reLAKSation 252. Callander McDowell
Is anyone listening?: ‘The market has spoken’ so claims an IntraFish editorial. This refers to a reported drop of 15% in the price of salmon. The editorial says that this had to come.
Ever since prices started to rise, we, at Callander McDowell, have argued that such large rises will be impossible to sustain. This might have been true long ago when salmon was viewed as a luxury dish for a special occasion but the growth of the salmon industry has altered that view for ever. The widespread availability of farmed salmon has meant that salmon is now perceived to be a value for money everyday meal dish. This new modern image has attracted many new consumers to the joys of eating salmon, yet if prices are allowed to soar to the point when salmon is no longer considered to represent value for money, these consumers will simply look for something else which is. The salmon industry will then be left with a lot of salmon that it cannot sell at the elevated prices and from there, prices can only move in one direction.
If it already isn’t starting to do so, then it is inevitable that eventually the salmon industry will be faced with the same problem that has dogged it since 1989 and which it has yet to resolve. Does the salmon industry want to keep salmon prices high because, if it does, then it must look for a different consumer base than that it supplies today. Instead, it must look to the luxury market, which by its very nature is small and exclusive. Alternatively, if it opts to supply the mass market, it must grow and must accept a lower price level. The industry will only damage itself if it allows prices to swing as they have. The main reason prices do move up and down the way they do can be attributed to the continued interference in the marketplace by the independent Scottish industry with their continued dumping complaints. They have a clear idea of the type of industry they want and are prepared to disrupt the whole industry in order to get it. It is this repeated disruption which prevents long term strategic development. Sadly, the EUSPG are only now beginning to realise that both types of industry can actually sit side by side and they can achieve higher prices independently of the wider market through sales of organic and other niche and specialist products. It is a shame that it has taken them fifteen years to recognise this but they have never been prepared to listen. They opted to undermine the wider industry rather than look at their own failings.
As we have mentioned in a previous issue of reLAKSation, higher process are only now starting to filter through to the end consumer. Until now, the industry has been in protected from the effects of the price rises by resistance from the supermarkets to increase their prices. It will be some time before the real consequences of the higher prices will become apparent but we are in no doubt that if prices remain high, demand will fall.
The IntraFish editorial discusses the fact that even as recently as last week, most players and observers in Norway were still talking of further prices rises when the Dutch Rabobank suddenly predicted a 20% drop in salmon prices. The Norwegian analysts supposedly shrugged their shoulders in doubt. Klaus Hatlebrekke, the analyst at DnB Nor Markets even said that he was confident that the salmon market would remain strong until 2008. Unfortunately, these analysts tend to focus on production and biomass. If biomass is considered to be low, then prices are expected to remain high and vice versa. It is not exactly high tech analysis. What the analysts seem to ignore is what is happening in the marketplace and what consumers are doing. There are no easy answers which is why Callander McDowell is not in the business of industry forecasting. Instead, we prefer to look at market trends and it is clear to us that consumers are not prepared to continue buying salmon at any price. This message has been at the heart of the market for several years. It just seems that no-one is listening.
Spend it now: Fishupdate.com report that the Norwegian salmon industry will have a surplus of almost NOK 3 billion from the first six months of this year. Lars Liabo of Kontali Analyse said that some businesses have earned more over this period than they did for the whole of last year. He expects that 2006 will become the best year for salmon farming ever.
As we discussed previously, some analysts expect the good times to continue until 2008, whilst others now suggest that prices are on the way down now. Whichever it is, one thing is for sure, sooner or later margins will eventually be squeezed.
Our hope is that prices will find a reasonable level that allows consumers to continue buying value for money salmon yet also allow farmers to make a realistic margin. Unfortunately, this is not going to happen without advance planning. With farms generating a surplus, now is the time for the salmon industry to invest in sustained strategic market development looking at what the markets want and adapting production to make sure that the industry can supply it. This is different to the usual advertising campaigns which tend to reflect producers needs rather than those of the consumer.
The current surplus provides the opportunity to ensure that the markets can continue to grow. The danger is that it can also be frittered away so when margins disappear again, this valuable resource isn’t there to invest in the future. This is the challenge for the industry, not just in Norway. The question is whether it is a challenge it is willing to face.
