5 essential steps for navigating seafood business marketplace uncertainties

01.24.2017 | Published By:

Michael Scheaffer

These are interesting times for seafood companies and fisheries based in Washington state. A confluence of factors, including changing ocean conditions and intense international competition are introducing uncertainties that complicate business decision making. It all begs the question of what seafood businesses can do to stay strong in the face of rapid environmental changes and shifting marketplace considerations. 

An uneven playing field

Compared to many of their international competitors, Washington state fisheries and seafood companies face significantly more regulatory hurdles and higher costs. Considering that up to 32% of wild-caught seafood imports were found to be illegal or unreported in 2011, international competitors often unfairly win customers from local producers.1 Moreover, many U.S. seafood imports come from countries who subsidize their commercial fishing fleets, helping to keep costs artificially low. For example, China, the top seafood importer to the U.S., subsidizes the fuel of its distant water fleet, with fuel subsidies accounting for an average of 80% of the fleet’s non-operational income.2 These types of subsidies not only make it harder to compete against imports, they also add to cost-pressures on exports. 

Changing ocean chemistry and warming temperatures

In recent years, ocean acidification and warming temperatures have started to directly impact fisheries along the west coast. Challenges associated with acidification and hypoxia came to the forefront starting around the turn of the century when Oregon fisheries began noticing seasonal die-offs and high death rates for juvenile oysters.3 Scientists have found that a prevalence of coastal upswelling along the west coast contributes to ongoing cycles of phytoplankton blooms, which are a key culprit in the changing water chemistry and lower oxygen levels.4 And while scientists and communities are closely monitoring west coast waters and exploring solutions for maintaining their health, unknowns and unusual events abound.

In 2015, the west coast experienced a large toxic algae bloom, which led to record-breaking concentrations of domoic acid in coastal waters and prolonged closures of shellfish and finfish fisheries.5 According to a recent study, the combination of nutrient loading from runoff and warming ocean temperatures could lead to even larger events.6 And with toxic algae events typically occurring every 3 – 5 years, it may not be long until we find out.7

Scientists have studied how the changing pH of the ocean in general could impact the development of the Dungeness crab. It turns out that as the ocean pH level drops, it could delay when eggs hatch, and significantly impact larval development.8 The changing ocean chemistry and temperatures are also worrying west coast shrimpers, even though recent harvests have been robust.9

Overall, scientists anticipate that rising water temperatures will increasingly impact fisheries in coming years. A 2013 Nature study published by the University of British Columbia noted that fish migrations to cooler waters have been happening for decades around the globe.10 On the West coast, some studies show that commercial species could migrate north by as much as 30KM per decade in pursuit of cooler waters.11 At the same time, new species, including predators (think Humboldt squid) could migrate into local waters.

Navigating seafood industry changes

Given all of the trade and climate-related business challenges on the horizon, business flexibility will be key to ongoing success for seafood companies. That’s why it’s critical to start paying close attention to business fundamentals in the near term and positioning your company for a rapidly evolving business environment. Here are some ideas for getting started.

Be deliberate about all activities
As fishermen, you want to catch fish. As processors, you want to process fish. As wholesaler/distributors, you want to trade fish. And as retailers, you want to sell fish. 
The question you need to answer is whether you are catching, processing, trading or selling the RIGHT fish for the RIGHT reason. Too often in the industry, fishermen bring in a catch because they don’t want to leave the water with their nets empty and processors want to utilize idle capacity. The problem is that the distribution/retail channel gets filled without a clear path to the consumer. That’s why it’s important to focus on catching, processing, trading and selling fish that consumers clearly want so it can be priced at a point that allows for profit at every level of the supply chain. 

Plan for what you can control
Given all the forces that are out of your control in the seafood industry, planning is more of an art form than a science. Yet because you work with perishable inventory, it’s important to try to plan for all aspects of the business in advance. Consider the costs of an engine failure or seized cable reel when you haven’t been paying attention to maintenance records. Or the cost of running out of box tops or storing product that doesn’t have a clear path to the consumer.

