Fishery Products International Ltd.: A new Challenge 1 Prepared by

COMPETITION

In addition to raw material competition, FPI faces direct product competition from other seafood products and seafood brands. Significant competitors are established companies offering full product lines of groundfish and shellfish and serving many or all levels of the food service industry, including food service, industrial, retail, and so on. Alternatively, some serve many segments but also target niche markets. Branding is important, and seafood companies generally distribute and market their own recognized brands. All maintain rigorous quality standards, frequently citing their adherence to the Hazard Analysis Critical Control Point (HACCP) systems. Originally developed by the Pillsbury Company to provide safe food for American astronauts, the HAACP systems integrate inspecting food production at different levels of processing rather than simply at the end product and are designed to improve quality output (Seafood Industry Profile, 1997).

1. 
   All figures shown are on a consolidated basis for 1999.
   
2. 
   SIF experienced an operating loss; i.e., net income before financial items was $1, 916 CDN, but SIF was able to show net income due primarily to the gain on asset sales and income tax carry forwards.
   
3. 
   Write-offs, e.g. sale of Russian operations
   
4. 
   Milton, C. E. (2000). Corporate Secretary & Treasurer, High Liner Foods, Email communications, July 26. .
   
5. 
   Barratt, E. (2000). Director, Sanford Ltd., Email communication, July 25.
   
6. 
   Websites are: www.fpil.com; www.highlinerfoods.com; www.sanford.co.nz; www.sif.is; www.icelandic.is.
   

Publicly-held competitors include Sanford Limited, SIF Limited, High Liner Foods Inc. and Icelandic Freezing Plants Corporation (IFPC) Plc. Through its 18 subsidiaries, associate companies in four countries and 1500 employees, the Sanford group is vertically integrated, both harvesting and processing a wide range of seafood products with its primary fillet products coming from whitefish species like hoki. New Zealand’s largest aquaculture company, Sanford exports primarily to Europe (31% of sales) followed by North and South America (23%). The company credits success in the US market to its consistent quality and supply (Sanford Limited, 2000).

Certain non-seafood products that are typical alternatives to seafood also impact seafood consumption (Exhibit 6). In 1999, the per capita consumption of value-added seafood dropped from that of 1998 due to competition from lower-priced poultry and pasta. Rising seafood costs are at least partially passed on to the end consumer, which can make seafood products less competitive with substitute poultry and pasta products. Rising costs led FPI to increase prices in the past two years, though it managed to work with customers to minimize the price increases and maintain market position.

Exhibit 6: Product Substitutes for Fish

To compete in its key markets, FPI maintains sales offices in Canada (St. John’s, Montreal, Toronto, Calgary and Vancouver), the United States (Danvers, Massachusetts and Seattle, Washington), Reading, England and Cuxhavin, Germany and a brokerage and distribution network throughout North America and Europe (Exhibit 8). Integrated information systems keep employees around the world connected. For example, sales staff can log onto the company’s intranet site to gather product nutritional and ingredient information.

FPI has developed a strong reputation for quality and brand leadership through new primary products such as FPI Ice Shrimp and the reintroduced FPI flounder. The fact that customers request FPI by name reflects a strong customer commitment and brand loyalty. To fully incorporate customer’s needs into product design, FPI’s development staff will often act as an “extension” of the customer’s menu development department, combining efforts to generate new process concepts and value-added products, such as Italian Style Mussels and Thaw‘n Eat Seafood Medley. Such value added products typically generate over 15% of sales (FPI Ltd.(c), 1999).

A serious challenge for all large seafood companies is that large customers such as McDonalds’s, Price Club and Red Lobster demand top quality and excellent service and are price sensitive. Consequently, while customers tend to be somewhat flexible regarding price if they are assured of a stable and quality supply, there is a price point beyond which buyers will switch to other seafood companies or seafood products, or to substitute products such as chicken and pork (Kavanagh, 2000).