Not again?: Almost six years to the day, the Scottish salmon industry is to be subjected to another Competition Commission investigation involving Marine Harvest. We, at Callander McDowell, have suggested many times that one of the reasons that the salmon industry suffers from repeated problems is because of interference from a small group of people who want to impose their own vision of the industry on everyone else. This latest investigation is yet another example. In addition to the environmentalists, who have their own agenda, another complainant was Dr Michael Foxley of the Highland Council who is concerned about the monopolistic position as well as the consequences for employment.
We are sorry to repeat this but which ever way you look at this, the merger is the result of the continued interference in the industry by those who wish to impose their vision of salmon farming on everyone else. The continued disruption to the marketplace has been sufficient encouragement for many, including large multinational companies, to sell out. Clearly, if there had been more effort at developing the right strategy for Scotland, then the industry would not be now dominated by large multinational companies. If there is any doubt that the wrong strategy was pursued, it is only necessary to look at the fate of the Tartan Quality Mark. In 1999, the PACEC report (referred to by the Competition Commission) suggested that most British retailers recognised the benefit of the mark which is why it could be found in most stores. At the time we questioned if this actually was a true reflection of the market to the TQM and we would still do so. If the market thought that the TQM was really beneficial, then why can the TQM not be found on any Scottish salmon today? This pursuit of the wrong strategy is also why the Scottish Salmon Growers Association and the Scottish Salmon Board as well as Scottish Quality Salmon no longer exist.
Clearly, there is going to be a lot more written about the Competition Commission and their investigation but at this time, it is the statement issued by Vincent Smith, OFT Director of Competition Enforcement which merits most comment. He is quoted by seafoodintelligence.com as saying that “the Office of Fair Trading has found that the loss of rivalry between the two largest companies may cause an increase in the price of farmed Atlantic salmon and thereby harm UK consumers. In addition, he said, that the effects are likely to be felt more acutely amongst those consumers having a strong preference for Scottish salmon.” We, at Callander McDowell, can only wonder if the Office of Fair Trading had taken any notice of the present market to see that prices can rise to harmful levels irrespective of whether the industry is dominated by one company or several. We also wonder why the Office of Fair Trading believes that elevated prices would harm the UK consumer. If they do think this then maybe they should be investigating why prices have risen to their current levels. They would perhaps find that it is due to market interference by the European Commission favouring one group of producers over another. We actually agree with the Office of Fair Trading that high prices do harm consumers but this investigation is not the way to resolve the issue.
Mr Smith also argues that if the merger is allowed to proceed unchallenged then it is those consumers who have a strong preference for Scottish salmon who would suffer most. He obviously believes that if the majority of Scottish production is held by one company, then they would be free to charge what they liked. Consumers wanting to buy Scottish salmon would therefore have to pay more. If only this were true.
Since 1989, the Scottish industry has pursued a strategy aimed at persuading consumers to pay a higher price for Scottish salmon. This strategy was summarised by the Scottish Salmon Board in March 1996 when they placed an advert in the Grocer. This stated that 76% of consumers prefer Scottish salmon to that of any other origin and 72% are willing to pay more for it. Unfortunately, when faced with a buying choice, none of these 72% of consumers were actually prepared to pay more for it because they realised that Scottish salmon was no different to any other in terms of its eating quality. The Scottish Salmon Board’s strategy therefore failed.
Although, when asked, many consumers do express a preference for Scottish salmon, this choice is not reflected in store. It is natural that most British consumers would select Scottish as their first choice when presented with a list of Norwegian, Chilean or Scottish salmon. We recognise that when some supermarkets ask their customers which salmon they prefer, the answer is always Scottish but we would argue that the brand identity of some of these supermarkets is so strong that if they told their customers that the best salmon came from a different country, their customers would continue to buy their salmon without any noticeable drop in sales. This idealised preference for Scottish salmon is just that.
If the merger resulted in higher Scottish prices, then it would not harm the consumer since clearly many have expressed a readiness to pay extra to buy it. We don’t actually think that they will so equally, consumers won’t be harmed by the merger.
Research has shown origin is not really of any concern to consumers and this can be seen from the way they buy salmon. The real issue of the merger is that it creates a company capable of producing the type and range of products that consumers actually want. The alternative vision of salmon farming companies is one that produces the products it wants consumers to buy. It is this divergence that has led some to decide that these companies do need to merger in order to keep consumers supplied with what they want. This is not about competition but about adapting to the needs of the modern marketplace.