Why retailers don’t pass on lower salmon costs
Wednesday,12 October,2011 13:26:53
Wholesale farmed salmon costs have been falling for several months. The cost of farmed salmon is down about 15 percent from last year and off about 30 percent from the height of the market in May 2011. The number of salmon promotions at retail are up from last year, but the average retail price for the ad promotions is the same as last year at $7.99 a pound nationwide. Retailers are being accused of not passing on the lower cost of salmon to consumers and fattening their profit margins instead. While this may be true in some cases, there are several factors at work.
Many large retailers and foodservice buyers have contracts with the major salmon suppliers for some or all of their fresh farmed salmon volume. Salmon contracts generally run from six months to a year. Some contracts may be as short as three months or as long as two years. Although salmon spot market prices have dropped, the cost to a retailer on an extended contract may not have come down yet.
With many seafood commodity markets higher than last year, many retailers did not pass on all of the salmon price increases to value-conscious customers over the last year. As salmon costs now fall, some retailers are just getting back to their normal margins. Why would retailers not pass on salmon all of the cost increases to customers last year? Seafood is an expensive protein option. When salmon prices get too high, many customers just switch to chicken, beef or pork. Savvy retailers know what retail price points are too high and cause a significant drop in salmon sales. In some markets, that retail price point is $8.99 pound, some places it is $9.99 a pound when salmon sales drop sharply. Retailers know that price in their market and stay below the tipping point, even if it means lower margins.
This may be the biggest reason that retailers have not dropped ad prices for farmed salmon to $6.99 a pound or lower, here in the fall of 2011. Once the salmon price is low enough that regular salmon customers aren’t switching to chicken breast, the overall sales gains from hot salmon promotions are minimal. Yes, a hot $5.99 salmon fillet ad will sell a lot of salmon. Salmon sales could double at $5.99 a pound compared to an $8.99 regular price. The problem is that most of the additional salmon sales comes at the expense of other fish. Many customers are just switching away from other fish such as wild salmon, tilapia or cod. These are called “cannibalized” sales, meaning the additional salmon sales eat into the sales of other like items. Many retailers learned this hard lesson in early 2011. In the first quarter of 2011, fresh seafood promotional options were few. The prices of crab, shrimp, oysters, and crabmeat were all higher than 2010 and much higher than 2009. Many retailers tried to lower margins on salmon and run fresh farmed salmon ads at hot prices to make up for lost shrimp and crab sales. It did not work. Salmon sales were good, but overall seafood department sales were weak.
Retailers have learned that hot ad prices for shellfish items such as crab, shrimp, and lobster increases sales for that item, but also drives overall seafood department sales. Many customers that buy crab, shrimp, or lobster on ad are often choosing not to eat out at restaurants. Instead, customers are making that seafood purchase for a special meal at home. These “incremental sales” are more profitable for retailers than cannibalized salmon sales.