« June 2008 Table of Contents
Foodservice, retail operators on guard as consumer
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
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
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
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'
"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
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
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
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
"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
As are many businesses that rely on steady supplies of
seafood at affordable prices.
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
"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
"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
"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
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
"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
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
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
"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
"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."
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
"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
Assistant Editor James Wright can be e-mailed at