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Top Story: High petroleum costs fuel price inflation

Buyers have to find more efficiencies or pass on cost to customers

Lisa Duchene
January 01, 2005

Mohammed Jeddy, the seafood buyer for 50 Fiesta Mart grocery stores in Texas, is in a bind. He’s paying about 5 to 8 cents per pound more for seafood due to higher fuel costs but fears losing customers if his prices are too high.

He charges just a little more, makes a little less money for the store than he did last year and every day looks to make his operation more efficient. Jeddy is still carrying a wide variety of seafood but has cut the frequency of weekly seafood deliveries from four to three to save on fuel costs and labor.

Many other retail, restaurant and distributor buyers are in the same jam, facing a cut to margins, passing on a price hike to customers or making up the difference through greater efficiency, like making sure trucks are carrying full loads and maximizing routes.

High petroleum prices add extra pennies to the price of seafood at every step along the supply chain, from harvest to processing, shipping to packaging. By the time product reaches a retail or restaurant buyer, as much as a dime per pound can be traced back to higher fuel and packaging costs, buyers estimate.

“It’s very bad,” says Jeddy, “It’s a ripple effect. Everything keeps going up. Along with [costs related to] country of origin labeling and tariffs, [fuel prices] are killing seafood.”

Six- to 12-month contracts with suppliers have protected Rockfish Seafood Grill, a 23-restaurant chain in Texas, along with many other casual-dining chains, from fuel-driven price hikes. Contracts typically call for the buyer to pay the supplier or distributor’s cost, plus an agreed-upon fixed sum.

Rockfish, for example, contracts its purchases of farmed trout. When fuel prices climbed in the last six months, the chain’s trout supplier ate the increase.

But negotiating a round of new contracts has been quite sticky, says Virginia Pivonka, Rockfish’s seafood buyer. Distributors are wary of locking in to prices when their fuel costs have been so volatile.

Pivonka estimates the cumulative impact of higher fuel costs adds about a dime per pound of seafood to the wholesale price, based on conversations with her suppliers.

In some cases, as with air-freighted fresh mahimahi, increased fuel costs at about 20 to 25 cents per pound to shipping charges.

Darden Restaurants in Orlando, Fla., says its buyers and operations staff have achieved efficiencies to prevent higher fuel prices from affecting the cost of supplying seafood to its 1,300 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones BBQ and Seasons 52 restaurants.

“Our buyers are focusing more than usual on managing our freight costs by further streamlining our shipping logistics and consolidating freight shipments,” says Mike Bernstein, Darden’s director of media and communications. “Our guests will not see price increases due to rising fuel costs to date,” he says, adding that increasing efficiency will prevent squeezing of margins.

Independent restaurants aren’t eager to raise prices either.

David Marder, the seafood buyer for Bob Chinn’s Crab House, with two restaurants in Chicago and Wheeling, Ill., has seen a slight increase in seafood prices due to fuel costs over the last few months, but he says the restaurant will absorb that — for now.

“The last thing we want to do is raise our prices,” says Marder.

Other operators know the dramatic increases in global oil prices inevitably have affected seafood prices but never see a cost breakdown.

“I know for a fact that the prices have gone up because of the fuel,” says Jim Filip, owner of Doris & Ed’s, a 90-seat upscale restaurant in Highlands, N.J., who buys most of his fish from the Fulton Fish Market. “But when you go out and buy 100 pounds of shrimp, [suppliers] aren’t going to say, ‘There’s another nickel per pound due to
fuel.’”

Filip absorbs the increase to stay in his customers’ good graces. But he worries about what will happen over the winter. If prices keep rising, everyone in the supply chain will have to pass on even more costs, forcing prices up higher, he says.

By any measure, world crude oil prices are high. In late 2003, prices were around $35 per barrel. In October, crude oil prices peaked at $55 a barrel, a nominal record but when adjusted for inflation below soaring prices in 1981.

Since October, prices have fallen but are still above $40 per barrel and expected to stay high.

“We’re not expecting immediate dramatic relief on the diesel prices,” says Jonathan Cogan, spokesman for the U.S. Energy Information Administration, a statistical and analytical agency within the U.S. Department of Energy. “Part of
that is an assumption that we’re going to see continued high crude
oil prices.”

The agency does not forecast jet fuel prices, but says it is likely they will follow the same trend.

The price of crude determines the price of marine diesel for fishing boats and container ships, highway diesel for delivery trucks, jet fuel for the airlines, the cost of raw materials to make plastic packaging and, of course, the gasoline prices consumers pay at the pump, putting many on edge about their household budgets.

Retailers and restaurants alike are pushing back on prices, wary that consumers will trade down if too much of the fuel cost is passed on. Consumer caution over spending combined with lobster prices around $6 per pound wholesale for chicken-lobsters has led to weak demand this holiday season, says Michael Tourkistas, president and CEO of East Coast Seafood in Lynn, Mass., a lobster distributor.

Restaurant chains have told him customers are satisfying seafood cravings with clam chowder rather than order a lobster dinner, he says.

In late November, average marine diesel fuel prices along the Gulf coast were $1.3785, or 69 percent higher than the 81.49 cents in November 2003, according to
the U.S. Energy Information Administration.

In some cases, when dock prices are too low to cover the price of the trip, fishermen stay tied up. Some Ecuadoran fishermen didn’t fish for mahimahi because a dock price of 60 cents per pound didn’t cover the fuel cost, says one distributor. Pivonka anticipates a shortage of Pacific brown shrimp in coming months for the same reason.

Importing product costs more because most shipping companies and airlines have increased their fuel surcharges over the past 12 months.

