The Real Cost of FOB: How FOB Pricing is Squeezing Fruit Exporters
Fruit exporters, if you've set your sights on Europe, your goal is simple: get your produce from the farm to the tables of eager consumers in Europe.
During the 4th Kenya International Avocado Conference, we received many questions about quality standards, revenue drivers, and negotiation terms.
This post will go deeper into FOB (Free on Board) pricing.
While it might seem straightforward, we believe that FOB pricing puts exporters in a weaker negotiating position, leading to lower profits and greater risks.
Let's explore the intricacies of FOB pricing and its alternatives through various Incoterms (International Commercial Terms), shedding light on why FOB is not the best option for fruit exporters aiming to conquer the European market.
What are Incoterms?
Incoterms are standardized international trade terms established by the International Chamber of Commerce (ICC) to facilitate global trade. They define the responsibilities of sellers and buyers regarding the transportation, insurance, and customs clearance of goods. Here's a quick rundown of some commonly used Incoterms:
FOB (Free on Board): The seller is responsible for delivering the goods to the port of shipment and loading them onto the vessel. Once the goods are on board, the buyer assumes all risks and costs.
CIF (Cost, Insurance, and Freight): The seller pays for the cost, insurance, and freight to bring the goods to the destination port. The risk transfers to the buyer once the goods are on board the vessel.
DAP (Delivered at Place): The seller is responsible for delivering the goods to the buyer's location, including all transportation costs and risks up to that point.
EXW (Ex Works): The buyer assumes all risks and costs from the seller's premises. The seller's responsibility is to make the goods available for pickup.
DDP (Delivered Duty Paid): The seller takes on all risks and costs, including duties, until the goods reach the buyer's specified location.
The Downside of FOB Pricing
At first glance, FOB pricing seems fair and straightforward. The seller delivers the goods to the ship, and the buyer takes them from there. Simple, right? Not quite. Here's why FOB might not be the best deal for fruit exporters:
Limited Control Over Logistics: Once the goods are on board, the exporter has no control over the shipping process. If there are delays, damages, or other issues during transit, it's the buyer's problem. However, if the buyer is dissatisfied, this can still negatively impact the exporter's reputation.
Weak Negotiation Position: Exporters lose negotiation leverage by handing over control once the goods are on board. Buyers might use any issues during transit to demand lower prices or delay payments, knowing the exporter has limited recourse.
Risk of Rejection: If the buyer finds any reason to reject the shipment upon arrival, the exporter faces significant costs and logistical challenges in reclaiming or reselling the produce. This risk is exceptionally high with perishable goods like fruits with a limited shelf life.
Hidden Costs: While FOB covers only the cost of getting the goods to the port, hidden costs usually exist. Exporters may need to navigate port fees, handling charges, and other unexpected expenses that affect their profits.
Exploring Alternatives: Incoterms That Empower Exporters
To avoid the pitfalls of FOB pricing, fruit exporters can consider other Incoterms that offer better control and potentially higher profitability. Let's explore some of these alternatives and their implications for fruit exporters.
Making the Right Choice
Choosing the right Incoterm is crucial for fruit exporters aiming to optimize their operations and profitability in the European market. Here are some factors to consider:
Cost Analysis:
Comprehensive Calculation: Evaluate all potential costs associated with each Incoterm, including shipping, insurance, duties, and handling fees.
Profit Margins: Ensure that the chosen Incoterm allows for healthy profit margins after all expenses are accounted for.
Logistics Capabilities:
Infrastructure: Assess your logistics capabilities and infrastructure. Can you handle the complexities of DAP or DDP terms?
Partnerships: Develop strong alliances with reliable logistics providers to effectively manage the transportation and delivery process.
Risk Management:
Insurance Coverage: Ensure adequate coverage to protect against potential losses during transit, especially for perishable goods.
Quality Control: Implement robust quality control measures to minimize the risk of rejection or damage during shipping.
Conclusion: Fruit Exporters Need a Helping Hand
Navigating the European market as a fruit exporter requires careful consideration of pricing and negotiation terms. While FOB pricing might seem straightforward, it puts exporters in a weaker position, with limited control over logistics and increased risks.
Alternative Incoterms like CIF, DAP, EXW, and DDP empower exporters, enhance buyer satisfaction, and ultimately improve their profitability, but they require a larger upfront investment.
Many exporters don't have access to this capital.
SAFTA is on a mission to change this and rebalance the power dynamics for fruit exporters.
What does that look like?