Fairtrade chocolate in United Kingdom

Fairtrade chocolate in United Kingdom

Introduction

In the research for a possible location to establish an offshore company to produce fair trade chocolate, the proposal of investing in British confectionary market seems to be worthy at first glance. As the fifth largest economy of the world, the United Kingdom was facing a large recession in 2009. (Ghani 2010) The UK is in the position of trough of its economy, however, the consumption of chocolate increased by 5.9% in 2009. (Financial Express 2009) It can be seen in these facts, the enthusiasm of purchasing chocolate could not be cut by the weak economy. Since Garstang became the first British fair trade town in the year 2000, there are more than 450 fair trade towns in the UK recently. (Fairtrade Foundation 2010) Such a fast growth in the amount of fair trade town may imply that the fare trade mark is being accepted by more British people and more ethics-minded consumers are paying attention to fair trade products. A research launched by Fairtrade Foundation shows that more UK consumers recognise the FAIRTRADE Mark with 70 per cent of total population in the year 2008. (Fairtrade Foundation 2010) All of these indicate a opportunity that the attractiveness of fair trade product, especially chocolate, has come to be apparent.

This report will begin with exploring the main opportunities existing in this market, which are great market potential, competitive political and regulatory environment. On the other hand, the risks cannot be ignored to evaluate this market. Such as the weak economic performance appeared by global financial crisis and Greek debt crisis, high labour costs and intensive rivalry from domestic companies. Its final conclusion is that the opportunities for the British potential market outweigh the risks exist, the potential of fair trade in UK is attractive for further investigation and investing.

Opportunities

The opportunities represented in this market are large market potential, skilled workers, competitive political environment, as well as the stable regulatory environment. In terms of market potential, it relates to the large consumption of chocolate and rapid growth in fair trade cocoa products. With the similar culture between these two countries, it brings the nature advantages in communication internationally. These opportunities show that UK provides a stable and satisfaction situation for this business to make a long term investment and this fairtrade chocolate market is full of expectation.

Market Potential

To introduce its fairtrade chocolate, the demand of chocolate and the recognition of fairtrade mark are needed to be considered. The British people are the biggest consumers in Europe, every person eats approximately 10kg per year. This figure is the equivalent of 25% chocolate consume in Europe. (Loughborough Echo 2010) It shows the opportunity that UK has a strong market demand for the sales of chocolate. Especially during the period of Easter, chocolate was consumed in huge amount. It can be seen that the chocolate consumer group is enormous in UK. From 2004 to 2009, the volume of chocolate sales increased from 568800 tons to 646100 tons with a 2.6% growth rates per year. (Euromonitor Internatioal 2010) This has been shown an increased trend of sales of chocolate confectionary. It would be a favourable indicator for which investing a long term project in UK. And the stable increasing trend in demand of chocolate provides opportunities of selling and manufacturing chocolate.

In addition, the fairtrade products are spreading fast in UK. More than 450 fairtrade towns have been established during the past decade. (Fairtrade Foundation 2010) This movement of fairtrade policy and practice is rapid growing. The British consumers are more knowledgeable about the chocolate, and they are more focusing on the quality of ingredient of the chocolate they purchase. (Euromonitor Internatioal 2010) Moreover, the fairtrade certified sector is worth over 500 million; especially the coffee and chocolate are the most valuable products in fairtrade sector. (Charles 2009) From 1998 to 2009, the sales of fairtrade certified products have increased to the value of 788 million in UK. This amount raised by 4684.4 per cent compared to the sales in 1998. (Fairtrade Foundation 2010) They reflect the recognition of fair trade mark and these kinds of products are accepted by more people. Particularly, the sales of fairtrade cocoa products have a significant growth from which, 2.2 million in 2001 to 219.4 million in 2009. (Fairtrade Foundation 2010) Such a fast growth rate shows a huge potential market for the opportunity of selling cocoa products in UK. This will be a significant opportunity of selling fairtrade chocolate in UK.

Skilled workers

According to the ‘Top 200 world universities ranking 2009' in Times Higher Education, UK owns the five top universities in Europe and three of the 5 top world universities. (Times Higher Education 2009)With such a higher educational level, a large number of educational and skilled workers can be employed by the business. Skilled workers are the important factor to increase productivity. Highly skilled workers can contribute excellent acknowledges to the business, it will be beneficial to the business for innovation and operation. In addition, the official language speaking in UK is English. This provides a natural advantage to the business operating in UK to communicate internationally. Such as reduce the costs of translation, time saving and communicate efficiently are in favour of manufacturing because of increasing productivity and efficiency of operating.

