Improving the Wild Caught Prawn Value Chain Kohne

Australasian Agribusiness Perspectives

2018, Volume 21, Paper 4
ISSN: 1442-6951

Improving the Australian Wild Caught Prawn Value Chain

Richard Kohne

Postgraduate Student, Faculty of Veterinary and Agricultural Sciences, The University of Melbourne, Parkville.
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Abstract

Australia produces some 20,000_tonnes of wild caught prawn product per annum, of which
approximately 6,500_tonnes is exported. The remaining volume competes with imports and domestic
farmed product on the domestic market. The purpose of this paper is to evaluate the wild caught
prawn value chain to provide insights for value chain participants with the view of maximising value
chain surplus. The chain is predominantly efficiency focused, but displays some responsive
characteristics in its sales activities. The industry has been performing profitably but there is a unique
opportunity to capitalise on a growing demand for sustainable disease free seafood in Asia delivering
a significant increase in value chain surplus. There are two key interventions proposed to realise this
potential growth in surplus. First, the formation of a unified national brand that promotes quality and
provenance of Australian wild caught prawns. Informing the consumer of the benefits of this product
over cheaper alternatives is critical to obtaining a premium price for a ‘clean and green’ product.
Second, the development of a steady sustainable volume to provide continuity of supply to domestic
and export markets.

Key words: Value chain, seafood, prawns, cold chain, fishing

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Improving the Wild Caught Prawn Value Chain Kohne

Introduction

It is well-documented and frequently reported that an increase in population and affluence in Asia
is driving an increased desire for clean and green Australian product (Hobday et al., 2014). This has
resulted in a once in a lifetime opportunity for many Australian agricultural products. In order to
capture the maximum value from this shifting demographic, Australia’s value chains will need to be
organised effectively. The goal for all value chain participants should be to maximise value chain
surplus to make everyone better off. Value chain surplus is the customer value delivered less the value
chain production cost. If the participants cannot achieve the best price for Australian product and
produce at the lowest cost given the production factors, the benefit to the Australian economy will
not be realised to its full potential.

Australia produces approximately 20,000_tonnes of wild caught prawn product per annum, of which
approximately one third is exported. The remaining volume competes on the domestic market with
imports of 32,000_tonnes per annum and farmed product of approximately 6,000_tonnes per annum
(ABARES, 2016). The location of Australia’s wild prawn fisheries are shown in Figure 1.

Figure 1. Map of Australian wild prawn fisheries

Source: Australian Council of Prawn Fisheries (2017)

The challenge for the Australian prawn industry is to achieve the maximum price for prawns both
domestically and internationally that reflects the quality and sustainability of the product. This
involves production and marketing activities.

Production activities must be aligned with sustainable fishing practices, effective cold storing, efficient
warehouse management and timely product delivery. Marketing activities will include promoting the
credence of the product to demonstrate the quality of a product grown in in the clean disease free
waters of Australia. The value chain must collaborate to maximise the value chain surplus. If retailers
engage in promotion without the support of producers to provide a quality product, their efforts
will be rendered useless as the product will not be of the quality desired. If retailers do not promote
quality, the producing activities will only add costs to the value chain and consumers unaware of
the quality will not pay a higher price.
Australasian Agribusiness Perspectives, 2018, Volume 21, Paper 4 Page 58
Improving the Wild Caught Prawn Value Chain Kohne

The purpose of this paper is to evaluate the Australian wild caught prawn value chain to provide
insights for value chain participants with the view of maximising value chain surplus. The analysis takes
a long-term view of the appropriate strategy and design of the value chain and its influence on how
to allocate resources. These design decisions will constrain or enable a value chain to perform at its
optimal level. The value chain design is supported by the medium-term planning and the short-term
operation which relates to more discrete operational activities of the value chain (Chopra and Meindl,
2012). Customer relationship management will be key to maintaining and building on a premium
brand, and supplier relationship management will be critical to maintaining product volume (Chopra
and Meindl, 2012). The industry will need to determine a competitive strategy that aligns with the
value chain strategy and that is underpinned with the value chain capabilities to deliver that strategy.

