Dean Hogencamp, seafood product specialist at Hilco Valuation Services joins the Hilco Global Smarter Perspectives Podcast Series to talk about the outlook for the seafood industry based on numerous factors, not the least of which is the significant and ongoing impact of the Coronavirus pandemic on foodservice.
Steve Katz 0:11
Hello again, and welcome to the Hilco Global Smarter Perspective Podcast Series. I'm your host, Steve Katz. Today we're speaking with Dean Hogencamp, seafood product specialist at Hilco Valuation Services, about the outlook for the seafood industry based on numerous factors, not the least of which is the significant and ongoing impact of the Coronavirus pandemic on foodservice. Just a little quick background, Hilco Valuation Services has significant validated expertise in the seafood market, including processing, importation, and distribution. Leveraging its deep industry knowledge, Dean and his team have delivered valuations on 15 of the top 20 seafood suppliers in the United States over the past five years. With that said, welcome to the podcast Dean.
Dean Hogencamp 0:57
Hi, Steve. Thanks for having me on today.
Steve Katz 0:59
Absolutely. It's great to have you here. And I must say I'm pretty anxious to hear what's going on in seafood from a business perspective. But also because frankly, I've got three daughters, two of whom are borderline pescatarian, so we consume quite a bit of seafood in our house. Dean, clearly, we're still in the throes of the pandemic. Restaurants are at limited capacity in many markets, and a large percentage of people aren't dining out. But that's just the tip of the iceberg from the perspective of what's going on related to the foodservice industry overall, which is a very significant percentage of seafood sales. To start us off today, can you give us the bigger picture on this?
Dean Hogencamp 1:39
Sure, I would say first and foremost, foodservice is an all-encompassing category that most people think of foodservice as restaurants, and of course restaurants drive a big portion of overall foodservice sales. But in addition to restaurants, you also have schools, prisons, stadiums, hospitality, i.e., restaurants, as well as commercial facilities. Obviously, with the COVID-19 pandemic, many of these segments have been significantly impacted. What's important to keep in mind is historically speaking, seafood sales into foodservice typically account for two-thirds of total seafood sales domestically. Obviously, foodservice drives a high portion of all proteins such as beef, chicken, as well as seafood, but seafood just because of the unique ways in which many people are concerned about possibly preparing seafood, you see a higher portion of overall sales of seafood going into foodservice. So as a result of the pandemic, seafood has been impacted at a greater rate than many of these other proteins. Obviously, as a result of the pandemic, in the early stages because of the lockdowns, because of the reduced seating capacity, we saw restaurants drop by approximately 70% in terms of total sales. As a result of this, you saw sort of an imbalance between the supply and demand equilibrium in the marketplace. So we had all the additional supply on-hand in anticipation of sales, which didn't come to fruition. As a result, you started to see the drop in replacement cost pricing in the marketplace. A lot of suppliers have tried to adjust to this. At the end of the day, what we're seeing right now is over the summer, we still saw those restrictions take place, i.e., dining restrictions, continued lock downs, and even as of late, we've seen a lot more restrictions come back into focus. As a result of this, we're still in that uncertain stage as to where we'll see food end up, of course, restrictions being the largest obstacle to the restaurant channel at this point in time.
Steve Katz 3:31
Yeah, it makes a lot of sense. I think people do tend to eat seafood out more than at home. But on the flip side of that, right, right now, with consumers essentially left with little or no choice, they are eating more at home. And so there's more demand for groceries. And that brings me to a few questions for you. So first of all, how much has this benefited retail, this shift? Secondly, have wholesale focus suppliers been able to shift themselves and take advantage of this increased demand at grocery? Because I know obviously, they're, you know, focused on wholesale. And third, has the growth at retail been enough to really counter what have been very significant losses I know on the foodservice side. If you can take each one of those in sequence, that'd be great.
