Due to its complexity it is often easier to split the aquaculture production process into various parts such as feed production, broodstock/genetics, larval rearing, nursery, grow-out, processing, packing and sales of finished product.
This segmentation is often mirrored in the industry, with companies specializing in one or a few of the processes and outsourcing the others.
One important question, however, is if there is real added value in integrating some or all the production processes into one company or, in other words, is the whole more than just the sum of its parts?
In the last few years we have seen a series of mergers and acquisitions in the Mediterranean aquaculture industry, with a consequent increase in concentration of production in fewer, larger groups. This process has taken a long time to start and still has some way to go, but a number of investment funds are looking into buying companies and achieving a degree of control of the sea bass and sea bream industry. How should these groups value companies with integrated fry production?
The value chain
Porters’ classic Value Chain model states that the value (cost and profit) of a business unit is determined by the unit’s primary activities, from inbound logistics to marketing and sales, including all transformation operations as well as support activities such as HRM, technology and procurement. Although Porter also talked of Value Systems that expand the Value Chain model to a more extended set of closed processes (for example, including the Value Chains of suppliers and customers), there is a ‘risk’ that Value Chain analysis is confined to a business division within a company.
This is the typical approach in aquaculture companies with hatcheries and on-growing farms. Each hatchery or the hatcheries’ division tend to be strategically managed as a value chain and not as a process within a larger value chain that starts with broodstock and ends with ready fish delivered to a customer.
The reasons for this approach are linked to factors such as the age of the industry (especially in marine fish aquaculture) and the fact that integration arrived recently with the purchase or building of hatcheries by on-growers, among others. Also it may appear simpler to split production into hatchery and growout in terms of analyzing business performance.
The impact of this type of analysis on business strategy is multifold; from poor cooperation in terms of supply and demand needs, to pointless competition between two different but complementary production processes, essentially focusing on trees instead of the forest.
A company that integrates fry production with on-growing will most often grow its own fry; it may also sell part of the fry it produces to other on-growers. It is therefore important that there is coordination between fry supply from its hatcheries and the needs of the on-growing farms.
This match between supply and demand is much more than having the right numbers of fry ready on the dates the farms need them. It is having the right batch sizes, the right mean weights and the right quality of fry ready on time to match site specifications, production plans, sales plans and performance standards that farms require in order to optimize their own production processes. This level of coordination is not simple and requires that hatcheries have excellent understanding of the production needs of the company’s farms and likewise, that farms understand the capabilities and limitations of the company’s hatcheries.
Often the best way to achieve good supply-demand coordination is to have the Chief Operations Officer manage all production operations in the company, from broodstock to harvest, packing and sale of the final product.
Importance of genetics
Being able to control the genetics of the fish you are growing is another very important advantage of integrating hatcheries and growout operations. And here again this is not simply a matter of getting fast-growing fry but includes many other factors such as adaptability to specific growout environments or maturation patterns that can be used to improve performance of the company overall.
Large companies tend to have their production sites scattered throughout a state and often in more than one country. This means that the hatcheries will need to deliver fry for different environments, some colder than others for example. Specific strains of fry can be developed in selection programs that will perform better in each environment.
Companies also have different markets for ready product; in the Mediterranean for example we have markets like the Portuguese that favour small size categories (200-300g, 300-400g) and markets that prefer larger sizes such as northern Italy or France (600-800g for example). Producing fish of each category can be optimized from the hatchery stage; fast-growing fry can reach 300-400g quickly, but will mature earlier, making it a potential problem if producing large fish and need to cross over the reproduction season.
On the other hand, there are genetic and environmental manipulations that allow one to delay age of maturation and alter sex-ratio in favour of the late maturing sex (often females in the species produced in the Med). Having control of these factors will impact greatly on productivity of the company overall.
Control of fry supply
Another point, especially for large companies such as Selonda Aquaculture in the Mediterranean, is the ability to influence the whole industry by being a determinant of the numbers of fry produced and grown and consequently the total supply of ready product going to market. This is critical as supply is a clear determinant of price and therefore of the financial performance of aquaculture businesses.
In the Mediterranean we have three to four companies that together supply over 50% of the global bass and bream fry production, and these companies, to a large extent, determine the volumes of bass and bream produced and delivered to the markets.
This is as much a power as it is a responsibility and looking at the value chain of hatcheries alone can lead to strategies of high-volume/low-cost/low-quality that can turn the hatchery into a profitable operation (through sales to third-parties) but lead to total destruction of value of the final product produced in the company because of low prices.
— Diogo Thomaz
Diogo Thomaz, PhD, MBA, is a Technical and Business Consultant for the Aquaculture Industry, based in Athens, Greece. After 15 years as R&D project manager and other industry positions he now leads Aquanetix (www.aquanetix.co.uk), a business intelligence service for the global aquaculture industry. He also heads RealSales Ltd a sales and technical consultancy company that supports aquaculture businesses expand opportunities and markets. He can be contacted by email on firstname.lastname@example.org
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