The Wild Caught Prawn Value Chain

The Australian prawn trawl value chain is made up of six key functions with operators within those
functions as shown in Figure 2. Promotors to the value chain are also shown.

Specific inputs

The specific inputs for prawn trawling include the vessels, the nets used to catch the prawn,
engineering services (such a repairs and maintenance), consumables such a fuel and other fishing
equipment.

Trawling activity

The specific inputs are combined with fishing labour to form the trawling activity. State and
Commonwealth departments of fisheries, as promotors for sustainability, regulate the fishing areas,
fishing season and amount of effort quota1 to ensure the sustainability of the fisheries. The skippers
and crew are paid hourly rates but in most cases also entitled to a percentage of the catch value.

Processing and packaging

There are on-boat and land-based processors. Vessels streaming product to land-based processors
generally pack to a wide grade2 in unbranded packaging. On-boat product is packed to tighter grades
and into retail packaging so they can sell directly to wholesalers, distribution centres or retailers. Land-
based product is streamed into these channels after repacking into retail grading specifications and
packaging. Soft and broken product is sent offshore as processing the low value product is not viable
in Australia (Hobday et al., 2014). Some of this product is sold directly from the overseas factory.

Primary wholesale and distribution

The majority of prawn product is sent to regional distribution centres controlled by supermarkets. The
remaining product is sent for wholesale distribution and through fish markets, where smaller

1
A fishing effort quota controls the time and resources that can be used in the defined fishing period. This is
compared to a product output quota where a regulated amount of product can be taken out of the fishery.
2
Grading of prawns into size categories based on the number of units per kilogram. For example a wide grade
may be 10-20 prawns per kg compared to a tighter grade of 10-12 units per kg. This provides more certainty for
the consumer.
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 Improving the Wild Caught Prawn Value Chain Kohne

Functions Push Figure 2. Wild Prawn Value Chain Pull

Trawling Primary wholesale and
Specific inputs Processing & packaging Importers and retailers Consumers
activity distribution
Categories of operators

5%
Local retailers $25-$35/kg
1,000t

Regional
70% $30-$35/kg
distribution Supermarkets
14,000t centre

14,000t Domestic consumer

On boat processors $13/kg Food service $35-$45/kg

Trawler owners % of catch

15% Wholesale
$17/kg
Skippers and fishing 3,000t distribution Retailers $30-$35/kg
Net makers
crew
$19/kg
Domestic land based
processors
Fish Markets Overseas
Engineering services 6,000t
and tenants consumer
10% 5%
2,000t
1,000t

5%
Overseas land based
1,000t Seafood importer
processors
5%
$15/kg 1,000t

Categories of promoters

Representative bodies – Australian Prawn Farmers Association HACCP (Food safety)

Department of Agriculture and Water Resources Australian Quarantine and Inspection Services (AQIS)

Fisheries Research and Development Corporation (FRDC)

State or Commonwealth department of fisheries

Note: all volume information is based on ABARES Australian Fisheries and Aquaculture Statistics
CSIRO
2016 report and communication with industry participants. Market pricing based on online sales
Australian Seafood Cooperative Research Centre (CRC) platforms where available as at May 2017 (e.g. Coles and Woolworths online).

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Improving the Wild Caught Prawn Value Chain Kohne

independent shops and distributors may purchase the product, some being overseas importers of
Australian product.

Importers and retailers

Local retailers sell a small amount of some product directly from the local processor or fishery. The
supermarkets pull product from their distribution centre based on demand and promotions. The food
service retailers stream product to places such as hotels, hospitals and fish and chip shops.
Independent retailers, purchase stock from wholesalers and sell to domestic customers. Importers
traditionally purchase product from fish markets and wholesale distributors.