Dean Hogencamp 4:22
Sure, with respect to the benefits of retail, during the early stages and over the course of the summer, what we saw was obviously, as a result of the lock downs, the only place or places open were considered the essential businesses, i.e. retail grocery stores, all the non-essential businesses were in essence shuttered during the early stages of the pandemic. As a result of that, there was obviously some frantic buying where a lot of people were looking for shelf stable products, frozen seafood being those shelf stable proteins in themselves. And basically what we saw was we saw retail, increasing anywhere from 20% to 40% of what their sales had been historically within the seafood sector. Primary products within the seafood that you're seeing in retail right now are frozen fish, shellfish, and shrimp. So yes, retail has benefited significantly as a result of the pandemic. To your second question with respect to the wholesale focus suppliers and how they've been able to shift, what wholesalers did was many wholesalers that were targeting food service, primarily during the early stages, what they've done is they've looked to repackage those products. Typically, when you look into the wholesaler, foodservice sizes are typically anywhere from 10 to 30 pound pack sizes. And what that is, is they may be bulk filets in a 10 pound box, or they may be individually quick frozen shrimp and in a 30 pound box. So what they've done is they've taken those and they repurpose those for the retail channel. Now, it's important to note that not everyone has been able to take advantage of this. It depends on the species, specifically. The higher price products that you typically see in the restaurant trades such as live lobster, the fresh fish, which would be salmon, tuna, or some of the higher-end shrimp that come in from either India or Mexico, which are headless shell-on that are targeted specifically to the foodservice, those who have suffered at a greater rate than the frozen product. Just to give a couple examples of what has or has not been impacted more I would say on the lobster side of things, it's been interesting. Obviously, the restaurant industry drives a good portion of the overall lobster sales, specifically for the lobstermen. And what they've done is when that outlet dried up, those lobstermen have tried to think outside the box. Many of them tried to sell to consumers directly but obviously that still doesn't take up all the demand. What we've seen over the pandemic with respect to shrimp as we continue to see higher sales volumes within retail particularly with respect to the individually quick frozen products. These items typically come in from overseas. They're sort of, I would consider these a value-added product, whether they're peeled and deveined, easy-peel or shell-on or shell-off product. Where we've seen challenges or where many of the wholesalers have seen challenges are those that provide a larger size shrimp, such as under 10 shrimp per pound, which they refer to as U10s or 16-20 shrimp per pound 16 to 20s. These come in from India and Mexico and they're basically headless shell-on product that are shipped in a frozen five-pound block. These products are typically sold direct to the high-end white tablecloth restaurants for your shrimp cocktail. As a result of the way these products are packaged, there's really no way to repurpose these goods into the retail segment. So that's where they've seen challenges. And as a result of that we've seen sort of a buildup of inventory in this specific product segment within shrimp. I think it's important for most to understand that frozen seafood typically maintains shelf lives of approximately 24 months. Of course, this depends on how the product is handled, how it's stored, this may increase and or decrease product shelf lives. For example, an IQF or an individually quick frozen shrimp, typically the shelf life is approximately 24 months. Whereas block frozen shrimp, they're literally encased in a block of ice, I've seen these shrimp be sold in excess of 36 months old. And as a result, I've seen significant positive margins in the event when the market shifts. So aging is a big piece to understand is to have all of this drives product value as well. To respond to your last question, even though we have seen considerable growth within the retail and online channels for seafood products, given that the foodservice channel accounts for approximately or has accounted for approximately 65% of total sales, this still has an offset the loss or the retail side has not offset the overall decline in sales volume within foodservice. I mean, the recent developments with COVID vaccines being offered to the general public, obviously have led to optimism however, it still remains to be seen just what impact long-term that COVID pandemic may have on the foodservice channel as a standalone item.
Steve Katz 9:06
Yeah, well it makes makes a lot of sense. I think a lot of people are hoping these vaccines will be administered quicker than it seems it's happening right now and I think a lot of industries, seafood included are hanging in the balance on that. Now, you also touched on something that I wanted to discuss, which is shelf-life. And obviously based on what you're saying there's an overabundance of supply right now. So how are suppliers handling that from a storage perspective? And how is this impacting their vendor relationships and pricing overall across the food species? And then lastly, what are your thoughts regarding what's going to drive a recovery for the industry and what that timing looks like?
Dean Hogencamp 9:55
Those are all good questions. I would say during the early stages of the pandemic everyone basically experienced a shock to the supply and demand equilibrium in the market. As a result, what we saw was higher levels of supply frozen product just because the demand was not there. In terms of storage, most suppliers use third-party freezers product storage. Some have their own freezers but in large part, everyone's utilizing the third-party freezers throughout the country for logistical purposes. And we saw a build up for most most of our customers. We saw as product shifted to retail, we were able to see many clients able to sell through those products to meet the needs of retailers. In terms of how this is impacting the relationships, I would say it's important understand that a lot of these seafood processors obviously rely upon the fishermen, specifically in the wild product segment for product supply. So what these processors saw on the early end of things was as demand dropped off, it's not as though they can simply call up their fishermen and say, you know what we're not going to buy from you today. I mean, many of these relationships have been cultivated over tens of years and just because some demand is not there today doesn't mean that demand won't be there in the future. So it was very important for a lot of these processors to ensure that they maintain these relationships. So what you found was as typically they would sell fresh product coming off the boats. As a result, those processes were now forced to freeze those products. As a result, you saw the buildup of inventory in freezers. Typically that would result in market pricing declines and I think a good example is it's not always the case because you are dealing with a wild product. And I think a great example would be for domestic scallops for example. During the early stages obviously with restaurants either closed or operating at reduced capacity, the demand for fresh scallops was not there. So what you saw a lot of processors doing was freeze those products. As a result, the market initially declined in pricing. But you also had the government come in and change their quotas on scallops. So inherently, there's going to be less future supply of these products. So even though these folks were not happy in terms of initially putting products in freezers and freezing them, the market for scallops has actually inverted and shifted in a favorable direction. So it actually has worked out not for all but in some cases, it actually has worked out based on shifts in product supply. We're seeing a similar thing in terms of Alaskan salmon. The COVID pandemic did impact product landings. So not only is it impacting people's availability or ability to actually go to restaurants but it's also impacting the worker availability as well. So as a result of that we've recently seen, and it's still ongoing, and the market is just closing or the current season up there is just closing, but you've seen actually processors processing less fish because there's less landings this year than there has been in the prior years. That's also aiding in terms of price in the market. I would say that the seafood industry obviously continues to work through the pandemic. Vaccines are obviously very important, which leads to a level of optimism within the industry. But it's really tough to point out or to predict what's going to happen in the future. I think the next two or three months is going to provide a much clearer picture in terms of how this has truly impacted the foodservice sector long-term. It'll be interesting to see how consumers react just going forward because there's a number of consumers that are more comfortable cooking food at home, as opposed to going out. So it'll be interesting to see how that how that plays out. I would say it is important to understand or to point out that the silver lining for many of these restaurants, and I think it's overlooked, is obviously restaurants have struggled. The government PPP program has been significant in allowing these restaurants to survive. Obviously, their first PPP loan came through over the summer, they just launched a second round of PPP, and I know a lot of people in the restaurant industry that this is going to allow them to continue to hopefully get through the winter, where we can get back to the summer months. So it'll be exciting to see how that all transpires.
