Java Time, with 17 current coffee shop locations and six more in development and plans to expand throughout the Middle East, is the largest coffee shop chain in Saudi Arabia.

AMI recently visited the Kingdom of Saudi Arabia to assess current and prospective distributors on behalf of one of its clients.  As expected the visit served to achieve the objective of selecting the most highly qualified distributor which offered the highest potential for this client’s growth.  Additionally, however, this visit served to convince me that Saudi Arabia – and the entire Persian Gulf region – offers huge opportunities for U.S. food and beverage manufacturers to develop their brands in high-growth markets.

The Saudi business people (I met only men) are professional, thoughtful and strategic in their approach.  It is important for them to develop relationships with the people they will be working with.  I found a high degree of loyalty and service by the Saudi companies to the foreign brands that they were representing.  To a foreigner, their graciousness and hospitality are outstanding.  However, among themselves there is frequent switching of loyalties and various business practices employed to gain advantage over competitors.  In order to understand what lies beneath the surface in Saudi Arabia, a foreign business person must ask questions to multiple parties before formulating an opinion.

Saudi Arabia’s economy will grow by 4% this year as oil production increases, up from 0.6% in 2009.  Real GDP is forecast to grow 4.5% in 2011 and 4.7% in 2012.  Inflation is stable at 5%.  The Kingdom is now undergoing a $400 billion stimulus program to boost its economy and create jobs for its 25 million people.  This fiscal stimulus is also expected to increase imports, much of it in the food and beverage sector.

The Kingdom is awash in foreign fast food chains and casual dining brands such as KFC, Pizza Hut, McDonald’s, Applebee’s, and others.  Leading international and local coffee shops dominate the social scene due to the lack of bars and other places for families and lovers to meet.  While most of the major players are present in the market – Starbucks, Costa, Coffee Bean & Tea Leaf, Dunkin’ Donuts – there are several local coffee shop chains that have equally high quality standards and a good perception among local Saudis.  Many of the local coffee shops differentiate themselves by having “private rooms” for families and friends which are cordoned off by curtains or locked doors.

In addition to Saudi Arabia, other Gulf Cooperation Council (GCC) countries (Kuwait, Bahrain, Qatar, United Arab Emirates and Oman) are experiencing high GDP growth, rising income levels, and a young population eager and willing to try new food and beverages.  These countries are also diversifying from oil and encouraging their citizens to consume imported items.  The GCC countries have no barriers to cross-country investment and services trade.  Soon the GCC will be a free-trade zone, but this has not yet been fully implemented.  Only Bahrain has a separate free trade agreement with the U.S.

If you are seeking accelerated growth of exports, then I encourage you to consider markets in the Middle East.  The people are friendly, cooperative, hospitable, and eager to engage with U.S. companies.  In fact, most Saudi businessmen I spoke with prefer importing from the U.S. rather than Europe because the Saudi riyal is pegged to the U.S. dollar, while the Euro fluctuates, increasing risks for importers.  U.S. companies would do well to exploit this competitive advantage while they still enjoy it.

Robyn Hawkins, CEO of Big Train, and Kenneth Luciani, founder of Baresso Coffee – the largest coffee shop chain in Denmark – at Caffe Culture, London.

The show came at an interesting time, not only because the U.K. was abuzz with the Wimbledon tennis tournament down the road from the show, nor because the English soccer team advanced in the World Cup tournament, nor because of the 40^th anniversary of the Glastonbury rock n’ roll concert (the U.K.’s answer to Woodstock) or even the Hard Rock concert featuring Pearl Jam.  Coffee futures hit a 12-year high on the New York and London exchanges.  Delivery of Arabica coffee in September rose to US$1.765 per pound, punishing hedge funds and other traders who had speculated on declining or short positions.  The reason for the rapid price increase is due to anticipated low coffee crops this year in Columbia and Central America.  Expect to see increases in retail coffee prices at your local supermarket and neighborhood Starbucks!

The coffee industry is also under pressure due to the widely held belief that coffee consumption in high-consumption, developed markets has reached saturation.  These markets include the USA, Germany, Japan, Italy, France, Spain and Sweden.  In these markets, the correlation between a rise in income and/or a decrease in price does NOT now lead to an increase in consumption.  In other words, coffee consumption is flat in the developed markets.

Coffee companies seeking growth have to expand to non-traditional, low consumption markets with high growth rates.  These markets include Russia, South Korea, Australia, the Middle East, Argentina, Turkey, Israel and Taiwan.  In these markets, as income rises the consumption of coffee also increases.  For example, outside the major coffee consuming countries, Russia has the highest volume consumption.  Given the demographics in these markets – rising disposable income, higher birth rates, low per capita coffee consumption, and an embrace of the specialty coffee industry – the prospects for growth are excellent.