Consumers

Australian wild caught prawn is largely consumed locally however there is also a significant amount
exported to other countries including Vietnam, Hong Kong and Japan.

Strategic Fit

Consumers largely view prawns as a commodity product and presentation by retailers as a thawed
out homogeneous product means there has been little room for product differentiation to date. This
is shown graphically in Figure 3, where the payoff per unit of product determines the iso-revenue line.
This line is marginally below 45 degrees as retail consumers place little value on responsiveness
given the availability of substitute proteins. There is therefore no material increase in price for a
product in a more responsive value chain (Chopra and Meindl, 2012).

The intersection of this iso-revene line (point 1) and the production possibility frontier (PPF) is the
point at which firms operates efficiently. The industry must remain focused on continually pushing
this frontier outward to PPF1 or PPF2 in the long run through technology and innovation to reduce
their cost of production and increase their competitiveness.

Figure 3. Production Possibility Frontier

Value Chain Drivers

The value chain structure can be broken down into six key drivers (Chopra and Meindl, 2012, figure
3.1) discussed in the context of the prawn value chain focus of efficiency.

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Improving the Wild Caught Prawn Value Chain Kohne

Facilities

Processing and storage are the key facilities in the value chain. Land-based processing facilities exist
in Australia and Thailand. These processors consolidate product from prawn fisheries across Australia
to increase throughput and lower the overall cost per kg for the industry. Product is largely stored at
centrally located third party cold stores after processing and/or packaging. These third parties
combine volume for all frozen food items in their regions to provide economies of scale and lower the
facility costs for the value chain.

Inventory

Wild caught prawns are largely consumed in summer and therefore the inventory follows a seasonal
profile3. Product is caught from March to November in most fisheries and largely sold in summer
(December to February) to meet peak demand. The amount of seasonal inventory held is determined
based on expected price increases during peak demand and the cost of holding stock.

Transportation

Third party trucking companies are used to move product. Given the fragmentation of ownership and
geographical dispersion of suppliers in different fisheries and customers across Australia, it is more
efficient for a third party to coordinate the transport activities using milk runs4 to lower the overall
transport cost.

Information

As shown in Figure 2, the value chain is dominated by push processes until the product reaches a third
party storage facility. The sales function then responds to the stored product information with pull
processes based on forecast demand. Little information is shared between these activities and
retailers act relatively independently to manage seasonal factors when forecasting demand and
ordering product from the storage facilitates.

Sourcing

Each step in the value chain is relatively specialised therefore most firms across the chain outsource
non-core activities as for transportation and inventory. In the trawling activity however most
operators perform responsive sourcing requirements in-house such as net making or repair, which is
critical to fishing. Efficient components such as engineering works are outsourced to firms with greater
capacity and expertise.

Pricing

Pricing is used as a revenue management tool given the seasonal demand for prawns. This is driven
by consumer demand in summer months where higher prices are charged to capitalise on peak
demand. Total supply must be managed however and with forecast peak demand, lower out of season
prices in the lead up to summer must be offered to manage the seasons catch such that product is
cleared before the following season.

3
Inventory stored in periods of low demand to be available for high demand periods (Chopra and Meindl, 2012,
p.63).
4
Milk runs reduce transportation by consolidating small shipments into one ‘run’ by the transporter (Chopra
and Meindl, 2012, p.424).
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Value Chain Performance

The prawn value chain is largely achieving its low cost strategy. National prawn production has
increased 13 per cent in the period from fiscal year 2013 (FY13) to FY15, with the value of the industry
increasing 25 per cent in that same period (ABARES, 2015). The profitability of the prawn industry has
also improved. Shown in Figure 4 is the historical financial performance for the Northern Prawn
Fishery (NPF), the largest Australian wild prawn fishery, which illustrates the increase in revenue and
EBITDA (earnings before interest, tax and depreciation) from FY05 to FY14.

