SMEs need State and bank support to thrive

The agrifood industry is facing into an immense period of opportunity and challenge.

How policymakers, entrepreneurs, farmers, and co-ops respond will dictate how much wealth can be created for individuals and Ireland as a whole.

As we approach the end of March, the dairy industry will be just 12 months away from its largest upheaval in 30 years. Already, there are indicators that dairy farmers are paving the way for a sharp uplift in output. Processors also have boots on the ground at new production facilities that will manufacture products for markets across the globe, especially in developing milk markets in Asia.

Dairygold, Glanbia, and Kerry have the highest profile projects under way but Carbery, Tipperary Co-op, and Arrabawn Co-op are also active.

Aside from the big changes planned in dairy, there are a vast range of small and medium food enterprises with ambition. The path forward for many of these is not as simple as that laid out for milk. Funding is one key concern.

At a large-scale level, Irish food companies have rarely been as inundated with offers of cheap finance as applies today. Bank debt is being offered at low interest rates by a number of banks to companies such as Glanbia and Kerry. Equity finance is a further option for the stockmarket-listed corporates and could be tapped at relatively high valuations, meaning it can be an efficient source of capital.

Among smaller firms, however, the scenario is very different. Many of these are finding a reluctance among banks to lend significantly. In addition, the cost of that funding is much higher than applies to large companies because banks have become more risk-averse towards these smaller entities.

Equity funding is also limited as many SMEs are family owned. Others can only source equity from venture capitalists who tend to demand high returns and significant influence in exchange for finance.

This funding hurdle for food SMEs is limiting their ability to expand. It is essential that Ireland devises a strategy that unlocks this funding puzzle for SMEs and allows them to flourish as producers of food and drink that can find traction with retailers and consumers on international markets.

The ability to export profitably is a key piece of any strategy designed to support SMEs as the domestic market is too small to sustain long-term success.

If we assume international expansion is key to unlocking financing for SMEs, then they must also face up to the radical changes under way in food retailing.

The remorseless march of the Aldi and Lidl business models is changing the way in which both own-label and branded food is being put before consumers.

Legacy retailers are under sustained pressure, as displayed by Morrisons in the UK last week when it issued a severe profit warning.

Suppliers who can win contracts with the new breed of discounters secure long-term agreements but at relatively low margins. Understanding how the retail landscape is shifting should be central to any strategy by an SME.

Plotting a government policy that supports SME growth is at least as important as the big project plans under way in dairy.

I would argue that we need a pool of lending and equity capital that is as competitively priced as those attainable by the very large companies but made available to SMEs that can crack international markets.

The State has a key role in designing such financial support. While important work is being undertaken by Enterprise Ireland, Bord Bia, and others to nurture a new breed of Irish food and drink winners, a more radical and far reaching set of initiatives is needed.

* Joe Gill is director of corporate broking at Goodbody. His views are personal.