STRATEGIC CHANGES IN PITTSBURGH ?

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STRATEGIC CHANGES IN PITTSBURGH ?
By Henk Brus (June 19, 01)

Two recent reports involving Pittsburgh-based StarKist / Heinz tuna drew my specific attention. The first one, in the beginning of this year, reported that Tri-Marine, the frozen tuna trader from San Diego, had acquired several large tuna boats from Heinz, which were used to supply their Samoa factory. Then recently I read a report of a meeting in Samoa, during which a StarKist / Heinz executive reported that part of its strategy is" to produce canned tuna wherever it is cheapest". Subsequently I also received several calls from puzzled people who had heard unconfirmed rumors that "Charlie" might pull out of Seychelles, where it operates a large canning plant.

These reports, the recent decision to close the Puerto Rico tuna canning plant, and the increase of toll-packing agreements between StarKist and several Thai canners all seem to point in the same direction. It looks as if pressured by disappointing financial results in its tuna activities, the world's largest canned tuna processor and marketer is shifting its strategy. As if it is in the process of transforming itself from an integrated fishing, processing and marketing orientated co-operation, to a company solely focused on branding and marketing its tuna.

With prices for whole round skipjack being below cost price for the last two years, the tuna fleet of StarKist has been the source of considerable losses. Instead of giving the company an advantage over its competitors, who do not have their own vessels, the tuna giant had to absorb the higher cost prices from its fleet, to the point that it was cheaper to keep the boats in port. It proved to be a better deal to do this, and have the groups canneries buy from other USA, Taiwanese and Korean vessels in American Samoa.

This tuna fleet had been part of a vertical integration strategy. StarKist's ambition was to control everything within the distribution and production chain; from tuna catching, to finally marketing and distribution, and thus reaching quality and cost-leadership. It has become obvious that this approach has not worked. The tuna boats have been sold. Last year the can-making facilities at the tuna plants were spun-off and out-sourced to Impress. What was once the world's largest canning plant in Puerto Rico, will now be closed down.

Despite all these measures Heinz' tuna activities still trouble investors at Wall Street. Some analysts think that Heinz should sell off its tuna business because it does not meet the desired returns. But who could buy it ??
Probably nobody ! In the current set-up and with the disappointing earnings, there is probably not a single investor willing to take on such a challenge. It looks like the Pittsburgh-based management has decided that cost leadership, in the current tuna market, is not determined by the level of vertical integration, but by the amount of flexibility. Flexibility in determining by whom and where StarKist Tuna is produced. If indeed this is the way that StarKist / Heinz will be going in the coming year(s), then we will see more major changes. I would not be surprised if the Americans would refrain from renewing the lease on some of its plants, and try to motivate their joint-venture partners (often the local authorities) to take over the entire exploitation of the facility. With most of these factories located on remote islands, their existence is crucial to local employment. In such a case, Heinz could spin-off the financial burden of a unprofitable tuna production facility by entering into a contract-packing agreement with the operation. Instead of managing the factory, StarKist / Heinz would be focused on ensuring the quality of the contracted production of its own tuna brands.

This would then place H.J. Heinz in the same position as most of the current private label importers and distributors in the USA and Europe. These importers also do not have any production facilities. However, the major advantages of StarKist over these importers will be its strong cash position, and its strong brand names : StarKist in the USA, and South America, John West in Europe, Australia and S-Africa.

Today's tuna market is increasingly characterized by an overcapacity of tuna boats, an over-supply of frozen tuna to canneries, and a surplus of canned tuna processing facilities over the world. In this market climate it seems a likely decision for Heinz to shift from being a large vertical integrated tuna company, to becoming a lean marketing and sales company.

Possessing a strong cash position, they will be in the best position to negotiate the lowest raw material prices with struggling boat-owners. With their volume and raw material, they can negotiate with ailing tuna processors (who are sometimes too short of cash to acquire raw material) the lowest production fee per case. A fee for canning the raw tuna, and label it with their own StarKist or John West brand, or even that of a private label customer.

In the above scenario, it is obviously important to consider the origin of fish and production locations related to trade agreements such as NAFTA for the US and the Lome agreement for the EU market. Therefore, decisions to close, spin-off, continue or start new cooperation will very much depend on the marketing strategies implemented towards both these major markets. It will be interesting to see further developments from Pittsburgh in the coming years.

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