Figure 4. NPF Performance

12,000 2.5

10,000 2
Catch (tonnes)

8,000 1.5

$millions
6,000 1

4,000 0.5

2,000 0

0 -0.5
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Tiger Prawns Banana Prawns Endeavour Prawns

Other Revenue/boat EBITDA/boat

Source: ABARES 2015. Note this was a one off publication thus no data exists for 2015 and 2016.

Revenue per boat, which is underpinned by volume, is critical to efficiency for operators to maximise
the return on their capital investment and leverage their fixed operating costs to provide prawns at
the lowest price possible to the consumer (Pascoe et al., 2012). The increase is largely driven by an
increase in prawn volumes per boat due to adoption of more precise fishing technologies and methods
and a reduction in the number of boat licences in the fishery5 (Pascoe et al., 2012).

While the dominant strategy for the value chain is efficiency it is important to note that the sales
activities require some responsiveness to maximise value chain surplus. Production occurs from March
to November however peak demand occurs in December and January (Lawley and Birch, 2013). An
amount of stock is held during the season to capitalise on this peak (Smith, 2016). In this period of
peak demand, product is transported in a responsive manner and at a time when rates are ordinarily
high, which is not consistent with the low cost production activities before this point. The value to
customers from this responsiveness is to have product available for summer entertainment (Lawley
and Birch, 2013). This is known as revenue management and historically the industry has had some
success in this activity. In 2016 prices increased approximately $4/kg or 10 per cent from March to
December in South Australia (Collier, 2016). It is important to review the spoilage and/or spill that
arises from this however6 and an improvement in the accuracy of forecast demand can help improve
value chain surplus (Chopra and Meindl, 2012).

5
A reduction in vessel licences was undertaken following an environment assessment study performed by the
Department of the Environment in 2006/7 (Curtain, 2007).
6
Spoilage is where the demand forecast is higher than actual demand thus sales are below expectations and
excess stock is held following the peak demand period. Spill is where actual demand exceeds the demand
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Although the value of the industry has been increasing steadily from FY12 to FY15 (ABARES, 2015), a
significant opportunity exists to improve coordination and deliver a national fishery management and
marketing body. This is discussed below.

Value Chain Constraints and Obstacles

Fishery management

A key constraint or obstacle for the value chain at present is the interaction between the industry
and its regulators. State or Commonwealth regulatory bodies manage the Total Allowable
Commercial Catch (TACC) in each fishery (Grafton et al., 2007). Regulation of each fishery across
Australia varies but consistently fishermen have different views to the regulator. Regulators are
incentivised to be conservative in their view to protect the resource and fishermen are incentivised to
be aggressive in their view to increase their volume and returns. This often results in volatile supply
for the industry as the regulator may agree with fishermen’s view in one year but operate reactively
to environmental concerns, often in a large overcorrection, in another year (Grafton et al., 2007).
Without consistent supply to customers it is difficult to establish sales channels with repeat customers,
particularly in export markets.

The industry requires independent science to provide objective assessments that provide reliable
stock sustainability assessments based on the current environment and TACC to satisfy both fishermen
and regulators. This information is critical to ensuring prawn fisheries across Australia can operate
efficiently and maximise chain surplus (Pascoe et al., 2012). The NPF has demonstrated some
leadership in its use of independent research with a rationalisation of the number of boats in the
fishery based on a scientific and economic study that determined the optimal number of boats for the
fishery to operate profitably and sustainably (Pascoe et al., 2012). This is a proposed intervention
discussed further below.

