once you have identified a party that you want to work with, you will need to consider on what basis you wish to appoint them, namely as an agent or a distributor. There are pros and cons of both approaches.
An agent will seek out customers in their territory and, where you have granted them authority to do so, enter into contracts for the sale of goods on your behalf. This means that you would have a direct contractual relationship with customers in the agent’s territory. In most cases, the agent will receive a commission based on a fixed percentage of all fees you generate from sales within their territory. An agent would also be entitled to compensation on termination of their contract with you, in order to reflect the goodwill it generates for your business.
A distributor will also seek out customers in their territory, but they will purchase the goods from you themselves and then look to resell the goods in the territory. This means that they have the contractual relationship with customers in their territory. You would not have to pay a distributor any commission on sales they generate, as they would look to apply a mark-up to the goods when they sell them on to their customers.
You will need to consider how you are going to export your goods and who will be responsible for this.
If your agent/distributor is going to take the lead, you will need to clarify whether this will be at their cost or whether you will be liable for the cost of transport. This is where Incoterms can assist (see 3 below).
If you are going to be responsible for transporting the goods to their final destination, you may want to engage a third party logistics services provider (3PL) to do this for you. Depending on where you are transporting the goods to, delivery may need to take place over a number of stages, for which you may need to engage multiple 3PLs and warehousing providers.
It can be time consuming and expensive negotiating all the different commercial issues involved in the international transportation of your goods from your premises to those of your agent/distributor. In particular, the parties will need to agree who will bear the cost of:
- Transportation of the goods;
- Insurance of the goods during transit; and
- Import and export duties
To save time, you can use one of the 11 sets of Incoterms (available here) which set out default positions for the parties to adopt. Each of the 11 sets of Incoterms strikes a different balance of responsibilities between the parties.
Which set of Incoterms you adopt will depend on who has more bargaining power and who wants to accept responsibility for what.
- Branding & Marketing
When the goods are sold to the end customer, you will want to consider what branding should appear on the goods and how they should be packaged/promoted.
A distributor will likely want to attach its own branding to the goods as well as your own. Given that it will have an established reputation in the territory, this may help increase sales of your goods, as customers are more likely to respond positively to your distributor’s branding more than your own, which could be unknown/foreign to them.
If a distributor wants to remove your branding entirely from the goods, then this will prevent you from gaining your own market presence in the territory, but you may be willing to accept this, so long as the distributor is purchasing sufficient numbers of goods from you.
In terms of marketing, you will need to consider what level of control you want on how the goods are promoted. Are you going to require agents/distributors to only use marketing materials you have provided? Do you have brand guidelines that need to be followed? If agents/distributors are going to be permitted to produce their own marketing in respect of the goods, do you want to sign this off before it is used in any campaign?
- Commission / Pricing
For agents, commercial consideration will need to be given as to what rate of commission you pay them on sales generated in their territory.
You could also choose to offer a higher rate of commission to agents on all sales over a minimum number within a specified period of time or where they secure particularly large orders for goods.
For distributors, commercial consideration will need to be given as to price you charge them for the goods to enable both you and the distributor to make a profit when selling the goods.
You may also want to offer your distributor discounts on goods ordered above a minimum number placed within a specified period of time.
Payment terms will also need to be considered. For agents, how frequently will you account to them on the commissions they have earned? For distributors, how many days will they have to pay your invoices?
- Currency Fluctuation
If your distributor is going to pay you for your goods in a foreign currency or you have agreed to pay your agent in a foreign currency, the parties will need to agree who will bear the risk of any significant fluctuations between sterling and the agent/distributor’s currency.
If the negotiating power of the parties is unequal, then one party may have to bear all the risk of currency fluctuations.
Alternatively, the parties can agree to each accept a degree of risk within specified parameters, but one party bears the risk if there is a currency fluctuation outside of these parameters.
- Minimum Sales Targets
Your agent/distributor will need to be incentivised to maximise sales of your exported goods in the territory.
For agents, this can partially be achieved by setting a high rate of commission on sales generated in their territory. For distributors, this can partially be achieved by charging a competitive price for the goods.
To further incentivise your agent/distributor, you can choose to place minimum sales targets on them. Minimum sales targets can work either by:
- rewarding the agent/distributor by offering a higher rate of commission on goods sold or a discounted price on goods purchased above the minimum sales target;
- penalising the agent/distributor by enabling you to terminate your agreement with them and/or withdraw any exclusivity rights they may enjoy within the territory where they fail to meet such minimum sales target.
Offering to grant exclusivity to an agent or distributor can also provide an added incentive for them to sell and promote your goods within their territory.
If you appoint an agent/distributor on an exclusive basis, it means that no one else (not even you) can sell or promote the goods in their territory. This gives them complete control over customers of the goods in their territory and removes the risk of any of their competitors stealing their commissions (in respect of agents) or undercutting their prices (in respect of distributors).
Of course, appointing an agent/distributor on an exclusive basis does come with an element of risk. You are completely beholden to them in terms of sales of goods in the territory, so if you are going to appoint an agent/distributor on an exclusive basis, it is recommended to include a minimum sales target and other triggers which allow you to withdraw exclusivity if they are not performing as expected.
Appointing an agent/distributor to represent you in another territory means placing a lot of faith in another business to act in your best interests in the sale and promotion of your goods.
As such, it is wise to put in place a governance structure whereby:
- each party will have a designated representative to deal with the day-to-day running of the relationship;
- the agent/distributor will regularly report to you on concluded sales, potential sales, the success of marketing campaigns, issues with the goods and other important information; and
- the parties can have regular meetings to assess the relationship, resolve any ongoing issues and plan for the future.
Choosing to export your goods for the first time is a big step for any organisation. It is important to be aware of the issues involved and to record the position you and your chosen agent/distributor agree in a commercial contract, so that the parties can refer back to this as and when any dispute arises.
Please let us know if:
- you are considering exporting your goods for the first time and require help drafting an agency or distribution agreement;
- already have an agency/distribution agreement in place and would like it reviewed to ensure it protects you and reflects the position you agreed with the other party;
- you require advice on the implications of appointing an agent over a distributor (or vice versa); or
- you are considering changing your agent/distributor and require assistance with this process.
Patrick McCallum is a solicitor in the commercial team at Wright Hassall. He helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.