The 13 major ocean-container shipping lines that carry freight from Asia to the United States and belong to the Transpacific Stabilization Agreement have increased fuel surcharges quarterly throughout 2004. The fuel surcharge on a 45-foot container was $235 in January and will be $345 in January 2005, a 46 percent increase.

Individual carriers make the final decision on whether to adopt the TSA surcharge increases. Orient Overseas Container Line, a TSA member that carries about 15 percent of the frozen shrimp imported from Asia, says it will raise fuel surcharges in January consistent with the TSA figures.

The story is the same for the airlines, which have steadily raised fuel surcharges throughout the year. Flying seafood from anywhere besides Alaska costs significantly more than it did a year ago. Alaska Airlines has not yet passed on higher fuel surcharges but plans to do so this month.

Icelandair increased its fuel surcharge to 25 cents per pound in May and then to 30 cents per pound Oct. 4. In 2004, Icelandair flew about 6,000 tons of seafood to the United States, mostly cod and haddock.

“We expect the fuel price to have stabilized and do not expect to add to the fuel surcharge in the near future,” says Pétur J. Eiríksson, managing director of Icelandair Cargo in Reykjavik.

Polar Air Cargo, which carries about 20 million kilos of seafood annually from Chile to Miami, raised fuel surcharges several times over the last year.

Polar also absorbed some of the increased cost, says Bill Fekete, the airline’s regional development manager of the Americas.

“From Polar’s standpoint, our increase in fuel charges mimicked what the rest of the industry is doing. We hope we see a reduction in fuel costs, because it’s a very heavy burden for all of us to bear,” says Fekete.

Seafood shippers do not seem to be changing their shipping patterns or reducing shipping at all because of increased fees, he says. For its part, Polar is trying to optimize the weight on the planes. An ideal load for a 747 is about 100 tons. Most cargo planes leaving Santiago are just about maxed, carrying 125-ton loads, most of which is fish.

In the mid to late 1990s, fuel represented 12 percent of total operating expenses for Alaska Airlines. Over the first four months of 2004, that share grew to 19 percent and, after October, grew to nearly 30 percent. An increase of just one penny in the price of jet fuel futures means $3.3 million over the course of the year.

U.S. average spot prices for jet fuel in Los Angeles increased 61 percent from December 2003, from 99.96 cents per gallon to $1.614 per gallon; and in New York prices increased 71 percent from December 2003, from 91.74 cents per gallon to $1.5729 per gallon.

But companies that ship via Alaska Airlines have generally paid what they did the prior year, says Matt Yerbic, the airline’s managing director of cargo services. Seafood cargo is a side business that only works when combined with carrying passengers and other cargo in and out of Alaska.

Recent fuel prices have climbed too high for the airline to absorb, and Alaska Airlines, which estimates it ships about half of the fresh seafood airfreighted out of Alaska, will be passing on some of those charges to cargo customers in January, says Yerbic. “We’ve got to offset this huge cost somehow, and we want to do it as fairly as we can,” he says.

Yerbic is cautious about the pending price hike, because he knows if the cost of air freighting fresh wild Alaska salmon rises too much, processors will be forced to freeze it and ship it by sea instead.

Packaging feels effects
Packaging prices are also rising as a result of increased fuel prices.

Global Packaging USA in Miami has paid about 30 to 32 percent more over the last 18 months for the petroleum-based polyester, polyethylene and nylon it uses to make about 50 million laminated bags annually to package fish fillets and shrimp.

As a result, prices of the bags have increased 15 to 20 percent. A laminated bag that can hold 1 pound of seafood costs about 13 to 14 cents, a price that will help the company absorb a 12 percent hike in raw material prices expected in January, says Jaime Davis, sales manager for Global Packaging.

All of these increased costs converge upon distributors, who have been the pressure point as the supply chain reacts to increased fuel costs.

The national average price of highway diesel in November climbed to $2.147 per gallon, a 44 percent increase over the $1.482-per-gallon price in November 2003.

Poseidon Seafood, a Charlotte, N.C., distributor that runs 50 trucks throughout the Southeast and logs about 2.5 million miles annually, is paying more than 26 percent more in December than it did the year before.

The increase adds up: Poseidon spends $20,000 more per month
on fuel.

“We do what we can to pass on the cost,” says VP Mike Henninger. “But a lot of the time you can’t, because you have so many cost-plus contracts built into the system.”

The company has become conscientious about every mile and is maximizing efficiency in every part of distribution, he says. The company is tweaking its routes so that a truck carrying as much seafood as possible delivers to as many locations as possible.

Other distributors are in the same boat.

Inland Seafood, an Atlanta distributor, uses 75 diesel trucks to deliver seafood to seven states.

“We’re paying more to begin with, because the catch price is higher,” says Robert Pidgeon, Inland’s director of purchasing. “We’re paying more to get it here, because the freight cost is higher, and marking it up more to cover our expense.”

The cost-per-stop jumped from $12 to $15, says Pidgeon. “It’s witchcraft, because we guess. Just because something costs $11 per pound to deliver to the restaurant doesn’t mean you can charge that to the restaurant.”

Passing on price increases is difficult in the competitive distribution business.

“When you try to raise the price, your customers raise hell with you and say, 'I can get it somewhere else for less,' or they pit one supplier against another and somebody caves," says Loren Morey, president of specialty processing for Morey's Seafood International in Motely, Minn.

For now, the good news is that prices are rising proportionally for all center-of-the-plate proteins, and seafood doesn't appear to be at a competitive disadvantage due to fuel prices, according to broadline distributors.

The bottom line depends on whether oil prices peaked just after Thanksgiving and will stabilize -- or whether they will climb higher. For now, every link in the seafood chain is making the most of every mile.

January 2005 - SeaFood Business
 

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