Mohamed Abdelgawad, Senior Associate at Sharkawy & Sarhan Law Firm, offers his insights on the opportunities for growth and the legal challenges facing Egypt’s food and beverage industry.
From a legal perspective, do you feel that Egypt faces any unique or particular challenges when it comes to the growth and sustenance of a thriving food and beverage industry?
The main issues relating specifically to Egypt and perhaps to emerging markets in general relate to regulators, the authorities responsible for supervising and monitoring this industry. In Egypt there are over 15 relevant authorities that the investor or company has to satisfy the requirements of, when it comes to food and beverage. There are a lot of conflicts between these authorities and this is very challenging.
Another issue quite specific to Egypt concerns trademarks and trade names. We have seen a lot of local chains that had their names replicated several times and some of them have had to rebrand. I’m talking about small and medium businesses, usually serving local food. The enforcement of the IP law and protection of trademarks and trade names would be a useful way to tackle this issue.
How do you address those challenges?
We try as much as possible as a law firm to enhance our knowledge of the different regulations, authorities, processes, timelines and risks that our clients will encounter. We prepare the client to know what risks they should accept and how to deal with situations in which they face corruption – where they are asked for bribes or any other illegal action. This is all we can do; we cannot change the laws and we cannot change the competencies of the regulators. From a business perspective, the business unions and the relevant Chambers of Commerce are trying to make some changes to the structure of the authorities to try to create some kind of unification amongst the entities that the investor interacts with.
Are there legal developments that have happened recently or that you would like to see happen to make the processes of licencing and permit procurement more straightforward?
I think this has been the most debated topic when comes to F&B. An initiative was started just after the Revolution talking about the establishment of an Egyptian food and drugs authority, similar to the FDA in the USA, to regulate both sectors (the F&B sector and the pharmaceutical sector). This has evolved I believe into the idea of developing a unified state authority for F&B and a separate body for pharmaceuticals other than the department that currently exists under the Ministry of Health.
This authority is expected to replace the National Institute for Nutrition. It is expected to combine all the relevant competencies in the government so that companies deal with one entity that has clear regulations, clear requirements for the permits, with clear timelines and a unified process, instead of asking the Ambassador to deal with the municipalities, deal with the Ministry of Health, deal with the police, deal with the Ministry of Agriculture… and with more interaction with the Consumer Protection Authority and other authorities relevant to the F&B sector.
This is the main development I know of and it is expected to happen soon. I don’t have confirmed information but the latest I heard is that it is now being discussed in Parliament and expected to be established in a few months. If done properly, it will boost investment and resolve many issues and obstacles faced by this sector, as one of the main sectors in the Egyptian economy.
What are the main legal developments that have impacted the service industry in recent years?
The main development is the VAT legislation, which has added new taxes to the service industry. In the eyes of many, and we actually agree with them, this was maybe not the right time to introduce this tax. The service industry and tourism have been affected by the current economic and security situation, so they are already facing a challenging period.
On the positive side, a main development is the support shown by the Central Bank of Egypt in setting regulations requiring banks to provide financing at low cost to the tourism industry and to small and medium businesses, including service businesses of course. If there is anything more to be done in this sector it is facilitating and enhancing the financing of these businesses and incentivising them financially (maybe by tax discounts, if not elimination). There could be financial incentivisation for the businesses that increase the country’s foreign currency income, including of course businesses within the tourist sector.
Franchising has proven a successful business model for food and beverage entities wishing to grow in Egypt. What risks and opportunities within the legal industry do you think organisations or businesspeople should be aware of, if they are planning to franchise their business?
This is one of the most interesting topics when it comes to the F&B sector because Egypt to date doesn’t have a franchise law. When we are asked to review a franchise agreement, it is very challenging because it is a mix of contracts under Egyptian law. These mainly comprise trademark agreements, transfer of technology agreements, supply agreements, distribution agreements and others. A franchise agreement could qualify as a joint venture agreement.