Effective planning is based on a combination of historic data and future expectations. To secure profits going into the season, spend some extra time making agreements for catches that you can reliably predict. For fishermen, that means making agreements with processors regarding quantities, species and prices for fish whenever possible. Processors need to focus on making agreements for fish they know they can handle profitably. And wholesalers/distributors should have agreements for at least the minimum volume they expect.

Know your costs
When a boat leaves the dock, fishermen often don’t know the price they will receive for their catch. That’s why it’s not only important to keep track of the costs for a voyage (noting changes, such extending a three-day voyage by two days to find the fish) but also to know your fixed and administrative costs so you know whether you are making money when you receive a catch price. Processors need to constantly question their cost structure. For example, could extending a conveyor belt eliminate the need for two people hauling product that last 15 feet?  Has the costing model been updated to reflect the cost savings of extending a conveyor belt? And wholesalers/distributors need to know their cost of handling the product.  Shipping terms are typically clear but if a shipping strike happens how do you deal with additional cold storage fees?

Know what you have
To maximize visibility into your operations, it’s important to implement a perpetual inventory system and a rigorous physical inventory procedure. Many new fishing businesses try to save on inventory systems, instead relying on comparisons between loosely performed physical inventories to determine what changed in a period (and then try to force the cost of purchases for the same period). Although this type of process may be materially correct in simple and low-volume environments, it tends to lead to inaccurate costing and a lack of visibility into quantities on hand, except at period-end. The goal of a quality perpetual inventory system is to track both cost and volume of actual activity.  Rather than a period-end “net adjustment”, perpetual inventory systems record the details of each component (for example, fish cost, labor, and packaging) and aggregate the cost of the catch plus each cost added for each processing step. At any stage of the process and any day of the period, a perpetual inventory system will provide the quantity and value of the inventory.

Get to know your bankers well and communicate with them
You’ve predicted how the season will go, you’ve decided on the fish you are going to handle and you’ve set up agreements to sell what you plan to handle. What happens when suddenly you catch more than you planned or the season doesn’t pan out?  Do you have the borrowing capacity to purchase more fish?  Do you know what the bank is going to do if the supply needed to meet your plan isn’t available? Different banks have different tolerances to the uncertainties in the seafood industry. Choose bankers with experience in the seafood industry. Talk to your bankers about both positive and negative factors that might impact your plan. In other words, don’t surprise your banker.

Full speed ahead

Despite the uncertainties, the seafood industry is still going strong. While only time will tell the ultimate impact of changing ocean conditions, fisheries and processors can stay profitable by focusing on fundamentals and adapting to the changing marketplace conditions.

If your fishing or processing business is looking to strengthen its fundamental business processes in search of higher profits and greater peace of mind, vcfo offers CFO consulting services that can help you find efficiencies and effectively plan for the realities of today’s seafood marketplace.


Sources:
1 Estimates of illegal and unreported fish in seafood imports to the USA, Science Direct, Volume 48, September 2014.
2 China’s deep sea fishing industry relies on fuel subsidies, China Dialogue, August 2016.
3 West Coast scientists sound alarm for changing ocean chemistry, Oregon State University News and Research Communications, April 2016.
4 Ibid.
5 An unprecedented coastwide toxic algal bloom linked to anomalous ocean conditions, National Center for Biotechnology Medicine, U.S. National Library of Medicine, October 2016.
6 Ibid.
7 Ocean conditions contributed to unprecedented 2015 toxic algal bloom, University of Santa Cruz News Center, September 2016.
8 Environmental Effects on Washington Crab, Fishermen’s News, September 2016.
9 Slow start to west coast coldwater shrimp fishing as price disputes erupt in Oregon, Quebec, Undercurrent News, April 2016.
10 ‘Fish thermometer’ reveals long-standing, global impact of climate change, The University of British Columbia News, May 2013.
11 Climate Changes Could Affect Pacific Fisheries, Fisherman’s News, September 2015.

Categories: Finance, CFO Consulting

Tags: financial strategy,cfo consulting,risk mitigation,measuring success

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