FPI harvests, procures, produces and markets seafood through three operations - primary processing, value-added processing and seafood trading. Primary processing includes sourcing and processing groundfish (such as cod, flounder, and turbot) and shellfish (such as cold-water shrimp, snow crab and sea scallops) into ready-to-market products or for further value-added processing. All primary processing is done in Atlantic Canada through nine processing plants. One issue for FPI is what to do with some of its extra capacity. For example, could the batter currently being used on fish be effectively used on other products such as chicken and produced in one of the state-of-the-art plants that operate only part of the year?

QUALITY ASSURANCE

In addition to using 12 groundfish vessels, five sea scallop vessels and one shrimp vessel to harvest seafood species off Newfoundland and Nova Scotia and purchasing raw material from more than 3000 independent Newfoundland fishers, FPI procures over 25 seafood species in over 30 countries. Vertically integrated, FPI can reduce volatility in raw material costs and secure a certain volume of supply, however environmental or natural conditions are beyond its control. In the past, ice conditions off the coast of Newfoundland and Labrador has delayed the fishery. Furthermore, quotas restrict FPI’s catch. As in many industrialized countries, Canada’s fisheries are managed under a quota system, where quota licenses provide harvesters with a “quasi-property right” to harvest certain amounts of fish. Processing licenses are also required for each species. Since the government relaxed a freeze on crab processing licenses in 1996, the number of licenses has increased from 19 to 36, all owned by 16 different companies (Government of Newfoundland, 1998). Although a company may purchase a license, it may choose not to use it if supply is not available or processing is not economically viable.

The company employs 3400 people worldwide, with 3000 in Atlantic Canada. FPI credits its successes to employee commitment and teamwork, particularly through challenging industry times. The company has co-packing arrangements in shrimp processing plants in Thailand, Ecuador, Indonesia, and Mexico; at fish processing facilities in Norway and Chile; aquaculture farms and secondary processing plants in China. The company has sales offices the US, Europe and Canada. There is low turnover among staff and executive management, a reflection of the company’s commitment to employees. During an attempted takeover bid in November 1999, the company regularly advertised in local newspapers to publicly praise employees’ work and dedication. On December 10, 1997, FPI appointed its first female plant manager when Angela Bugden became the plant manager of FPI’s Riverport, Nova Scotia scallop harvesting operation. She is also responsible for the five scallop trawlers and the refit yard for the trawlers. Over the last three years, FPI has also invested in teamwork training for the plant management teams at its two state-of-the-art shrimp plants and has done so in partnership with the Center for Management Development at Memorial University of Newfoundland. A problem that FPI must contend with in building teams in their plants is the close interpersonal relationships among members of the plant management team, plant employees and the fishers who supply the plants. These close interpersonal relationships negate the sharing of sensitive cost information as it may be used in subsequent negotiations between FPI and the unions representing employees and FPI and the association representing the fishers.

FPI believes in “quality, honesty, teamwork and innovation and continually invests in its primary and secondary processing operations to remain competitive, having invested over $65 million since 1995 (FPI Ltd. (a), 2000). Spending $11 million to convert a groundfish plant and $6 million for new flow line processing technology in its largest primary processing facility, it has two “state-of–the-art” shrimp plants and a world-class primary processing facility. It has made significant investments in new technologies such as automated weighing, packaging and freezing technologies that have improved efficiency in its two value-added plants. All of these investments are considered vital to remaining competitive and meeting customers’ changing needs.

The company also remains committed to sustainable resource management, as evidenced by its Environmental Monitoring Committee that monitors operational practices to ensure regulatory compliance and sound environmental policies. The company has partnered with the Marine Institute at Memorial University of Newfoundland to research and develop leading and sustainable harvesting processes and Memorial University to research in oceanography and fish conservation. As well, it has worked with the Federal Government’s Department of Fisheries and Oceans to gather scientific resource data allowing for more accurate allocation of quotas. In 1999, the company pioneered the use of groundfish seining technology reducing unwanted by-catches and unwanted contact with the ocean floor.
PERFORMANCE

In the early 1990’s, the company struggled through severe industry supply shortages and recorded provisions of $65 million and $20 million in 1992 and 1993 respectively (Appendix A). With the exception of losses in 1995 due to lower groundfish and scallop quotas, a drop in crab prices, and poor US and Mexico market conditions; profitability has slowly improved. In the past five years, both operating and net margins have remained relatively stable and income per share has slowly climbed (Exhibit 10). Accounting for a special charge of nearly $1 million relating to the takeover bid, the company still recorded a profit of $10 million in 1999 and for the first time in 11 years paid shareholders a dividend.

