Fishery Products International Ltd.: A new Challenge 1 Prepared by
Download 485.19 Kb.
|
- Navigate this page:
- Richard Ivey School of Business University of Western Ontario London, ON, Canada 709 737 8522 709 737 2467 (Fax)
- Exhibit 1: Current Organizational Structure
- Exhibit 2: Company Hostory
- Exhibit 3. Exhibit 3: The Value of Canadian Fish Exports
- January 2000 Canada to US
- Canada to All Countries – shrimp, scallops, crab, groundfish* only
- PROCUREMENT AND PRICING ISSUES
| Fishery Products International Ltd.: A New Challenge1
Prepared by Tami L. Hynes Faculty of Business Administration Memorial University of Newfoundland St. John’s, NF, Canada And W. Glenn Rowe Richard Ivey School of Business University of Western Ontario London, ON, Canada 709 737 8522 709 737 2467 (Fax) growe@mun.ca This is a draft copy and is not to be used or quoted from without permission of the authors. FPI Ltd.: A New Challenge BACKGROUND It’s early September 2000 and CEO Vic Young is reflecting on the past few months. Since 1984, Young has led Fishery Products International Limited (FPI) through a host of challenges, ranging from the fishery crisis in the early 1990s, to a recent hostile takeover bid by three united competitors. Though the bid was rejected, Young recognizes another takeover attempt is very possible and wonders if he can convince shareholders to remain confident in FPI’s management team. FPI was experiencing one of its best performances in more than a decade with a projected annual earnings target of net income in excess of $0.75 per share. This compared with $0.51 per share in 1999. In late August, Young traveled to New Zealand to explore opportunities to give FPI a more international flavour in the fish-marketing business (see Appendix F for more details). HISTORY From its beginnings in the Atlantic Canadian fishery, FPI has grown into an international seafood company producing and selling a complete range of seafood products around the world. Publicly traded and among the largest seafood companies in North America, FPI is headquartered in St. John’s, Newfoundland, Canada and has offices in Canada, the United States and Europe. The fishing industry has a long history in Atlantic Canada and drew primarily European settlers to the region as early as the 1500’s. By the early 1980’s, over-fishing, over-capitalization (i.e., an excessive number of plants), and a recessionary economy led to a collapse of fish stocks and a fishery crisis in the region. In debt millions of dollars, several fishing companies went under or were near bankruptcy, causing the federal and provincial governments to step in to restructure the fishing industry. Fishery Products Ltd., the Lake Group Ltd., John Penney and Sons Ltd. and other seafood company assets were amalgamated into Fishery Products International Ltd., and through a cash infusion and conversion of debt to equity, the federal government gained 63% of the new company, the Newfoundland government, 26%; and a bank, 11% (Benson, 1999). For the next three years the newly formed Fishery Products International Ltd. operated as a crown corporation, until it was privatized in 1987, after a profitable 1986. The firm was restructured (see Exhibit 1 for the current structure) and in an attempt to preserve local interests and prevent private control of a government-funded company, the provincial government passed the “Fishery Products International Limited Act,” restricting FPI’s share ownership to 15%, a restriction mirrored in the company’s by-laws. The Act, which is currently in force, stated no shareholder could own more than 15% of the shares of the parent company FPI Ltd., nor could they combine resources to acquire control of FPI (FPI Ltd.(c), 1999). In the late 1980’s and early 1990’s, FPI faced ongoing struggles (Exhibit 2). Declining cod stocks, worker demonstrations for wage increases, and a high Canadian dollar hampering exports weakened the whole industry (DeMont, 1989). FPI was already operating below capacity when on July 2, 1992, the federal government severely reduced cod total quotas to 132,000 tonnes (Feschuk, 1992). On September 6, 1993 the federal Government and the North Atlantic Fisheries Organization1 (NAFO) imposed a moratoria on flatfish species (e.g., American Plaice, Yellowtail, flounder) on the Grand Banks and further quota reductions in other groundfish stocks, including cod, a traditional key species. Over time, FPI responded to these resource issues by sourcing fish internationally (including fish from Alaska and South America), by adding more value to its cod-based products and by moving away from cod and into other types of seafood such as shrimp. The 1989 purchase of Clouston Foods Canada Ltd., a Montreal seafood brokerage was an example of this shift in strategy, as was the company’s 1992 purchase of Halifax-based National Sea Products’ US food service operation to use as a shrimp plant. Exhibit 1: Current Organizational Structure 
