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Belt-tightening time

Foodservice, retail operators on guard as consumer confidence wanes

By James Wright
June 01, 2008

As the spring thaw set in, the embattled U.S. economy - and consumer confidence in it - remained as cold as the winter snow. Recession fears had grown from whispers on Wall Street to dinner table conversation. Financial experts' opinions on the state of the economy were like night and day, yet consumers had already begun tightening their belts, limiting purchases of luxury items in the face of soaring food and energy costs - a scenario many would describe as unfavorable for seafood merchants. 
 Money's tight, and with seafood prices increasing, trading down from halibut to hamburger may be a common, if not savory, choice for frugal consumers. Seafood suppliers, retailers and restaurateurs are working to ensure that doesn't happen, even as many companies' first line of defense during lean times includes condensing the marketing budget.

But enticing consumers to the table on the cheap may prove challenging. With such a confluence of issues - sluggish housing and credit markets, a continually weakening U.S. dollar, a tense presidential election and a climbing unemployment rate - Americans have much more to consider than tonight's meal.

Consumer spending, which represents more than two-thirds of total economic activity, increased just 0.1 percent in both February and March (adjusted for inflation), according to the U.S. Department of Commerce. In April, the Reuters/University of Michigan Surveys of Consumers index dropped to 62.6, the lowest reading in more than a quarter century, signaling a slide into recessionary territory. The Bush administration, which has rejected the notion of a recession, hoped a $152 billion stimulus package, including tax rebate checks ranging from $300 to $600, would infuse some cash into the admittedly struggling economy.

Whatever the current situation is called - a recession, a downswing or a challenging economic environment - there's no denying that the coming months will test seafood companies' mettle.

"When Warren Buffett says we're in a recession, we're in a recession," says Joel Knox, president of Inland Seafood, an Atlanta distributor that serves both retail and foodservice customers. "We've been in one for a year. We first started to notice it last Mother's Day when [sales weren't] as strong. When you're not spending money on momma, you're not spending money."

Buffett, by many accounts the world's richest man, in late April told CNBC that a recession - officially defined as two or more consecutive quarters with negative growth in real gross domestic product - would be longer and deeper than most people think. "I think consumers are feeling gas and food prices," he said, "and not feeling they've got a lot of money for other things."

Foodservice operators, in particular, are closely monitoring consumer spending and dining-out trends. A slowed foodservice industry, worth an estimated $558 billion annually, will pinch seafood sales, according to Knox and others, because so much of the seafood that Americans consume is eaten away from home.

"A lot of public [foodservice] companies are reporting flat or declining same-store sales," says Gary Karp, executive VP at 
Technomic, a foodservice consulting firm in Chicago, adding, "We're in a challenged economic environment." For example, national seafood chains McCormick & Schmick's and Landry's Restaurants each posted lower dollar sales in 2007, while Landry's shareholders are reportedly considering a private ownership bid by CEO Tillman Fertitta.

In January, Technomic downgraded its U.S. foodservice industry nominal growth forecast from 5.1 percent to 3.6 percent, citing a larger-than-expected slowdown in discretionary consumer spending and a 4 percent inflation rate. In mid-May, the forecast was lowered again, this time to 2.2 percent.

Retailers aren't immune, either: According to The Nielsen Co. of Shaumburg, Ill., Americans made an average of 59 trips to the grocery store last year, down from 61 in 2006 and 72 in 2001.

"The biggest challenges," says Karp, "come from three areas - personal disposable income, which is being absorbed more through the high cost of food and gas; unemployment, and when it rises, the environment becomes less certain and consumers are more likely to stay home; and consumer confidence, which tends to reflect the attitudes of consumers. It's under pressure."

As are many businesses that rely on steady supplies of seafood at affordable prices.

Opportunity knocks

There may be no such thing as a recession-proof business. But that's not keeping Rich Vellante, executive chef and VP of restaurants for Legal Sea Foods, an upscale seafood restaurant chain along the East Coast, from remaining optimistic. A recession, he says, is no time to abandon the core of Legal's business: high quality seafood. In fact, it's quite the opposite.

"We're approaching it as an opportunity. It's fantastic for tourism and Europeans are taking advantage [of the currency exchange]," Vellante says. At press time in mid-May, the U.S. dollar had declined in value against many key foreign currencies, most notably the Canadian dollar ($0.98) and the euro ($0.65).

"It's a great opportunity to gain market share and be visible or do some things that other companies won't be able to do," Vellante says. "Sure, we have to watch our pennies like everybody. But we feel good about how societal choices are geared toward seafood for health reasons."

One way Legal is adapting to higher seafood costs is putting a new spin on customary fare, such as the lobster roll, a New England favorite. Because lobster prices have been high for the past year or more, Legal devised the "Trio" sandwich, a traditional roll containing lobster, shrimp and crabmeat.

