reLAKSation 269. Callander McDowell
Green light: The Competition Commission has now provisionally cleared the takeover of Marine Harvest by Pan Fish. They said that they did not think the acquisition would significantly reduce competition nor did they think that the merged company would be in a position to raise prices or control supply. We, at Callander McDowell just welcome the fact that common sense has finally prevailed.
This Competition Commission investigation has been prompted by those who perceived this acquisition to be at odds with their own vision of salmon farming in Scotland. However, the reality is that the destiny of the Scottish salmon farming industry is already mapped out and has been for years. Any attempts to interrupt this progress, however well intentioned, have only added to the continued market disruption which has undermined industry development.
In 1989, the Scottish industry had to choose the direction in which it was headed. Unfortunately, the decision was even then irrelevant because the market had already dictated the future direction of the industry. This was decided as long ago as when the pioneering salmon companies put the first smolts to sea. It is now clear that any attempt to divert the industry away from its inevitable course has simply brought pain and suffering to those who had hoped to avoid the unavoidable.
Salmon were originally selected as a candidate species for farming because they already had a luxury market image together with a high market value. This value was a reflection of the rarity of wild fish. Unfortunately, the very act of farming devalued this rarity value by increasing the number of fish coming to market and as a result, the original high price was unsustainable. The choice for farmers was stark. Salmon farming could be either restricted to being a very small niche industry producing few salmon at a high market price or it could be expanded to supply an ever increasing demand for value for money fish. Since the whole purpose of farming is to provide consumers with the fish they want (and to make a healthy profit whilst doing so), expansion was always going to be the only option and as with any business, the pressure to reduce costs would bring streamlining and consolidation. This is just a simple fact of business life which we have seen in many and varied other industries.
Salmon farming was originally conceived as a way of helping crofters and fishermen diversify their livelihoods but this was never a realistic vision. After all, the first salmon were put to sea in Scotland by Unilever, a massive multinational conglomerate. Their involvement was always going to dictate the future industrialised nature of salmon farming and Pan Fish are simply continuing this trend.
In 1989, we, at Callander McDowell, argued that the future salmon industry would be dominated by large multinational companies. The increased fishing pressure on commercial wild stocks of all fish, not just salmon, means that alternative supplies of fish must be produced on a huge scale. A few small independent salmon farmers are never going to meet the ever increasing demand for farmed fish which is why the Competition Commission are right to give the acquisition the green light. It is just unfortunate that some people felt that this investigation was necessary in the first place.
Executive decision!!: One of the interesting aspects of the Competition Commission investigation was the opportunity to gain an insight to the views of some of those who can influence the development of the salmon industry as they are published on the Competition Commission website. The one that stands out most, at least for us, is that from the Scottish Executive.
It would be easily understandable if one became despondent on reading the Executive’s submission because it appears to bear little resemblance to any salmon industry that we know. There are many points in the Executive’s submission which merit further discussion but we would like to concentrate on just one – boom and bust.
The Scottish Executive state quite clearly that the salmon industry has suffered from a continual cycle of ‘boom and bust’. Whilst that maybe apparent to them, it is not to us.
Certainly, the evidence from price data does suggest that the industry has been subjected to a cyclical pattern of price rises and falls but we would argue that this is not evidence of ‘boom and bust’. That salmon farming was subjected to boom and bust was first proposed by Professor Chris Ritson of Newcastle University who was employed by the then Scottish Salmon Growers Association in 1989 to explain why prices had fallen. His view was that the price fall was the first sign of a boom and bust cycle and this view has persisted ever since. However, Professor Ritson was wrong. The price fall had nothing to do with boom and bust. Instead, it was the inevitable result of the changing market image of salmon brought about by farming. The increased production arising from farming meant that the new industry underwent a change from one of low volumes (and high margins) to one of high volumes (and low margins). Salmon was evolving from a luxury to an everyday food and this change was reflected by the fall in price. Having worked exclusively with mature industries, Professor Ritson failed to recognise what was happening to the fledgling salmon industry and persuaded the Scottish industry they were now on the start of a boom bust cycle instigated by the dumping of cheap salmon by Norway.
So if the cycles exhibited by the industry are not boom and bust, what are they?
The Scottish Executive state in their submission to the Competition Commission that they have supported measures to ‘dampen’ the salmon boom bust cycle in the EU market. Rather than the result of a boom bust cycle, it is these measures which have caused the cyclical effect. The repeated pattern can be matched up to the various dumping cases instigated by sections of the Scottish industry. The cycles are the response to either a lack of confidence or increasing confidence in the market. We have seen just this year how imposition of the MIP has forced prices upwards as confidence in the market was undermined, even though the MIP was not responsible for any direct effect.