Source: Data from 1999 Annual Report Exhibit 2: Company Hostory
Sources: Benson, 1999 and Young, 1999. INDUSTRY OVERVIEW As a global commodity, seafood is sourced, processed, sold and consumed world-wide. The market for seafood products is highly competitive, with buyers at all levels demanding high quality and service along with competitive prices. Processors purchase raw material (fish) from seafood harvesters and develop the primary product into basic or value-added packaged seafood products. These processors typically distribute and market these products to wholesale and/or retail buyers in established markets around the world. As well, firms are generally vertically integrated, procuring some supply from company-owned vessels, processing in company-owned plants and distributing and marketing through in-house representatives positioned in strategic markets. Generally, margins remain higher with the fish harvesters on one end, and retail chains and restaurants at the other end, requiring processors, whose margins are typically less, to be highly efficient (SIF, 2000). Excluding 1990, human consumption of fish has increased steadily over 30 years, averaging about 85-90 million tonnes between 1995-1997 (Seafood Industry Profile, 1997). Japan and the US are the top seafood importers; Canada ranks 11th. Most of Canada’s fish products are exported to the US, where American consumers spend approximately $50 billion per year on fish and shellfish products; followed by Japan, then the UK (Industry Canada, 2000). Export information is detailed in Exhibit 3. Exhibit 3: The Value of Canadian Fish Exports
*filleted Source: Industry Canada (2000) Seafood companies encounter competition at distinct levels of their business cycle, i.e. in procuring raw materials and in marketing end products. In the US, there are about 1000 companies involved in this industry, while in Canada there are nearly 150 companies that vary widely in size, sales volume and product delivery (Industry Canada, 2000). None of Newfoundland’s 16 seafood companies have a disproportionate share of the market for raw material and all compete with local and foreign processors.
Capital costs for start-up are high and a processing license must be obtained from the provincial government. The provincial government is inclusive in trying to give these licenses to as many communities as possible. New processors may have difficulty obtaining raw material, as harvesters have established relationships with or financial ties to existing processors (Government of Newfoundland, 1998). PROCUREMENT AND PRICING ISSUES As with any global commodity, industry and economic conditions affect raw material procurement. A critical issue involves resource sustainability. Significant over-fishing in many parts of the world has caused serious depletions of certain species stocks, threatening the viability of both harvesters and fish processors relying on those stocks. In many countries, such as New Zealand, industry and government have joined efforts to jointly manage fish resources and ensure a sustainable resource base (Sanford Limited, 1999). In Canada, the Department of Fisheries and Oceans (DFO) establishes fish quotas through the Total Allowable Catch or TAC while provincial and territorial governments issue processing licenses (Warren, 2000). Most of the time it is evident DFO works with the provinces and territories to sustainably manage fishery resources and balance quotas with processing capacity (Warren, 2000). In most countries, raw material is purchased through free market, auction and/or direct sales mechanisms. Newfoundland Provincial Legislation, in an attempt to protect harvesters, requires joint processor and harvester negotiation of minimum prices paid to harvesters for raw material. Unique to Newfoundland, this collective bargaining process between processors (through the Fisheries Association of Newfoundland and Labrador or “FANL”) and harvesters, (through the Newfoundland Fishermen, Food and Allied Workers’ Union or “FFAW”) has occasionally delayed the fishing season and caused lost revenue for harvesters and processors alike (O’Reilly, 2000). Since 1998 both parties have agreed to use a task force recommended Final Offer Selection Process where an arbitrator, in the event an agreement cannot be reached, determines a minimum price. An arbitrator was required to establish capelin prices in June 1999 and to establish and renegotiate shrimp prices in August 1999 and March 2000. The 1999 shrimp pricing agreement permitted re-opening earlier price negotiations based on changes in market conditions (FANL, 1999). In reality, market and economic conditions mentioned earlier ultimately drive the market price of raw material. Driven by supply and demand, global