"[We wondered], how do we create a similar experience at a lower price point? The cost, the value, how [a dish] will be perceived by guests - it's always a piece of the lens," he says. "We don't go and find the silver bullet, but we're more mindful that some items are more stable in pricing than others. Value is an interesting thing. A Mercedes Benz is a value to some; to others it's not. The same goes for seafood when you go out to eat."

"The beauty of the seafood category is the variety," adds Karp of Technomic, who says foodservice operators should be more aggressive during a recession, not less. "[Customers] may buy fewer shrimp cocktails and crab cakes, but you can replace them on the menu with other seafood items. Providing choice increases consumption of seafood in total. Even if that reflects some decline in specific [species], you prefer to keep it in the seafood category."

Jim Ulcickas, proprietor of three Bluewater Grill Seafood Restaurants in Southern California, says his company's sales have not been hurt by the slumping economy because they successfully re-engineered their menu without raising prices.

"We did a promotion with cioppino in January using trim and other byproducts and the perceived value by the guest was much higher than the actual cost," Ulcickas says. "You have to be creative and develop promotions around items in good supply. It also helps to lock in long-term vendors to [help you] find 
solutions for core products that are the same or better."

For the majority of the foodservice industry, however, the summer months could be make-or-break time. Gas prices are forecast to exceed $4 a gallon during prime vacation season. The national minimum wage will get a boost to $6.55 an hour, representing a 12 percent increase in 21 states. Because the foodservice industry is the nation's third-largest employer - 13.1 million people, according to the National Restaurant Association - labor cost increases could put a significant dent in profits.

And a continued rise in seafood prices and energy costs could open the door for cutting corners, says Knox of Inland Seafood, which would further damage the industry's reputation.

"It'll be buyer beware," he says. "When price becomes the most important thing, and it is in the struggle to survive with restaurants and distributors, they may do things they wouldn't do in the best of times - substitution of species, frozen [seafood] thawed out and represented as fresh fish - out and out fraud in the industry."

Outside looking in

Economic hardship is not limited to the United States. In the United Kingdom, where the British pound is worth approximately $1.97, a weakened economy is hurting seafood merchants, according to industry analysts Plimsoll Publishing.

Almost one-third of the UK's top 385 seafood companies are showing signs of recessionary 
behavior, Plimsoll reported in April. And more than half have seen their profit margins shrink, while many are operating at a loss.

"We are reading every day how the credit market and the world of finance has been hit, but nonetheless, I was still surprised to see just how much the fish merchants' market is feeling the pressure," wrote David Pattison, senior analyst at Plimsoll.

Companies exporting seafood to the United States eagerly await a turnaround. Colin MacDonald, CEO of Clearwater Seafoods in Bedford, Nova Scotia, describes the current state of the U.S. seafood market as "skittish."

Clearwater's U.S. business, about 40 percent of the company's overall sales, is "generally slower than we anticipated," he says. Foreign exchange had a $30.2 million impact on the company's 2007 sales and distributable cash, according to its annual financial report.

"People are pretty upbeat about sales this year, but it's yet to be seen," says MacDonald. "You can tell there's a recession - you can feel it. And it's going to take a little while to recover."

Companies tied to the seafood industry are facing tougher times as well. Jason Baker, a sales and marketing representative for Ketchum Manufacturing in Brockville, Ontario, which makes gill tags and point-of-sale tags for retail seafood cases, says a weak U.S. economy hurts business.

"The Canadian economy is basically geared to the U.S. economy. We watch it religiously," Baker says. "As a Canadian manufacturer, we have traditionally benefited from an 80-cent [Canadian] dollar.

"We are a low-margin, high-volume type of business. One of the first things that's cut [during a recession] is marketing. We had major growth for the past two-and-a-half years. Now we're just holding our own."

Global impact

The fate of the U.S. economy impacts other nations' economies as well as potential consolidation within the seafood industry. Kristjan Davidsson, managing director of global seafood for Icelandic banking conglomerate Glitnir, says seafood merger-and-acquisition activity in the near term could increase.

"The current economic situation will not only yield challenges for many, it may as well bring up opportunities for the ones who stay alert and keep their eyes open," says Davidsson, adding that further consolidation is likely as the divide widens between the companies that are performing well and those that are not.

"There may well come up some acquisition opportunities that were not there a few months ago, a merger that was not on the drawing table may become feasible and the time may become right to exit for a business owner. This time of economic turmoil will be a high time to evaluate such options."

Tim Antilla, VP and senior relationship manager at Wells Fargo in Seattle, is more worried about the impact of inflation than a "softer" economy. Antilla, who says the economy is in good shape despite turmoil in the financial markets, says consolidation has helped the seafood industry become less susceptible to financial ebbs and flows.

"We've seen a lot of consolidation over the last several years; it's made companies stronger to weather any downturn. I'm not seeing signs of stress with primary producers and secondary processors and wholesalers," says Antilla. "They're always subject to resource availability and fluctuating prices."

Assistant Editor James Wright can be e-mailed at jwright@divcom.com

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