Steve Katz 13:47
Yes, it will. I'll tell you a lot of people are hurting right now and although it is interesting, I think what you were saying about how market dynamics really, you know, can positively affect an oversupply situation. So, that was surprising to me. And and I'm sure to a lot of our listeners as well. Okay, to wrap it up, as we move through the first couple of quarters of 2021. What thoughts or advice can you offer to those companies in this space as well as to their lenders in regard to managing these types of businesses and limiting their risk through the remainder of this period whatever that turns out to be?
Dean Hogencamp 14:24
Yeah, I would say with any business, I mean the key metrics that drive the business include product turnover, product margin, and product aging. Obviously, with the buildup of products being frozen as opposed to being fresh, you are starting to see in many species, a buildup of the product aging. I think it's really important for lenders to work with the companies to understand what products are aging out, as well as understand what the company's disposition plans are for those products. Just because a product is old, I think the scallop example was a good one. Just because a product is old doesn't necessarily mean it's worth less. So it's really important to understand what's going on with those market replacement costs. So in terms of market replacement costs, I always talk to lenders and I say, you know, let's try to look at mark to market reporting. So you have product aging, which I would say for most lenders, typically when we look at a borrowing base or a credit agreement, product aging is always utilized. And what they do is basically they cap product age. So if a product is 18 months old, 24 months old, or even older than 12 months, they'll put caps on lending availability. There's really no specific guideline as to each specie of seafood is acts a little differently, but I would say that most lenders do cap goods at basic goods age greater than two years. I think it's important to realize and understand that most seafood that has been packaged specifically for foodservice, whether it be domestic or imported, does not actually include a best use buyer or an expiration date on the product packaging. That's news to most that aren't familiar with the industry, you can walk into a warehouse that product could be three months old or 24 months old and from the outside or from the inside, you would have no idea specific now I want to be clear that's specific for foodservice. When it comes to retail, retailers of course, they require products to maintain a best use by or a expiration date on that retail product packaging. Typically retailers require no more than 12 months or 18 months from the date of product packaging. So it's important to differentiate foodservice package products from retail. In addition to aging, I would say the second piece that lenders should really work with clients would be to try to generate mark to market reporting. I always say to lenders, if you can put reserves in place based on mark to market reporting, it basically acts as a lever for the lender. Most of these species, there is market data readily available so they can actually report routinely what product replacement costs are in the market. And this just allows the lender to make sure that they're insulated from market movements. I say this because some lenders will put this into place. And it's great. We'll look at a company, will look a company 12 months later and the market may have moved either favorable or unfavorable, but those with these levers in place mitigate the swings that we see on the recovery side from our end. Those without levers are the ones that typically see larger product swings. So to recap, I would say the two pieces most important would be to monitor product aging, and if possible, put mark to market reporting in play.
Steve Katz 17:26
Well, Dean clearly, there's a bit of a rough road ahead for the industry. And I'm guessing that we're going to see more suppliers in the future hedging their businesses with more of a retail and wholesale balance to guard against the situation like this again, moving forward. So thanks for providing that information for our listeners. It was terrific. And for those of you listening today who are in a senior management role within the seafood industry or who have seafood exposure within your portfolios, please consider reaching out to Dean and his seafood products team at Hilco Valuation Services for a conversation. With that in mind, Dean's email is DHogencamp@hilcoglobal.com. That's DHogencamp@hilcoglobal.com. Dean, it was a pleasure having you on with us today. Thanks for joining us.
Dean Hogencamp 18:15
Glad to be here and to share this information with the listeners, Steve.
Steve Katz 18:17
And listeners, we hope that today's Hilco Global Smarter Perspectives podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. Until next time for Hilco Global, I'm Steve Katz.
Transcribed by https://otter.ai