Markets have been selling the Euro on concern that Euro zone austerity measures will damage economic growth in the 16-country currency area. The austerity steps are a reaction to market fears about the risk of a debt default in some Euro states, notably Greece, Spain and Portugal.

Some economists have said that, while the Euro zone’s recent $US1 trillion safety net for the debt obligations of its members solved near-term insolvency risk; it does not resolve the longer-term problem of huge public deficits and welfare programs.

The Euro has fallen nearly 7% cent against the dollar this month, hitting a four-year low on May 17. It has lost almost 15% for the year – 18% in the last 6 months – making it the worst-performing major currency so far in 2010[1].  The Euro is down 24% from its record high against the dollar in July 2008.  The plunging Euro is also affecting Asia-Pacific currencies adversely such as the Australian dollar.

All this is scary stuff for exporters hoping to grow sales in Europe.  Yet we should remember that the Euro debuted in January 1, 1999 at US$1.17, even less than today.  Two years later Greece became the 12^th country to convert its currency to the Euro.  Has the Euro been “over-valued” the past few years?  In short, yes.

Europe has weathered many crises over the millennia, and it will withstand this brief currency fall. The European Union is a political union of 27 countries with a dynamic economy of over 500 million people.  The EU generated about 28% of the nominal gross world product in 2009.  Do you think this economy is going anywhere but upward?

Despite a tumbling Euro, the Greek debt crises, and rising U.S. unemployment, U.S. exports increased 3.2% in March.  This indicates that worldwide economic growth and demand is expanding.  Ted Wieseman, an analyst at Morgan Stanley Research, said “Europe’s down but the other regions are accelerating” in Asia, the Middle East and Latin America.

U.S. exporters have reason to remain sanguine.  Rather than a scattered approach to exports, companies should identify a few high potential international markets and focus their resources in a strategic marketing approach.   They should adjust their cost structure and ensure that pricing in foreign markets is competitive, and that local consumers perceive they are receiving value.  Export pricing should be seen as “marginal,” that is, all fixed costs need not be included in final pricing as they are in domestic pricing.  Finally, U.S. exports should be “localized” to the extent possible, always remaining in compliance with local packaging and ingredient regulations.

U.S. exporters are very well-positioned to exploit a recovering world economy, and with preparation, can enjoy phenomenal success in global product markets.

New trends are developing all the time and one area in particular that holds promise is the Ramadan bazaar. The Malaysia government has been encouraging local traders to set up Ramadan bazaars with great success. Malaysian consumers find it a great way to break their fast, get halal cooked foods, drinks and festive goodies.
The Ramadan bazaars are becoming more of a fixture throughout Malaysia, with the number of stalls increasing, the quality and range of products growing and local governments are even educating stall holders on hygiene and providing free seminars on good business practices. The bazaars operate from late afternoon to late evening and are the talk of Malaysian consumers seeking special delicacies.

The anticipated results of AMI’s new Asia representative office will be to increase sales of current AMI clients, provide them additional brand exposure, and decrease their costs.

It is Thaksin’s “red shirt movement” – which he is funding – that has demonstrated mainly in central Bangkok and has caused havoc in the country, severely disrupting normal business activities as well as tourism.  The “red shirts” have been accused of turning the constitutional monarchy in Thailand into a republic. It is directly challenging the country’s current power structure and political elite, and seeking the return of Thaksin.  He has said publicly, “If the country and the people really need me, I will do it.  I want to be part of the solution.”

Obviously Thaksin is infuriating the current government of Prime Minister Abhisit Vejjajiva, which is becoming weaker every day.  Tens of thousands of “red shirt” protesters are camped in downtown Bangkok, but after nearly two months only a few of them have been killed by the omnipresent military police.

Below is live commentary from an AMI representative who went “inside” the red shirt movement yesterday:

“The red shirts cover a very large area in the downtown, central business and shopping district of Bangkok.  It is clear that they are not going anywhere.  The movement is well organized, with toilets, garbage collection, recycling, first aid, people cooking, vendors selling.  Buddhist monks (clearly “red shirt” supporters) have set up an area for spiritual blessing.  There are people from all over Thailand in the camps – it’s a complete mini-city!

The red shirt leaders have strategically placed loudspeakers around the entire area.  They have their own radio station which broadcasts throughout most of

Thailand .  The red shirts have won the hearts and minds of the people…civil war is in the cards.”
What does this mean for U.S. exporters?  In the long term, not very much will change.  Businesses will once again flourish in this entrepreneurial, hard-working country.  In the short term, expect a decrease in normal sales turnover and consumer purchases, disruption of shipments, and a cautious approach to new product launches.  Maintain a long term horizon, which is good advice for exports in general.  Remember that Thailand has had 21 coups in the last 75+ years, but growth of 9.4% from 1985-1996 and 5.5% subsequently.  It is a robust market for those who are patient.