Hofstede cultural dimensions

The company also needs to aware of the cultural differences between UK and Switzerland if they want to set up an offshore business. Understanding and be sensitive of global business culture difference generates one of the most important factors in international business success. When considering the model of Hofstede cultural dimensions which estimate the culture difference within these two countries, the cultural dimensions of the United Kingdom is similar to the one of Switzerland. (Hofstede 2010) Particularly, these two countries both have higher Individualism and lower Power Distance Index. Higher individualism index indicates that the people in these two countries pay more attention to themselves rather than the teams. Based on these common cultural factors, the company set up in UK would adjust the business culture and international contact more efficiently. As a result, conflict of doing business in UK would be minimized. Moreover, these will benefit the communication of the global businesses. This shows a significant opportunity for manufacturing that it can increase the productivity in a long term period. In addition, it will give an advantage of selling products. Because they have the similar characteristics of culture, these can assist them to advertise their product in a common value.

Competitive political environment

From the Doing Business 2010 data, UK gets a higher score and ranked at the 5th place out of 183 economies in ease of doing business. It has moved up a place from the ranking of 2009. (Doing Business 2010) As an OECD country, UK provides an outstanding environment for doing business. On the other hand, there are a least number of barriers to entrepreneurship in UK compared to other countries. (UK Trade & Investment 2010) The business can enter this domestic market and operate within the country easily with few number barriers. Moreover, transparency of state government will affect the development of economy. Corruption is one important factor to reflect the level of transparency. A lower level of corruption would support a stable political environment. From the ‘Corruption Perceptions Index 2009', it ranked UK 17th out of 180 countries. (Transparency International 2009) With a lower level of transparency, the development of UK economy would be more efficiently. It will benefit the company to develop in a long term period.

The tax rate in UK is also a competitive advantage. UK has a lower tax rate on labour income compared to other OECD countries. (OECD 2009) The top corporate tax rate in the United Kingdom is 28%, which seems to be favorable among G7 and relatively low with most of the UK's main competitors. (UK Trade & Investment 2010) The attractive tax rate would strengthen the incentive for foreign investments and decrease the business' administrative costs burdens. In addition, the European parliament declared a strategy to encourage fair trade republic procurement. (Fairtrade Foundation 2010) The sales of fairtrade products will be boosted by government's support. And it will benefit the development of fairtrade manufacturers. These relatively competitive political factors will be opportunities for manufacturing because of transparent political environment and lower tax burden.

Protection of Intellectual Property Rights

UK has an integrated legal framework to support the protection of the new ideas (includes patents, trade marks, designs and copyright) created by the businesses to encourage them competition fairly and protect new ideas and innovation. (UK Trade & Investment 2010) The Intellectual Property Office is the major organisation in United Kingdom responsible for supervising the IPR. UK is the sixth largest manufacturer in the world, in order to assist the Britain manufacturers stay at a leading position, the government had launched a new legal framework for manufacturers to protect their intellectual property in 2008. (M2 Presswire 2008) The foreign direct investments are closely related to the intellectual property rights, this would increase the confidence of foreign investors and encourage more foreign direct investment to manufacturing sector. Moreover, the UK government is concerning the act of intellectual for stimulating economy recovery. They set the position of intellectual property as the heart of economic recovery. (Venkatraman 2009) With an integrated legal framework, it can provide a fair environment of competition to domestic businesses. Such as trade marks and patent, these are important part of the manufacturer's interests to contribute the business's success.

Risks

Although the UK has the opportunities of large market potential, stable political and legal environment, the risks can not be ignored to consider the possibility of establishing this business in UK. Obviously, the first risk is the weak economic performance by global financial crisis. A weaker Economic performance may affect the consumers' confidence for consumption. And the health problems like obesity may change the lifestyle of consumers. The changing of lifestyle may bring some uncertain factors for the decisions of business. Furthermore, higher level of labour cost, strong competition from domestic competitors and restrictive labour regulations are the major risks for doing business in UK. All of the risks may make it difficult to discuss the market and the long term investment.

Weakness of economic performance

After financial crisis, GDP growth rate of the United Kingdom for the forth quarter in 2009 increased by 0.4%, which still stays at a lower level compared to the growth rates before financial crisis. In the case of CPI, it had been recorded as 3.0% in February of 2010. This shows an increased tendency since 2009. (Office for National Statistics, 2010) Lower growth rate of GDP and increasing of CPI may relate to a decreasing purchase power of British people, this may affect the sales of the business's products. From the economic figures above, although the economy of UK has improved after crisis, it still does not totally get out of the economic trough. According to the report from Ashley Seager (2009), foreign investment fell by half in Year 2008 by the influence of downturn and impacted cash flow which deterred investors from doing business in UK. Furthermore, some unpredictable factors created by Greek debt crisis may come to influences the EU countries. If he rates are increasing, they may face a worse crisis. (Investor's Business Daily, 2010) This temporary instable phase of the EU economy may a risk of selling or the business, because it decreases customers' confidence for purchasing chocolate.