E
xhibit 11: Profit (Loss) by Geographic Region

E

xhibit 12: Canadian and US Domestic and Export Sales

E

xhibit 14: Segmented Annual Revenue in 1996 and 1999

Overall, share prices have declined since the company’s initial public offer in April 1987 and have ranged between $5-7 over the past five years, with the exception of a price increase during late 1999 because of the hostile takeover bid by NEOS. Daily trading volume is comparatively low, ranging from approximately 61 to 1500 trades versus 20,000 to 200,000 for Nortel (BMO Investorline, 2000) however this does not appear to impact share price (Rowe, 2000). Although EPS has increased each year since 1996 from $.37 in 1996 to $.66 in 1999, the Total Return Index Values chart (Exhibit 16) demonstrates FPI has not afforded shareholders the same return as other food processing companies or the equities market.

Source: Statistics taken from Robert Morris and Associates (RMA), 1999.

1. 
   Canada, the US and Mexico have adopted the North American Industry Classification System (NAICS) for industry product classifications, however historical financial data is available only under SIC/ISC codes. SIC codes 5146 (Fish and Seafoods) and 2092 (Prepared Fresh or Frozen Fish & Seafoods) compare with FPI’s NAICS code, 31170.
   
2. 
   Data is for companies with USD 25MM and over in revenue.
   

On November 5, 1999, FPI announced it was the target of an unsolicited takeover bid. In a bid to take FPI private, NEOS Seafoods Inc., a newly formed consortium of three companies from Newfoundland, Nova Scotia and Iceland, offered $9 per share to acquire 100% of FPI’s 16 million outstanding shares (Doyle & Cleary, 1999; FPI Ltd. (e), 1999). This bid was subject to the provincial government and FPI’s shareholders approving removal of the 15 percent ownership restriction. CEO Vic Young promptly responded that the offer was below book value of $10.75 and “extremely low” (Doyle & Cleary, 1999). He pointed out that the FPI Act required any successful bid on FPI to have approval from FPI’s shareholders and the Provincial Government to lift this restriction. The 15% shareholder restriction is known as a “poison pill” and made a significant equity purchase of FPI impossible.

E
xhibit 16: Quarterly Share Price 1987 to 2000 and Total Return Index Values 1994 to 1999

Canadian fishing companies are subject to foreign ownership restrictions and must be majority-owned by Canadian interests (Milton, 2000); US companies face similar foreign ownership restrictions. Unlike FPI, it is not uncommon for competitor seafood companies to be majority owned by one or two investors. As well, institutional investors are the primary investors in many seafood companies. For example, ASG is controlled by an investment firm while one shareholder owns 37% of Sanford Ltd. Meanwhile, two corporate investors own over 50% of High Liner’s shares (High Liner Foods, 2000 & Milton, 2000).

At 55, Vic Young has led FPI for 16 years. An officer of the Order of Canada, Financial Times’ 1994 CEO of the Year, and the holder of a honourary doctorate from his alma mater, Memorial University, Young started his career with the provincial government in 1968 and became the Deputy Minister of Treasury Board. He stepped down in 1978 and became the chairman and CEO of Newfoundland Hydro. In 1984, he became Chairman, and CEO of Fishery Products International (Smith, 2000). Young is not expected to retire any time soon, however it is not immediately evident who would replace Young or whether he or she would possess Young’s ability to continue building a strong culture and team commitment.