With a population of only 4.7 million people, Singapore is not a large market.  However, with one of the highest per capita incomes, 2010 first quarter growth of 32%, duty free entry for most products, and very transparent import requirements, Singapore is an excellent entry into the fast-growing Southeast Asia region.

With people over 60 years old expected to represent 18% of the population by 2015, and “health” being the most sighted concern among Singaporeans, the food sector’s highest growth rates are expected to be in the healthy, natural, and functional food categories.

Some of the products that have benefited most from this trend have been fruit juices (with an average growth rate of 39%), soymilk (+21%), and most dramatically wine (+214%). Wine is seen as the healthy alternative to beer and hard alcohol with an additional 37% growth expected by 2012. Natural supplements including both Chinese traditional herbs and Western health products are also expected to be some of the hottest categories in the years ahead.

MALAYSIA

The increasingly urban population of Malaysia (representing 71%) has changed consumer spending patterns, particularly in the food sector where convenience and time-saving have become the biggest selling points.  While there has been some ageing of the population, particularly in recent years, over 60% of the population is still under 30.  These savvy young shoppers are increasingly seeking internationally recognized brands and products, which provides a great opportunity for U.S. food and beverage exporters.

Despite the consumer sector’s dramatic shift towards convenience and prepackaged products, the food service and Industrial sectors are a significant market for U.S. food ingredients. Malaysia has positioned itself as a safe, Halal food processor for many countries in the region and the Middle East. There are some specialty ingredients that are purchased by Malaysian manufacturers for product that is for export only and never makes it to Malaysian retail shelves.

High import tariffs in Malaysia can affect imported products’ competitiveness. The most important factors in this market are having a recognized Halal certification and a good distributor to get your products in front of customers and decision makers.

INDONESIA

The largest Muslim country in the world, Indonesia is another significant market in Southeast Asia that should not be ignored. With a population of approximately 230 million, famous tourist destinations such as Bali, and a significant manufacturing sector, Indonesia can be a very attractive market for consumer products, food service, and Industrial ingredients.

Although still a developing country, products that are fortified and functional are the most popular in Indonesia. Prepackaged foods are growing in popularity; however, most Indonesians still prepare food from scratch or purchase ready-to-eat food from street vendors. Rice remains the largest staple here, but meat and dairy products have seen significant growth of 68% and 100%, respectively, in recent years as incomes have risen.

One of the biggest challenges in Indonesia is distribution. As an archipelago consisting of  thousands of islands, it can be a challenge getting product from one end of the country to the other, especially if it requires cold storage or to be frozen during shipment. The island of Java – with the two largest cities, Jakarta and Surabaya, and over half the country’s population – would likely be a solid entry point that would allow a U.S. company to enter the market while avoiding significant distribution challenges.

In addition to having a recognized and current Halal certification, there are other unique requirements for the Indonesian market. For most products, local importers need to register the product with the government, a process that can take significant time. Only the registered importer can import the specific product independently. This can cause unique challenges if a U.S. exporter decides that it requires a new Indonesian importer.  As always with exporting, careful planning and a thorough assessment of a chosen importer are critical to success for U.S. companies.

“Green” is definitely an ongoing trend there. Like other developed markets, there is a heightened sense of concern for packaging to be more environmentally friendly and to reduce the volume of waste entering landfills. While they still have not gained the popularity seen in the U.S., “organic” and “natural” products are increasingly gaining more shelf space and consumer preference.  A growing number of Australian importers and distributors are enthusiastic to market new imported products in these categories. In this way, U.S.- certified companies have an advantage as USDA certification is recognized as equivalent to the Australian standard, taking away the stress and paper work that can occur in other markets.

While there is a strong consumer preference to “Buy Australian,” with the current weakness of the U.S. dollar more Australian manufacturers and retailers are considering to import U.S. ingredients and finished products. The U.S. is perceived by Australians as being on the forefront of food and beverage trends.  This perception not only applies to finished retail products but also to unique imported ingredients that offer Australian companies a point of difference in the market place.

While the diversity of restaurants in the major cities is commensurate with other leading world cities, there are unique differences. Quick Service Restaurants (QSR) offer a variety of set family meal combinations.  Casual dining restaurants advertise “BYOB” (alcoholic beverages).  The Australian foodservice market has taken its own unique way to integrate out-of-home dining into consumer lifestyles.

While maintaining its unique identity, the Australian market has many similarities to the U.S. which make many U.S. products a good fit. While navigating strict quarantine regulations on imported food can be tricky, recent trends in consumer preference, currency values, and regulations may make this the perfect time to enter the Australian market.

