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Over the last several years, downward pressure
on shrimp prices have become an increasingly important concern to
farm-raised shrimp producers. A slow growing global economy has had a major
impact, but so have fundamental changes in the marketplace, including
stronger buyers, more transparent markets and a record flow of farm-raised
shrimp into the developed markets of the |
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Shaped by this scenario, many shrimp producers feel they have no alternative except to bend over backwards to satisfy the demands of the powerful high volume buyers of frozen farm-raised shrimp. Wholesale buyers enjoy the luxury of being able to select from a wide range of global producers. Not surprisingly, these high volume buyers make their power position abundantly clear to the producer during negotiations as they chop the price. These well informed buyers come armed with volume deals, detailed industry analysis and even faxed offers from other producers as they try to squeeze as much value as possible from farm-raised shrimp producers. With no shortage of supply and less than strong demand, the economics of supply and demand continue to favor the shrimp buyers of the world. The producers who were fortunate enough to survive Taura and WSSV are faced with yet another serious threat to their survival - lower wholesale prices and dwindling margins. While this appears to be a rather gloomy scenario for shrimp producers and first line sellers, certain strategic defenses are available to the visionary producers willing to invest in corporate change. Farm-raised shrimp producers can meet these powerful buyers on their own terms and restore a level playing field. Knowledge, strategy, technological advancements and value selling are just a few of the tools at the disposal of the producers. As with any business, knowledge is power. High volume buyers in the shrimp commodity markets are typically extremely well informed on important issues such as cost of production, supplier options and current market conditions. Buyers systematically aggregate all of the available information from their own organizations, other suppliers and trade publications and deploy a moving low cost average pricing framework from which to work. Buyers also have an intimate knowledge of the economic impact of their own options (such as the cost of switching suppliers), so they can generally decide on their sourcing strategies and pinpoint acceptable tradeoffs before they even start discussions with suppliers. It is the responsibility of the producer to come armed with the same information as the buyer. An accurate knowledge of customers and current market conditions gives producers the power to deny historic discounts or extended services that no longer make good business sense. Producers need to gather detailed knowledge of every buyer's economics and key selling points. Large buyers may start off negotiations by playing their volume card first or they may hold it close the vest for final negotiation. Either way, you can rest assured they will show no mercy as they attempt to squeeze the price as low as possible. This approach is certainly nothing new, but in the supply-rich euphoria of today's shrimp markets, suppliers want and can demand additional value. Buyers are now beginning to shift costs and risks to their suppliers. As far as the present day buyer is concerned, everything is negotiable. Many buyers simply don’t care about the effect this line of attack might have on relationships: the goal is to grab value. Producers must take a much tougher negotiating stand by reducing services to certain buyers or even abandoning them altogether if they have simply become too expensive to serve. Some suppliers have suffered so much from the buyers attacks that countering them, rather than passively watching margins erode further, has become a strategic priority. In the hardest cases, where the margins of the core business have been cut to unsustainable levels, management may have to consider more fundamental changes, such as forming joint ventures or exiting the business altogether. A company less severely affected by margin erosion can take a more balanced approach, not only by developing an improved knowledge base but also by making the move to value selling. In this case, a supplier has more time to preempt some of the pressure buyers could bring to bear in the future—a strategy that would set the tone for discussions with them and uncover new sales opportunities. Still, the company must be ready to counter more aggressive demands from its customers by holding firm to its pricing policy and resolving to walk away if the full cost of serving them is unacceptably high. The farm-raised shrimp producers sales force can be an easy target for professional buyers, since traditional incentive plans for sales reps are based on volume. This predisposes the salesperson, who is just trying to make a living, to readily accept the buyers demands. Sales managers encourage this volume mentality by pressing for greater market share at almost any cost. The importance of retaining a large volume customer who accounts for a large percentage of annual sales volume becomes paramount and prompts sales reps to avoid measures, such as demanding a fair price, that could jeopardize relationships with them. Sales reps must be offered incentives to avoid surrendering value on any terms the buyers choose. The key to success is to understand the buyer's approach, which focuses on total value rather than lowest price, and to prepare the organization for a new kind of selling. In this way, a supplier can restore the balance of power with its buyers and give them greater value while not threatening its own viability. To be fully prepared for battle, it is rather obvious but not always fully understood that the shrimp producer must have a very clear understanding of the cost structure of his product. For the producer, there are many points besides Point A and Point B in the delivery chain. The producer must know the exact cost of production at the farm (Point A), the cost of the finished processed product F.O.B. plant (Point B), the precise cost delivered to the main point of entry prior to customs clearance (Point C), the exact cost of the product