reLAKSation 253. Callander McDowell
A price hike too far?: Ever since prices started to rise at the beginning of this year, we, at Callander McDowell, have argued that there was a danger that the very same consumers who had fuelled the growth of the salmon industry would be deterred from buying salmon if the price rose too high. The very act of farming has made salmon into a value for money every day meal choice and it is exactly because it is a value for money meal choice that consumers buy it in the quantities that they do.
Although salmon prices have soared in recent months, the higher price has not really filtered down the supply chain to the consumer. Consumers have so far been protected from having to pay the full market price of salmon. This in part is because the supermarkets have recognized why consumers buy salmon and have encouraged them to continue doing so. Yes, there have been small increases but these have been imposed through small reductions in pack sizes so that the consumer has continued to pay the same price.
This all changed a couple of weeks ago when supermarkets finally decided that the supply chain could no longer insulate the consumer from market forces and as a result the price of salmon in most supermarkets went shooting up.
Two weeks on and whilst some supermarkets continue to implement price increases, others have now slashed the price of salmon, at least one offering whole salmon at half price of £3.49/kg. The reason why is simple. Unconfirmed reports suggest that sales of salmon have plummeted since price increases were imposed. Consumers just turned away and looked for something else.
The warning bells had already started to ring even before the supermarkets increased their prices. One independent fishmonger who sells large quantities of salmon has even attached an article from the newspaper Fish Update to his fish counter to explain why salmon prices had risen. He did this because so many of his customers had complained about his increased prices.
We don’t know how many times we will have to repeat the simple fact that the majority of consumers buy salmon because its cost represents value for money. The European Commission and, now as we discuss later, the new Chairman of the SSPO talk about fair prices. However, consumers are not interested in what is a fair price so long as it relates to their own dinner plate. The salmon industry has to decide what it wants to be. Does it want to respond to consumer demand and supply a value for money product at a price the consumer wants to pay? Alternatively does it want to produce a high quality product for which it expects a premium price? The imbalance within the industry that has led to repeated trade disputes relates to the fact that a minority of farmers prefer the second option but when they fail to achieve their expected price premium, they blame the rest of the industry for their failure. Yet, the message from the market place is clear; consumers are not prepared to pay such premium prices for their salmon and as soon as the industry realises this, then the quicker they will be able to supply consumers with what they want as well as achieving profitable production.
Well timed: Shetland Marine News report that Michael Gibson CBE, the newly appointed chairman of the Scottish Salmon Producers Organisation has been on a two day visit to Shetland on what can be best called a fact finding tour to farms and processing companies. He said that he was delighted to be visiting Shetland as the islands are a major producer of Scottish farmed salmon. He added that he was well aware that trading conditions for many Shetland companies has been difficult in recent years but he is encouraged by the recent rise in farm prices.
Presumably one of the processing companies not on Mr Gibson's itinerary was Shetland Smokehouse, which had just gone into voluntary liquidation with the loss of seventeen jobs. The company said that it is no longer viable because of the recent increase in salmon prices. Shetland Catch which owns the company said that when they acquired it, salmon prices were only £2/kg whereas now they are £4.60/kg, an increase of 130%. They said that their customers were not prepared to pay such high prices and as a result, they had lost some key customers.
Sid Patten, Chief Executive of the SSPO echoed Mr Gibson's comments. According to IntraFish, Mr Patten said that it is very difficult to speak other than in positive terms about the current high prices being paid to salmon farmers. He said that he was unable to comment specifically about Shetland Smokehouse but that there is a need for better understanding of the workings of the supply chain.
We, at Callander McDowell, think that Mr Patten should be responding to the closure of Shetland Smokehouse exactly because it should give him that better understanding of the supply chain. He may be happy that his members are currently in receipt of such high prices, but the if companies further down the supply chain are going out of business because their customers are not prepared to dig deeper into their pockets to buy their salmon, then the high price structure will simply undermine the viability of the whole salmon sector.
For many years, the Scottish industry has been trying to regain Scottish salmon's exclusivity through repeated trade measures or the imposition of production controls. Finally, it seems that they are starting to achieve their aims. Salmon prices are at their highest level for years and as a consequence large sections of the existing market are now being deterred from buying salmon. These consumers are not prepared to buy salmon at any price, despite the obvious health benefits. Instead, they will look to buy cheaper value for money alternatives. Yet again it seems that the Scottish industry would prefer to ignore what consumers want and instead think of the state of their bank balance rather consider the long term future. Rabobank estimate that industry margins in Norway are now in excess of 50%. As the latest, but withheld, Scottish Executive study of production costs found that Scottish cost of production is no different to that in Norway, it can be assumed that Scottish producers are also benefiting to the same degree. Mr Patten suggests that these peaks, and any subsequent troughs, could be avoided by a long term sustainable pricing policy for salmon. He is wrong. This is the production-led thinking that has led to the current increased prices. Instead, a more market-led strategy would transfer the emphasis from price to more consumer focused and profitable products.
The timing of the Shetland Smokehouse closure must have been unfortunate for Mr Gibson but it is also a timely reminder that Scottish salmon producers cannot isolate themselves from what is happening in the wider marketplace. They are part and parcel of the same international salmon industry as everyone else.
Not our fault: After reflecting on the closure of Shetland Smokehouse, new SSPO chairman, Michael Gibson laid the blame with the supermarkets. He said that they dictated prices which were not sustainable for producers or processors. He said that we are in a situation where some retailers are holding prices too far down so pressure is being placed on one part of the supply chain. He believes that the consumer must be prepared to pay a fair price for 'her' food. He added that in fairness, he doesn't think that the consumer has ever said that 'she' is not prepared to pay a fair price. It is supermarkets that may have said 'she' is not prepared to pay it. Mr Gibson pondered the question whether this is because their customers have said no or because the supermarkets are concerned about keeping the price low for competitive advantage.
The true answer is probably somewhere between the two but even that does not tell the whole story. Research from the now defunct Scottish Salmon Board found that over 70% of UK consumers preferred Scottish salmon to any other and were prepared to pay a premium price to buy it. However, when faced with a buying decision in store, these same consumers baulked at the higher price. At the same time, the supermarkets found that as salmon was so widely available; it could be sold in greater volume at a more realistic price. The combination of widespread availability and value for money prices boosted salmon consumption, especially as a value for money, everyday meal choice. The supermarkets capitalised on this new image as did the salmon industry. However it is too simplistic to suggest that competition between the supermarkets may be the cause of problems within the supply chain. Most of the British supermarkets are not in direct competition with each other but target a specific segment of the public. This can be seen from the pricing policy of each supermarket. Prior to the latest price rises, packs of salmon fillet sold from £6.27/kg to £15.05/kg. This is not competitive pricing but catering to the specific needs or aspirations of their customers. It seems unlikely that supermarkets at both ends of this spectrum are paying the same price to farmers. Some might have be squeezing margins but the prices charged by others suggests they are not. At the same time, whilst some supermarkets have been selling imported salmon, those at the top end have sold only Scottish and have paid higher prices to farmers to guarantee continued supply.
The supermarkets are an easy target for those producers who have a blinkered vision of the marketplace. We, at Callander McDowell, have always welcomed those with other experiences into our industry suggesting that they often bring a different perspective with them. In the case of Mr Gibson, a long standing beef farmer, he seems to bring all his existing prejudices to his new role. It’s too easy to blame others for the industry's problems rather than face up to the industry’s own deficiencies!