Logistics management

A key obstacle is a lack of trust between fishermen within fisheries evidenced by the low level of
coordination in logistics. The remote location of fisheries requires transportation of goods to
centralised cold store facilities. Currently many operators hold product until they have enough stock
to fill a truck to the facility, which may be a number of weeks. The cost of holding this stock locally
is higher than the third party due to scale, electricity costs and freezing infrastructure (Marasco,
2008). Operators in the same fisheries do not consolidate their product given the competitive nature
of the industry and a lack of trust. Amalgamating product for transport known as ‘direct shipping
with milk runs’ (Chopra and Meindl, 2012) would provide savings for all operators and increase both
efficiency and responsiveness of the value chain as product arrives at a lowest cost facility faster
(Marasco, 2008). This lack of coordination between operators due to a lack of trust has been a key
constraint to the value chain.

Interventions to Improve Value Chain Performance

Maximise price through branding

Fragmentation exists among fisheries in Australia (Grafton et al., 2007). The impact of this
fragmentation is that there is no national marketing presence. Consumers increasingly demand

forecast and buyers who may have been willing to pay a higher price are turned away. The result is based on the
accuracy of forecast demand (Chopra and Meindl, 2012).
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sustainably caught seafood (Jacquet and Pauly, 2007). Australia must therefore manage their
fisheries sustainably both to ensure a long term future for the industry and to meet customer
expectations. Demonstrating quality is critical for Australian prawns as cheaper international product
from South East Asia where farmed prawn production is increasing will mean Australian product is
uncompetitive if only based on price (Jacquet and Pauly, 2007).

A key proposed intervention is therefore that the Australian prawn fisheries consolidate management
and marketing. A commonwealth body with state representatives would align the industry and
facilitiate a consistent strategy and consistent management practices. The body would allow
collaboration for a national brand based on sustainability and a ‘clean and green’ image that attracts
a premium price in key markets (Jacquet and Pauly, 2007). The wild prawn fisheries are managed
sustainability with a number of fisheries receiving the Marine Stewardship Council’s approval as
certified sustainable fisheries. This sustainable status should be promoted and used as a marketing
tool to underpin product branding (Ward and Phillips, 2008).

Australia currently exports approximately 6,500 tonnes of prawn per annum (ABARES, 2016). If the
alignment and national branding delivers an uplift consistent with the higher margin branded goods
attract over private label goods in major supermarkets, an additional $1/kg (approximately 10 per
cent) (Volpe, 2014) will be added to the value chain surplus, a material increase of $6.5 million.

Independent science

Profitability and value chain surplus can be maximised using independent science to review biomass,
determine fishing periods and review the number of boats and their efficiency in each fishery (Luis
et al., 2011). An independent survey before the start of the fishing season will provide reliable
information for fishermen and regulators to set a rational TACC for the season based on the
assessment of prawn stock. Following these surveys and studies the industry will better understand
what influences prawn stock and will have the ability to deliver a more stable TACC to the industry
who can then establish consistent supply to markets and scale its operations with greater certainty
(Luis et al., 2011).

Collaborative planning and information sharing

In order to increase the efficiency of the value chain, on-boat inventory technologies should be
adopted (Jensen, 2007). Currently information is stored internally by each fishing company who collect
their product information when unloading and labelling product before sending it to the cold store.
Sales teams are provided with volume and size information from this point. This lag between catching
and selling can be reduced with the use of on-boat stock recognition (Jensen, 2007). Successful
implementation of this information technology would mean product can be committed before the
boat unloads, so participants further down the value chain can make decisions around where to
place the product in advance, minimising time in intermediary facilities.

This transparency and information sharing also presents an opportunity to reduce the bullwhip effect
through collaborative planning. Retailers can be provided access to live stock information from their
suppliers and use this information to inform their seasonal forecasting and sales strategies. The
information will improve forecasting by reducing supply risk (Jensen, 2007). This will minimise the
variability of orders to suppliers and the level of surplus stock7 in the value chain resulting from
forecasting error.

7
The benefits of this collaboration will be reflected in inventory turns with efficiency increasing from an increase
in the number of turns driven by a reduction in average stock held.
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Conclusion

The Australian wild caught prawn value chain is predominantly efficiency focused but displays some
responsive characteristics in its sales activities. The industry has been performing profitably but there
is a unique opportunity to capitalise on a growing demand for sustainable disease free seafood in Asia
delivering a significant increase in value chain surplus.