once it has cleared customs (Point D), the cost of product held at a local cold storage facility (Point E) and the cost of the product delivered to the buyer's destination request (Point F). But even this is not enough. Ideally, producers must calculate the pocket price for each order a customer issues. The pocket price is vital for making a key strategic decision: whether the supplier should walk away from any customer’s business. At a minimum, information about a customer’s historical price performance should strengthen the supplier’s resolve during negotiations by showing where losses usually occur. Net loss relationships must be negotiated strongly and with resolve to make the account profitable once again. To raise prices and/or cut service levels for an under performing customer to the point where it might defect requires the sales force to embrace a profound cultural change and develop the ability to assess risk. The payoff is a better negotiating stance and thus improved margins. Dropping a customer always poses dangers, but they can be mitigated by a thorough knowledge of the business at risk. The buyer who leaves for what looks like greener pastures may come limping back after a few months of coping with the competitor’s poor logistics and even poorer product quality with a new found willingness to accept accepted higher net prices and longer, guaranteed-volume deals. Producers must realize that for the buyer, the total cost of ownership (TCO) is paramount. The buyer does not care if your farm is on an island and it is a logistical nightmare just to get the shrimp off the farm. It's not the buyers problem nor should it be.. The buyer only cares what the cost is to get the product from point A (the farm) to Point B (his warehouse or his customer's warehouse). While the buyer does not care about such details, the producers survival depends on it. It should be made abundantly clear to the buyer that each additional step down the distribution ladder has a cost and it is the buyer who must pay for this added service. In addition to production costs, the producer must factor in added costs such as promotion, logistics, administration, financing, shipping, customs clearance, inspections, cold storage, local delivery and many other costs of getting the product to the requested point of delivery. Buyers typically attempt to shift costs such as freight, storage, and financing to sellers by having sales contracts specify delivered rather than FOB plant prices, thereby excluding the cost and risk of getting the shrimp from the processing plant to the final destination. The closer the buyer can get the product to Point B, the happier they are (as long as they don't have to pay). A supplier can find out its customers’ key buying factors and its competitors’ blind spots, initially by questioning its sales and marketing employees and then by holding thorough discussions with its current and prospective customers. The insights it gains will help the sales force and managers weigh potential tradeoffs in negotiations with particular buyers. Say that one of them threatens to switch suppliers to get a lower price. If the sales force knows from the customer analysis that another buying factor—for example, the level of service—concerns this customer less than price, the supplier can offer to cut back on certain services, thus keeping the customer and its previous margin. Such tradeoffs must of course be managed to assure that the company balances the risk of losing volume and the ability to control fixed costs across the entire customer portfolio. By looking at your product from the viewpoint of the buyer and understanding its total cost of ownership and the way it creates value, producers can determine how existing or new offerings could help the buyer add still greater value to his own customer. Such "value selling" differs from the common costs-plus approach, which bases prices on the sum of cost components. Value selling is based on creating, emphasizing, and capturing more of the economic value from a product or service for all downstream players. Selling value is different from the traditional job of selling commoditized farm-raised shrimp products in that it shifts the emphasis away from price and towards value. To make the transition and master the art of value selling, the marketing arm of the producer must often change the skills and even the personnel of its sales force, which will have to undertake additional knowledge-building activities such as conducting interviews with customers, end users, and industry experts; visiting customers’ sites; and even placing orders with competitors to experience their service and processes directly. Caution is urged when negotiating fixed-price contracts, which may force the producer to absorb unexpected price hikes for raw materials such as shrimp feed. With limited sources and high demand for fish meal and fish oil, the cost of feed has nowhere to go but up. Farm-raised shrimp producers will either have to become more efficient at converting feed to flesh or margins will continue to get squeezed even further. In theory, producers benefit from fixed-price contracts if raw-materials prices fall. In reality, when that happens, suppliers bent on preserving relationships with their customers often let buyers, who watch upstream prices carefully for such opportunities, cut prices by renegotiating contracts prematurely. And finally, the producer must also invest heavily in concepts such as genetic improvement of shrimp stocks now so they may enjoy the benefit of improved growth and lower production costs in the future. The well managed technologically advanced producer who reaps lower production costs must protect this investment at all costs and not allow the buyer to grab this value until the competition catches up on the technology curve. Niche markets, technological superiority, competitor intelligence, superior quality and service, efficient management, economies of scale, retraining of sales reps and just good old face to face tough negotiating can be used as tactical defenses against the take no prisoners approach of certain buyers. Established farm-raised shrimp producers who are interested in improving the profitability of the marketing and sales efforts are encouraged to contact us with a request for proposal (RFP). |