market prices drive what processors will pay for raw material or processed product. For example, since 1996 UK (which consumes 46% of worldwide cooked and peeled shrimp) prices for shrimp have declined (FANL, 2000). In addition, foreign exchange rate fluctuations, oil price increases and even natural disasters can affect the cost of raw material. Protective economic barriers such as tariffs add costs and reduce margins and therefore the prices producers will pay to harvesters. Fluctuations in the Canadian dollar versus the US dollar also affect prices foreign buyers are willing to pay to Canadian processors though in recent years the Canadian-US dollar exchange rate has strengthened seafood exports, adding flexibility to the prices processors are willing to pay for fish. Seasonal variations in yields and the level of buying competition also affect prices. For example, during summer months shrimp yields decline as they become softer and harder to peel, effectively raising raw material per pound or finished product costs. Icelandic and Greenland companies are competing with FPI for Newfoundland shrimp supply and this higher competition has helped raised shrimp prices. To avoid losing relationships with fishermen for species such as crab, processors have invested $110 million in Newfoundland shrimp processing facilities (FANL, 2000). While FANL and FFAW negotiated prices are “minimums,” a shift in market prices may cause individual processors and harvesters to negotiate pricing arrangements above this minimum. Exhibit 4 demonstrates the annual difference in negotiated shrimp and actual market prices from 1994 – 1999. Depending on competition, economic conditions and other market volatilities, it is virtually impossible to accurately predict annual raw material costs from year to year. E  xhibit 4: Market and Negotiated Minimum Shrimp Prices Source: FFAW/CAW (2000). Presentation to Howard Noseworthy Selector/Arbitrator for the 2000 Shrimp Fishery. Presented by FFAW/CAW, March 13. INDUSTRY CONSOLIDATION There is increasing evidence of industry mergers and consolidations as companies attempt to leverage the benefits of technology and the Internet. The fishing industry is highly competitive and industry margins historically tight. Consequently, firms are looking to merge with, or acquire, other seafood companies. In mid-1999, New Zealand firm, SIF Ltd., participated in several mergers and acquisitions, notably a merger with a major Icelandic seafood player, Iceland Seafood International (SIF and Iceland, 2000). In late 1999, NEOS attempted an unsuccessful takeover bid for FPI Limited (Doyle and Cleary, 1999), a consolidation that would have created a significant global industry player and US supplier. On May 6, 2000, Icelandic Freezing Plants Corporation (IFPC) Plc., one of the three companies that attempted the FPI takeover, purchased 14.6% of FPI’s shares, citing an interest in FPI’s US market presence (IFPC Plc.(a), 2000). The FPI Act ownership restrictions are prohibitive in that no one shareowner may own more that 15% of FPI’s outstanding shares and two or more shareholders may not act together to acquire FPI. IFPC has also bought 5% of each of High Liner Foods in Nova Scotia and Pescanova S.A. in Spain (IFPC Plc.(b), 2000). To gain a stronger foothold in Europe’s frozen flatfish market in the UK, IFPC purchased Árnes Europe, a subsidiary of the Icelandic fish and processing firm Árnes (IFPC Plc.(c), 2000). Canadian firm Highliner Foods diversified its holdings into non-seafood products by acquiring Italian Village – a pasta products operation (High Liner Foods Inc., 2000). Business-to-business commerce on the Internet is generating substantial interest as companies can bring buyers and sellers together and automate transactions (Kaplan & Sawhney, 2000). In a recent move designed to take advantage of business-to-business e-commerce opportunities and increase world-wide business in the seafood industry, FPI, along with eight players in the seafood market announced the formation of “SeafoodAlliance.com” (IFPC Plc. (a) and IFPC Plc. (c), 2000). The participating companies hope the “vertical portal” will help reduce transaction and processing costs in the seafood industry and enhance the development of individual e-commerce strategies (Seafoodalliance.com, 2000). In addition to Sanford Limited, Scandsea and Young’s Bluecrest Seafood Limited, which joined in July 2000, the group includes Pacific Seafood Group, American Seafoods Inc., SIF Group, Pacific Trawlers/Crystal Seafoods Inc., Clearwater Fine Foods Inc., Coldwater Seafoods, a subsidiary of IFPC, the Barry Group of Companies, High Liner Foods Inc. and FPI. These major seafood competitors operate globally and are headquartered in Canada, the US, Iceland and New Zealand. Download 485.19 Kb. Share with your friends:
| |||||||||||||||||||||||||||||||