Choosing the right Incoterm in B2B F&B: Why Ex-Works falls short

Introduction

In the dynamic and ever-expanding global market, effective communication and well-defined terms are crucial for smooth transactions between brands and distributors.

Among the various International Commercial Terms (Incoterms) that outline responsibilities and costs in international trade, Ex-Works (EXW) is a commonly used term.

However, in the B2B Food and Beverage (F&B) sector, relying solely on Ex-Works can lead to complications and inefficiencies.

In this blog, we will explore why Ex-Works may be the wrong Incoterm for brands and distributors and recommend an alternative that better suits the complexities of this industry.

Challenges with Ex-Works in the B2B F&B sector

Ex-Works (EXW) is an Incoterm where the seller's responsibility ends once the goods are made available at their premises, leaving the buyer responsible for all subsequent costs and risks.

While EXW may be suitable for certain industries, it presents challenges in the B2B F&B sector:

1. Logistical complexity

   Ex-Works places the majority of responsibilities on the buyer, including transportation, customs clearance, and risk during transit.

   In the F&B industry, where products often have specific storage and transportation requirements, expecting distributors to manage these complexities may result in logistical challenges.

2. Quality control issues

   F&B products are highly perishable, and maintaining quality throughout the supply chain is paramount.

   Ex-Works may lead to quality control issues as the buyer assumes control from the point of origin. 

   Lack of oversight during transportation and potential mishandling can impact the quality of the products upon arrival.

3. Uncertain costs for Distributors

   Distributors working on an Ex-Works basis may face unpredictable costs related to transportation, customs, and handling. These uncertainties can hinder their ability to provide accurate pricing to clients, potentially affecting their competitiveness in the market.

Recommendation: FOB (Free on Board)

Given the unique challenges in the B2B F&B sector, a more balanced Incoterm that ensures shared responsibilities and minimizes risks for both parties is essential. The "Free on Board" (FOB) Incoterm emerges as a suitable alternative.

Advantages of FOB in the B2B F&B sector

1. Shared responsibility

   FOB divides responsibilities more equitably between the brand and the distributor.

   The seller is responsible for delivering the goods to the port of shipment, including the cost of transportation to that point. From there, the buyer assumes responsibility for the shipment, including freight, customs clearance, and delivery to the final destination.

2. Reduced logistical complexities

   By specifying the port of shipment, FOB simplifies the logistics, allowing the brand to focus on delivering products to a known location. This ensures better control over the initial phase of the transportation process.

3. Enhanced quality control

   FOB allows the brand to oversee the quality and condition of the goods until they are loaded onto the vessel. This helps in maintaining the integrity of the products during the critical early stages of the supply chain.

4. Predictable costs for Distributors

   Distributors working under FOB have a clearer understanding of their costs, as they are responsible for expenses beyond the point of shipment. This clarity enables distributors to provide more accurate and competitive pricing to their clients.

Conclusion

While Ex-Works may be suitable for some industries, the complex nature of the B2B F&B sector demands a more collaborative approach.

FOB strikes a balance between the responsibilities of the brand and the distributor, ensuring smoother transactions and maintaining product quality throughout the supply chain.

By carefully selecting the appropriate Incoterm, brands and distributors can foster stronger relationships and navigate the challenges of international trade more effectively.