The main red flag we have from a legal perspective, from the point of view of the franchisor, is the presence of a provision which provides for automatic renewal of the trademark licence agreement, and the inability of the trademark licensor to refuse the renewal of the agreement, unless the trademark licensor has a valid reason (the valid reason being a discretionary matter for the courts).
The other issue that is significant, especially to non-Egyptian franchisors, occurs if the contract falls under the transfer of technology agreement. In this case there are a lot of provisions that are mandatory, that will automatically be applied to the contract and that have significant impact. The main two provisions are the mandatory application of Egyptian law and the fact that it is not possible to agree on arbitration outside of Egypt.
The challenging thing then is working out how you will deal with a franchise. Egyptian companies in particular need to understand the concept properly. Most of the clients we deal with who are interested in franchising their business are more interested in granting a licence to their trademark than anything else. They are not aware of the different dimensions of this business: you have to have a franchise team, you have to monitor and support your franchisee to make the project succeed. A lot of Egyptian investors don’t understand this. There is also a lack in the consultation services regarding this type of contract. Very few people understand the essence of franchise, namely the obligations of each party and the importance of these obligations to make the project succeed.
Sometimes changes need to happen – adapting menus to fit local Egyptian tastes, for example. How easy is it to change a pre-existing agreement in this way if necessary?
Usually franchise agreements offer the right to do this. But this generally happens with big international brands that are in a position to do this; they are in a dominant position. The Egyptian franchisees have to comply with this, not just for legal reasons but also for business reasons. The challenge comes with the Egyptian franchisors because any change may affect the profitability of the project. To date we don’t have a lot of well-established Egyptian names that are also willing to establish franchises. So the impact of the changes that could be introduced may affect the relationship.
Of course sometimes you face the reverse situation, where it is the franchisee who wants to make changes, and actually this happens quite a lot all over the world. Sometimes the franchisee has to change the taste or the ingredients to meet the needs of the local market. All this must be properly negotiated and addressed in the franchise agreement. As a franchisor you don’t want to give the franchise to someone who will change the whole identity and concept. Usually this is covered by having a franchise team within the franchisor dealing properly with the contact person in the franchisee to make sure this is dealt with properly in terms of the company’s values and the brand’s position in the market.
From a business perspective, how does litigation work within the F&B industry?
There is a lot, like any other industry. The most common one is related to the health and safety of food, the classic example being of course a claim by someone that there is a foreign object in his food. But this is not really a strict legal matter but rather a factual one at the end of the day and all court cases end with experts giving evidence, so it is difficult to objectively determine from a legal perspective what should be done. Documenting quality control efforts properly may help in this respect.
Another issue related to having a large number of different authorities in Egypt is that sometimes companies face litigation issues that are not logical for them. For example, an inspector from a governmental authority may come to a warehouse and find food stocks that have expired. They start proceedings against the client. When you talk to the client to find out what happened you learn that yes, the stocks were expired, the client was going to get rid of them safely but had to keep them in the warehouse in the meantime. If there was one independent authority, we could regulate the business of warehousing and the book-keeping of the warehouse.
What are effective mechanisms that you have seen or are aware of for smaller, local businesses to utilise the expertise of the Egyptian legal industry to increase their operations?
From the investors’ side, they need to appreciate the role of the lawyer. They need to understand that the fees they are paying are reasonable. You should expect a service for what you pay and it is a service that has economic value. However there is a gap in the market between the consultation services and the abilities of the small and medium-sized businesses to obtain these services. There are no service providers in between, providing reasonable services for a reasonable price. Some mechanisms to try to resolve this could be as follows:
1) Market evolution (which is already happening now). New law firms are appearing, offering more reasonable legal fees, which will increase competition between firms to meet the needs of the market.
2) Investors will need to appreciate the role of the lawyer and their willingness to pay may then increase. They might try to use their associations by coming together to obtain advice together, which would decrease the cost for each one.
Speaking generally, the legal sector has an important part to play in the F&B industry. Without proper processes, you will always face a lot of corruption. Many clients, especially Egyptian owners of small and medium-sized businesses, don’t appreciate the role of the lawyer in drafting agreements or documenting the ongoing relationship. This is a key development needed in the market.