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« October 2007 Table of Contents

Processing Survey: Challenges abound

Sourcing, safety, shipping costs remain top obstacles in biennial processor survey

Seafood processors face numerous challenges, but despite the hurdles sales are showing an increase for the second year in a row. However, rising business costs are keeping profits level.

Regardless of company size or location, keeping on top of government regulations is the top challenge for today's seafood processors. More than half (53.7 percent) of respondents to SeaFood Business' biennial processor survey listed compliance as one of their company's top three challenges.

"[Regulations] are necessary and work out very well on some things and not so well on others," says Stephen Connolly, chairman and CEO of Steve Connolly Seafood Co. in Boston. "It's a nuisance to have all these [fishery management] regulations, but it works."

Government regulations heavily influence seafood sourcing and product availability, which was mentioned by 42 percent of respondents as one of their greatest concerns. Numerous domestic fisheries are in decline, such as cod in the North Atlantic and red snapper in the Gulf of Mexico, and there are many new fishery regulations in place, with the renewal of the Magnuson-Stevens Fishery Conservation and Management Act this January.

Even some farmed species are in short supply. U.S. catfish supplies hit a 10-year low this year. A little more than 39 million pounds of catfish were processed in July, down 14 percent from the same period in 2006, according to the U.S. Department of Agriculture's National Agricultural Statistics Service.

With erratic domestic supplies, processors are turning to imports to meet their customers' demands.

"With closings and openings [on fisheries], it's pretty hard to know what is going to happen with availability," Connolly says, adding that, "farm-raised fish are very handy, especially in the winter."

"Wild-caught product is being eclipsed by farm-raised in many respects, causing socioeconomic effects throughout the U.S. industry and internationally," says Dana Staples, a North American sales representative for the Barry Group of Corner Brook, Newfoundland. "Farm-raised product is much more economical [than wild seafood] to produce and process, given the control conditions." Staples adds that farmed seafood will be a growth vehicle for the Barry Group in the future.

Sourcing a global task

Imported seafood represents nearly 80 percent of the U.S. seafood supply. While that number continues to grow, almost three-quarters of respondents said that North America remains a primary seafood supply source, with South America and China following at 32 and 25 percent, respectively.

The Barry Group is sourcing from fewer countries than in previous years, notes Staples.

"We did try bringing in product out of China, but we have decided that at this point we will put that on hold a bit given the events of past months," he says.

Connolly only buys from overseas suppliers when it's something "extra fancy" that isn't available in North America like Dover sole, turbot and branzini.

American Mussel Harvesters of North Kingstown, R.I., sources only from North America, according to sales representative Greg Silkes, whose father, Bill, founded the company more than 20 years ago.

"We source from Canada and the United States," says Silkes. "The majority of the oysters are farmed."

Sourcing is not the only challenge mentioned by survey respondents. Processors also have to contend with the safety of imported seafood and the consumer's inexperience with preparing fish. Despite the fact that the Food and Drug Administration and National Marine Fisheries Service promote seafood as a healthy option, processors say consumers continue to mention methylmercury as a hurdle to purchasing fish.

American Mussel sells at retail, wholesale and direct to the consumer.

"We like to communicate directly with the end-user and tell them what they can do with seafood. People just don't know how to cook it and eat it," says Silkes.

AMH is also challenged with educating its customers on the freshness of its shellfish.

"We have a seawater system to store live seafood. One of our biggest issues is selling people on the idea of the seawater system. Chefs look at the shellfish tags and might say seven days out of the water is old. But it's fresh, it's beautiful. It's as fresh as when it was harvested."

Getting it there

Shipping costs rounds out the top three challenges that seafood processers continue to face.

"Shipping costs have pretty much flattened out in terms of dealing with increases this year," says Dave Plese, director of private label at Highliner Foods based in Lunenburg, Nova Scotia. "Although this latest week doesn't give me much confidence," he says, referring to the $7 per-barrel increase in oil prices during the first two weeks of September.