Do your products contain imported sugar, raw sugar or flax seeds? Do you currently export finished or manufactured products containing these ingredients?

If you answered “yes” to both of these questions, you may be eligible for Duty Drawback. The Duty Drawback program was initially established in 1979 by the first tariff act of the United States. The program gives US manufacturers the opportunity to receive up to 99% of the customs duty paid to U.S. Customs. Duty Drawback is available in any instance in which an import duty has been paid on an imported ingredient and finished goods are subsequently exported.

Depending on the usage and volume of these ingredients purchased, this could lead to a substantial savings and thus lower prices for your international customers.

Why Apply for Duty Drawback?

• Drawback programs could help you obtain a significant refund on duties paid on imported sugar products, flax seeds, etc.
• Removes the handicap of including the duty paid on imported ingredients in your costs and, consequently, your export price.
• Allows you to offer a lower export price to international buyers and increases international sales by making your products more price-competitive and more accessible to foreign buyers.

Who Should Apply for Duty Drawback

• Confectionery manufacturers
• Baking products suppliers
• Processed food producers

How to Apply for Duty Drawback

• Visit the U.S. Customs website for the full brochure and list of necessary paperwork.
• Gather all supplementary supporting documents
• Contact your freight forwarder or nearest Port for assistance.

For more information on Duty Drawback and how to apply, please contact AMI.

The language of the NEI is optimistic, lofty and naïve.  It will promote trade missions, educational tools for small businesses and first-time exporters, and endeavor to reduce trade barriers in foreign countries.  That is the good news.

The bad news is that the NEI would reduce funding for the highly successful Market Access Program (MAP), which this year will provide about $160 million to small- and medium-sized U.S. food and beverage companies to gain access to foreign markets.  The Market Access Program (MAP) uses funds from the U.S. Department of Agriculture (USDA) to help U.S. producers, exporters, and private companies finance promotional activities for U.S. agricultural products. MAP funds promote the development, maintenance, and expansion of commercial export markets for agricultural commodities.

Despite the numerous “success stories” of U.S. food and beverage companies penetrating foreign markets as a result of the MAP, the current Administration appears to value more highly other export promotion activities.  The Administration believes the private sector should replace funding of the MAP budget.

Nonetheless, there has been a surprising backlash from several U.S. Senators and Representatives, whose constituents depend on agricultural exports for their livelihood.  Those interested in expressing their opinions on this issue may consider contacting their local representatives.

The NEI is also naïve in that it pushes a U.S. agenda without consideration of other countries or their objectives.  In other words, it promotes U.S. exports but not imports to America.  Other countries seem to resent this and find it hypocritical of a country that promotes “free trade.”  The Obama Administration has failed to study history and recognize that cross-border trade, free and transparent markets, and foreign direct investment have brought enormous prosperity not only to the U.S. but also to other developed economies.  The NEI seems more like a token gesture to U.S. labor unions and protectionist movements than a meaningful initiative to stimulate global trade and investment.

Just days before U.S. Secretary of Commerce Gary Locke lead a U.S. trade mission to Brazil to promote US products last month, the Brazilian government announced that it will levy $600 million in extra import duties on U.S. products in retaliation for U.S. subsidies of cotton, which “protects” the U.S. cotton industry.  Apparently, the Administration failed to consult other countries about its new export initiatives.

Worse still, the U.S. Administration has failed to ratify three previously negotiated Free Trade Agreements (FTA) which have been in limbo since the last Administration – South Korea, Panama, and Colombia.[1] Robert C. Hamilton, Washington State’s Assistant Trade Representative, Office of the Governor, argues that the Obama Administration could not focus on the three FTAs until the passage of the Health Care legislation.  He also mentions that each FTA has its own unique challenges: Panama’s status as a U.S. tax haven; Colombia’s labor laws; and South Korea’s auto industry.  The latter’s local auto industry had, until recently, 95% market share.  The Korean government has for years scrupulously audited its citizens who purchased imported cars.

None of this seems to have bothered the Europeans, who after catching wind of the potential U.S.-Korea FTA, swooped in after the Americans and signed an FTA with Korea!  Even Chile receives duty free access to Korea on most goods.  The Europeans recognize that Korea, with an economy of $929 trillion (2008 World Bank), is an excellent market for European products.  Unfortunately U.S. imports still face stiff import duties in Korea, making U.S. companies less competitive than its European and Chilean counterparts.  This in turn shuts out U.S. companies from the 4^th largest market in Asia and the world’s 15^th largest economy, maintains trade barriers, reduces U.S. exports, and fails to create new jobs.  It appears that politics is impeding trade and commerce.