BOSTON -- The seafood category is being transformed by increasingly higher margin demands from consolidated chains operating under the burden of stepped-up profit pressures.
Such forces on the department will determine future development of the category, and may include the addition of more self-service stations and less fresh product, according to a panel of experts who discussed the topic of retail seafood profitability at the International Boston Seafood Show.
"We couldn't have foreseen this [rate of mergers] 10 years ago," said panel moderator Howard M. Johnson of H.M. Johnson & Associates, Jacksonville, Ore. "If the trend continues, there will be five or six retailers controlling most of the markets -- that's buying power."
The problem for seafood is that average gross margins cannot support consolidation's high realignment and integration costs. Johnson told the audience the most recent figures he found, for the year 2000, showed retail seafood sales averaging gross margins of 21.5%, a figure the panel acknowledged is too low.
"The store can't get by on 21.5%. We need 35%," said Larry Daerr, a panelist and regional seafood manager for Supervalu, Eden Prairie, Minn. "We're now up to 29.5%. We're getting closer."
For independent Queen Anne Thriftway, Seattle, "[a] 30% gross doesn't cut it. We need 40%, especially in a small store," said Rick Cavanaugh, the retailer's seafood director. "We need the octane to grow."
It seems chains, in particular, don't want to give up gross for the sake of fostering an attractive image provided by low-slung European ice cases filled with 60 or more species from around the world, said Daerr. The panelists agreed stores that cut back to selling either all-frozen product or turn to self-service counters may increase profits on seafood, but they sell less of it overall.
For example, while self-serve reduces labor costs, it can turn away true seafood consumers who want to see and smell the fish.
Daerr noted the full-service model seems to be fading from the chain level and is becoming more a market-survival tactic used by independents.
"Some independents will continue to look at the image, instead of the gross, because they don't want to lose customers," he said.
Several independents have been able to do all things, turning their seafood departments into destination stations that reward creative thinking with strong profits. Queen Anne's Cavanaugh sells seafood from a 12-foot, four-tiered, self-serve, no-frills, no-ice case.
"We've hit 50% [average gross margin] and 5.5% of sales out of 12 feet," said Cavanaugh, who said he searched until he found special lighting to make the prewrapped seafood packages look better. "It makes a dramatic difference, which is very important in this type of display."
Many of the 60 items in the case are fresh, while others are previously frozen and sold thawed. He also provides informative labels identifying the country of origin for each item and displays a huge map that indicates the fishing grounds.
Although the product is all prewrapped, the case is monitored constantly by seafood department personnel, making Queen Anne's seafood department a hybrid between total self-service and service.
Supervalu's Daerr said he visited Queen Anne Thriftway and was impressed that Cavanaugh worked vertically in the department's footprint to use the small space to full advantage. The area could even accommodate a display of watermelons in the summer, noted by Daerr during his tour.
"In Rick's store, you don't see any of the bad subliminal messages you sometimes get from seafood departments -- no wet packages or bloody labels that don't look fresh," said Daerr. "It's beautifully managed."
"Retail is almost a real estate business," echoed Johnson of the merchandising plan. "If you can't go out, go up -- use every inch."
The department has other forces working in its favor that retailers can use to boost the department's profile and profitability, panelists noted.
Frozen seafood should be located in the seafood department and high-quality frozen items, if attractively packaged, can be used to increase sales. To that end, shrimp may come out of the luxury category and its sales may increase if prices remain low, the panel said.
Other trends supporting seafood's margins will come from agreement on, and acceptance of, an organic designation; an increase in the use of cost-efficient aquaculture to fill natural-caught supply gaps; and an increase in the number of third-party suppliers who can provide case-ready and value-added products.
"We job out a lot of stuff," Cavanaugh said of outsourcing. "Our suppliers have all the licenses. We tell them what kind of items we want, then we don't have to have our people out back making them. It increases our profitability."
Philip C. Walsh, a panelist and former retail executive with Stop and Shop, Quincy, Mass., said retailers will likely get some help in keeping profits up because low prices will continue to prevail for farmed salmon, one of the best-selling items in the seafood case.
Daerr and Cavanaugh, the retailers, said they pass the low salmon costs along to customers and increase volume sales.
"Shrimp and salmon are two big items," noted Walsh, who is today managing director of Enaca International, a Miami-based distributor. "We can get the margin on them."
In about four years, when price wars, trade issues and other problems are finally resolved, Walsh said perhaps only four salmon suppliers will be left, much like today's poultry industry -- "they'll be big, and prices won't go up much."