Compared to the last SFB Processor Survey in 2005, shipping and the environment remained chief concerns. Foreign competition became a more crucial challenge, mentioned by 38 percent of processors in this year's survey, more than labor costs at 34 percent.

Profit plateau

Profitability also remains a challenge for processors. Simply put, it's getting harder and harder to make money on seafood.

Nearly 40 percent of survey respondents said their profit margins remained the same from 2005 to 2006, and only 33 percent reported an increase, and almost 20 percent had a lower profit margin.

"[Our biggest challenge] is profitability throughout the supply chain: harvesting, production, sales, distribution and final sale," says Staples of the Barry Group. "The overall cost of doing business has increased many times faster than the actual sale price of the product in most instances."

While profits have hit a plateau, U.S. seafood consumption increased from 14.8 in 1996 to 16.5 pounds per capita in 2006, nearing the record 16.6 pounds set in 2004. Sales have risen accordingly in the same 10-year period, yet the cost of doing business has also increased.

In 2005, a majority of seafood processors reported a sales increase for the first time since 1998, with 62 percent of survey respondents reporting higher sales in 2004 over 2003. That hike continued this year, with 67 percent of processors saying sales rose from 2005 to 2006, while sales remained the same for 23 percent. The greatest gains among companies reporting increased sales were those with more than $50 million in revenues. Of the 9 percent of processors reporting reduced sales from 2005 to 2006 sales, 8.8 percent were companies with sales under $1 million.

Organic growth

This year, in addition to asking processors if requests for sustainable seafood products increased, SeaFood Business also asked processors whether they've had increased requests for organic products. Only 36 percent of respondents had increased requests for organic seafood, while 61 percent experienced heightened demand for sustainable products.

While Highliner's customers are asking for organic product, "It's more on higher-end restaurant-quality product," says Plese. Sustainability is an issue that "everyone is dealing with now," he adds. Everyone is aware of sustainability, "but it is somewhat of a back-burner issue" adds Plese.

"I am asked about it, but no one seeks proof, per se," explains Staples of the Barry Group. "It's sort of a crap-shoot."

Sourcing sustainable U.S. supplies isn't an issue, says Connolly, but more important is finding reliable sources outside North America.

"I read about sustainability all the time, and it is important, but we don't get a lot of requests for that, because most of the stuff we sell is sustainable," Connolly says. "The rest of the world we can't control. Unilaterally, it's almost impossible to control international waters. In New England it's easy. We set a season and when it's over that's it."

With farmed-seafood supplies commonplace, and with the Marine Stewardship Council certifying new fisheries as sustainable, processors are better able to source stable seafood supplies and at the same time meet consumers' requests for sustainable products.

However, processors are constantly searching for ways to keep their product around in the future.

"Aquaculture is helping sustain the natural resource," American Mussel's Silkes says. "Our company is based on sustainability. We constantly look for numerous supplies of a product instead of focusing on one supplier."

Another request from customers is harvest information. Country-of-origin labeling at retail is required for all seafood products, and while restaurants are under no such obligation, many restaurants are opting to plug their seafood's origins to ramp up the romance factor for their guests.

"That's becoming more popular. Folks want to know where their food is from, especially now with COOL, and the government going after people putting the wrong names and origins on the product," Silkes says. "The more information you can give your customer, the end user, the better. They want to know about what they're eating."

Almost 60 percent of survey respondents said that the harvest region of the product is highlighted on their product packaging or in other marketing efforts, 10 percent more than in 2005.

Methodology

Diversified Business Communications' Market Research Department conducted the SFB 2007 seafood processor industry survey. The survey was mailed or faxed in mid-June to a random sample of 1,323 of the magazine's processor readers, targeting buyers or those who influence their companies' seafood buying decisions. A total of 225 surveys were returned, for a response rate of 17 percent.

Editorial Assistant April Forristall can be e-mailed at aforristall@divcom. com; Assistant Editor James Wright can be e-mailed at jwright@divcom.com