High labour costs

High labour costs could be a distinctive feature of UK's economic landscape. In order to maximise the profits, labour cost is a very important factor needed to be considered by the business. The hourly compensation labour cost in manufacturing sector is $29.73 in 2007. This is much higher than the developing countries and some of the European countries, such as $1.10 in Philippines and $8.20 in Czech Repubic. (Bureau of Labour Statistics 2009) High labour costs could increase the total costs of the company, the company need to mark up their price to cover their costs and earn profits. If this price is not competitive in the market, this company may lose the game.

Health problem of obesity

Obesity is a critical problem in UK. Approximately 75% British adults are overweighed because of assimilating excess calorie, and nearly 25% of them have Obesity problems. (Harrington 2007) This health problems may caused by unbalanced daily diet, as a result, the perspective of selling chocolate may affected by the recognition of this problem. As British have come to realise this problems, their habits are changing. Some consumers switch from chocolate to other snacks which are healthier with lower level of calorie. A trend may be predicted that more people will prefer to find healthier confectionary alternaltives to be substitute for chocolate bars. (Euromonitor International 2009) The government has been also more concerned about this problem, they try to limit the size of chocolate packaging for sale. (Rigby 2010) For these reason, the business needs to think over the perspective of this chocolate market, whether the consumption rate will continue to grow in the future.

Intensive competition of domestic competitors

According to the official statistics, there are four chocolate confectionery companies occupied the main chocolate market share in UK of 2008. Cadbury took the largest market share which is 30.29%, Masterfoods, Nestlé and Kraft accounted for 22.23%, 17.67% and 5.30% respectively. (Euromonitor International, 2009) In addition, after Cadbury was merged by Craft, they became the biggest giant in the British candy market. Obviously, if the Swiss chocolate firm wants to enter this market, the intense competition from these biggest competitors could not be avoided. In addition, both of Cadbury and Nestle started selling fair trade chocolate in UK market. These intensive competitions may cost a large amount of funds for the company to introduce their products into this market and compete with their competitors.

Restrictive labour regulations

To set up a business in the United Kingdom, the company may face a range of restriction of labour market under political regulations. From ‘The Global Competitiveness Report 2009-2010', restrictive labour regulations are the most problematic factors for investors to do business in UK. (World Economic Forum 2010) According to the official data, there are more than 30 million labour forces currently in UK which is the second largest labour market in EU. (Office for National Statistics 2010) Although UK provides a large number labour to businesses, the regulations for this flexible labour market are restrictive. Increasingly, more regulations are being set to restrict the legitimacy of contract, such as the regulation of contract of employment, termination of employment contract. In addition, the redundancy payment, working hours, minimum wages, and employment of foreign workers are legally regulated. There may be an adverse impact on the operation of business under lots of regulation of labour market, especially the recruitment strategies. If the regulations are not coincident with market equilibrium, a higher level of lowest wages may raise the real costs of the company. As a result, there may be inefficiency for the business.

Recommendation and Conclusion

The factors on both sides shown in this report indicate that the United Kingdom represents opportunities and challenges coexist in terms of business environment. On the one hand, the UK has a large group of consumers in the consumption of chocolate, and the value of chocolate consumption continues to grow shows a high attractive chocolate market potential in UK; on the other hand, the weaker economic performance of UK in post-crisis era may affect the gaining of investment. At this stage the economy may be relatively weak, but the trend of economic growth is more important to be focused for a long term investment. Although the economic growth still stays in a lower level, the GPD growth rates show an increased trend since the second quarter of year 2009. With a favourable increased trend of economic growth, to implement this long term project is feasible.

When considering the restrictive regulatory environment, it may discourage foreign investors to come into the Britain market. Under complex legal framework, more costs may be used for lots of regulatory procedures. And restrictive labour market regulation could limit the freedom of recruitment and dismissal. However, the labour regulations seem to be double-edged. As a flexible labour market in UK, the government is responsible to keep fair in working environment. Actually, the regulations of labour market aim to protect both the employees and businesses by creating global competitive advantages and economic efficiency.

Therefore the recommendations are that UK should not be eliminated at this moment and do further analysis for this market. The analysis can be focused on the changing lifestyle of British people: the impact on the perspective of sales of chocolate due to concerning obesity problems, forecasting future market demand of fairtrade chocolate. Moreover, the legal and political factors should be analysed further more: the changing of labour law, the stability of political environment in a long term period and other legal framework regulation changed may affect the business's operation. The conclusion is that the plan of establishing a fairtrade chocolate company should not be vetoed down, UK's market is full of attractiveness for which investigate further.

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