It is clear that this cyclical effect has been artificially manipulated and the simple reality is that if the Scottish industry, supported by the Scottish Executive, had opted to capitalise on salmon’s changing market image, rather than try to retain that which existed before salmon farming began, then the industry would not have experienced any cyclical effect at all. Instead, it would be still following the beginnings of a standard growth curve. However, the past cycles are not just the response to confidence or lack of confidence in the market place. There is also a real effect, which has caused some farms to go out of business.
The Executive discusses the competitiveness of the Scottish industry and their comments illustrate what went wrong for some farms. The Executive say that the Scottish businesses will need to restructure and optimise their production to retain their competitiveness or ensure that they can produce a premium product which can offset higher costs. Translated this means that should Scottish farms aim for low margin, high volume production or instead opt for a low volume, high margin strategy? It would seem that many farms have opted for the second choice. They have aimed to produce a premium product for which they expect to receive a higher market price. The problem is that whilst they have aimed to produce such a premium product (whatever that means) and have incurred extra costs in doing so, they have not been rewarded with a higher market price. This is because consumers have recognised that they can buy salmon which tastes just as good for a value for money price. Why would they want to pay a premium when they can’t tell the difference?
The higher costs but lower incomes meant that cash flow suffered, eventually leading to insolvency. Perhaps if farms had restructured and produced what consumers actually wanted, the situation today would have been very different? Instead, they aimed for trade defence measures, supported by the Scottish Executive. The Executive state that they must be convinced that such measures are justified and are absolutely necessary but it seems to us that the Executive heard only one side of the story meaning that there was an absence of balanced discussion.
The Executive state that the European Commission investigation concluded that dumping had occurred and the MIP was imposed as a result. However, we at Callander McDowell know that the EC investigation was seriously flawed and that the MIP should have never been imposed.
Finally, the Executive say that whilst Scottish businesses need to restructure, which has been clear for the last 15 years, they say that it will be difficult for EU owned businesses because the domestic banking sector is still reluctant to re-engage in an industry of market imperfections. However, who can blame the banks. Why would they want to risk their money in an industry suffering from a recurring boom bust cycle? Maybe if the request for investment was accompanied by a well defined and market oriented business plan, the banks may take a different view! The acquisition of Marine Harvest by PanFish seems to suggest that there are some people out there who are prepared to take on such a risk. Perhaps, they have a different vision of the industry to that expressed by the Scottish Executive?
Who will buy?: Before the Competition Commission announcement was published, Fishupdate.com reported on fears in Scotland as to the fate of jobs on the west coast. They discussed various scenarios in which parts of the new business might have to be sold off in order to meet any disinvestment proposals from the Competition Commission. Fishupdate.com asked whether any scenario consisting of a group of sites and a processing factory would find a buyer. An unnamed industry insider said that “any buyer would not be a Scottish one”. He added that “the Norwegians would come in and buy them rather than a Scottish firm. There are no Scottish firms likely to be in a position to take them over”.
Whilst it is now unlikely that a Scottish firm would be in a position to take over any significant disinvestment or make any other acquisition, it was not always so. It wasn’t so long ago when McConnell Salmon took over the then Marine Harvest so what has changed? Why should Norwegian companies be able to dominate the industry whilst Scottish owned firms have become relatively inconsequential? In theory, there is no reason why Scottish owned firms could not be playing their part in the development of the industry but the reality is that they pursued the wrong strategy.
The Scottish industry have continued to focus on the production of Scottish salmon as a premium product even though it is clear that most consumers prefer to buy salmon which represents the best value for money. These firms have fought against the tide of change and as a result they have had to pay the price. Premium salmon is a niche market and therefore Scotland has developed into a niche industry. By comparison, Norway has responded better to consumer demands and has developed into a more consumer oriented industry. This is why it can pursue a strategy of growth and acquisition.
Finally, in their submission, the Scottish Executive highlights some barriers to entry in which they suggest that any new entrant would only be successful if they could buy out existing producers. However it is extremely unlikely that any new entrant would want to invest in salmon farming. As with the banks, who in the right mind would invest in an industry which is subjected to recurring market disruption, recurring dumping actions and the repeated imposition of trade measures? In trying to protect their image of salmon farming, the Scottish industry has actually undermined the possibility of future investment except from those who have already experienced some success. This is why the modern salmon industry is dominated by Norwegian and Chilean companies and not those from Scotland.