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Distributor Survey: Soaring fuel costs erode sales gains

But profit margins get boost from increased demand for seafood

James Wright
December 01, 2005

Joel Knox has one word to describe the impact of gasoline prices on his business: “monumental.”

The president of Inland Seafoods in Atlanta says fuel cost is the single biggest challenge his seafood-distribution company faces today. He says that since gasoline prices have nearly doubled in the last two years, distributors will have to change the way they do business or fold up their tents.

“We’re a service company, first and foremost,” Knox says. “And now we have to do the most detrimental thing [for business] — curtail service.”

To offset crippling fuel prices, Inland switched to smaller, more fuel-efficient trucks and enforces minimum orders for its customers. Even the dreaded fuel surcharges had to be added, Knox says, because the per-delivery cost is up 70 percent this year.

“You gotta pass [fuel costs] on as much as you can,” he says. “We’re paying more for product than ever, so we’re getting hit on both ends. Distributors are getting killed. There will be a real crash-consolidation in the next 18 months. It’ll be hard to
survive.”

John Sands, director of fresh and live seafood at Supreme Lobster in Las Vegas, has had to take similar measures. Supreme’s delivery trucks run all over the city and the surrounding area, often several times per day. The company also has enforced minimum orders to make each delivery worthwhile, yet Sands says his customers understand why prices are what they are.

“There’s always a reasonable amount that a distributor should absorb [before passing it on],” Sands says. “But every year you’re going to have cost increases. The cost of product this year is significantly higher. It’s because of fuel.”

Rising fuel prices were cited as the second-biggest challenge facing the seafood-distribution industry in SeaFood Business’ sixth distribution-industry survey, behind sourcing/product availability.

It should be noted that the survey was sent to distributors nationwide before the devastating hurricane
season in the Southeast, which pushed fuel prices to unprecedented high levels.

Demand, profits are up
The survey revealed that despite the rising cost of doing business, demand for seafood continues to grow.

Seafood product lines grew for more than half (56.5 percent) of the survey respondents, while only 5.6 percent decreased their line. Total seafood sales are up for 69 percent of respondents, while only 9 percent noted a downward sales trend.

The proof is always in the bottom line. Broadline distributors, whose product lines include multiple proteins, had an average profit margin of nearly 15 percent for seafood, while seafood-only distributors’ margins were much higher, at 23 percent. Broadliners can often accept smaller margins on seafood and make up the difference with other products, says Sands. Still, most distributors foresee an overall increase in seafood consumption.

“People are eating more seafood because they’re more attuned to the health aspects,” says Mike Henninger, VP of Poseidon Seafood in Charlotte, N.C. “They can see through the sensationalism [in the media].”

Retail, foodservice growth
In a stagnant U.S. economy, consumers may be more cost-conscious, especially when dining out. But foodservice still dominates the markets that distributors serve, as 84 percent of respondents noted it as one of their targeted markets. Retail grabbed a bigger piece of the pie than in the last survey, finishing second at 71 percent. Two years ago, foodservice outlets and restaurants were serviced by 86 percent of distributors polled, while 64 percent sold to retail outlets and supermarkets.

Distributors see seafood sales growing in both segments. Henninger keeps a close eye on upscale-casual-dining chains and says the category is as strong as ever.

Dinnerhouse/casual-dining restaurants accounted for 54 percent of foodservice sales, according to the survey, followed by white-tablecloth at 38 percent and institutional (non-commercial) at 14 percent.

“[Casual-dining] growth drives overall growth in seafood sales,” Henninger says.

Others believe the retail industry has the greatest potential for growth. Inland Seafood’s Knox says that current economic conditions will prompt consumers to prepare more meals at home. “People will quit eating out because it costs $70 to fill up their SUVs,” he says.

Diversification
Finding a reliable source of seafood was the most-mentioned challenge by survey respondents, as 73 percent cited sourcing/product availability as a major issue.

Keeping a broad base of suppliers is important, Henninger says. Most distributors agreed, as 43 percent reported their number of suppliers has increased in the last year.

“It’s a supply and demand business,” Henninger says. “That’s nothing new. If your current suppliers can’t produce, you gotta go where the boats are.”

Staying diversified is essential, not only to keep costs down, but also to keep up with unpredictable demand, says Sands, adding that his customers are getting savvier. Because of the Internet and fax machines, they get to see prices from competitors all over the country. Even if they’re not buying from Supreme, having an alternate source helps them negotiate prices. And in a town like Las Vegas, one needs to have options.

“I’ve got to have people I can call, who I can depend on 24-7,” Sands says. “Even if it’s three different vendors, because chefs often give me a day’s notice hours before they need 500 pounds of product.”

Methodology
The 2005 seafood-distribution industry survey was mailed and faxed in August to 2,000 SeaFood Business distributor readers who purchase seafood or who are involved in seafood-purchasing decisions. A total of 357 distributors returned a completed survey, for a response rate of 18.1 percent, up from 11.6 percent in 2003.

Among respondents, 56.3 percent were seafood-only distributors, 30.2 percent were broadliners and 5 percent categorized themselves as “other.” Diversified Business Communications’ Market Research Department analyzed the surveys.
 

December 2005 - SeaFood Business 

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