There are two key interventions proposed to realise this potential growth in surplus. First is the
formation of a unified national brand that promotes quality and provenance of Australian wild caught
prawns. Informing the consumer of the benefits of this product over cheaper alternatives is critical to
obtaining a premium price for a ‘clean and green’ product.

The second key intervention is for the industry to develop a steady sustainable volume to provide
continuity of supply. This requires an acute understanding of the health and influencing factors of
fisheries across Australia. Fishermen and regulators need to work with independent scientists to set
appropriate catch constraints to maximise value for the industry but maintain a sustainable status.

If these activities are successfully implemented, the Australian prawn value chain will be in a position
to realise a significant increase in value chain surplus driven by demand premiums. If $1 of additional
margin and 5 per cent increase in volume can be delivered through these initiatives the value chain
surplus will increase by $26 million8.

References

ABARES (2016), Australian Fisheries and Aquaculture Statistics 2015, Fisheries Research and
Development Corporation, Canberra.

ABARES (2015), Northern Prawn Fishery Key Trends, Department of Agriculture and Water Resources,
Canberra.

Australian Council of Prawn Fisheries (2017), “Australian Prawn Fisheries in Numbers by State”,
viewed 23 January, 2018 <http://australianwildprawns.com.au/australian-prawn-fisheries/>

Chopra, S. and Meindl, P. (2012), Value Chain Management: Strategy, Planning and Operations, 5th
edition, Pearson Global Edition, New Jersey.

Collier, K. (2016), “Plenty of prawns available for Christmas feast but price up…”, Herald Sun, viewed
27 May, 2017 <http://www.heraldsun.com.au/news/victoria/plenty-of-prawns-available-for-
christmas-feast-but-price-up-due-to-exotic-disease/news-
story/11b7cca5ccbfbda03ebb4bf0f031d7e0>

Curtain, C. (2007), “Kimberley Prawn Industry threatened by Commonwealth licence buy-back

scheme”, ABC Rural, viewed 24 January 2017 < http://www.abc.net.au/site-
archive/rural/wa/content/2006/s1902700.htm>

Grafton, R.Q., Kompas, T., McLoughlin, R. and Rayns, N. (2007), “Benchmarking for fisheries
governance”, Marine Policy 31(4), 470-479.

8
A 5 per cent increase in volume at a 10 per cent margin provides approximately $5 million. A $1 increase in
margin on total volume of 21Kt (after the 5 per cent increase) provides approximately $21 million.
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Hobday, A.J., Bustamante, R.H., Farmery, A., Fleming, A.J., Frusher, S., Green, B., Jennings, S., Lim-
Camacho, L., Norman-Lopez, A., Pascoe, S. and Pecl, G., (2014), Growth opportunities and critical
elements in the value chain for wild fisheries and aquaculture in a changing climate, Fisheries Research
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Jacquet, J. and Pauly, D. (2007), “The rise of seafood awareness campaigns in an era of collapsing
fisheries”, Marine Policy 31(3), 308-313.

Jensen, R. (2007), The Digital Provide: Information (Technology), Market Performance, and Welfare in
the South Indian Fisheries Sector, pp 879-924, Harvard College and the Massachusetts Institute of
Technology, Cambridge, Massachusetts.

Lawley, M. and Birch, D. (2013), “A profile of the Australian seafood consumer”, International Food
Products Marketing, Academic Conference on Food Marketing, 20--21 June 2013, Budapest,
Hungary.

Marasco, A. (2008), “Third-party logistics: A literature review”, International Journal of Production

Economics 113(1), 127–147.

Pascoe, S., Coglan, L., Punt, A.E. and Dichmont, C.M. (2012), “Impacts of vessel capacity reduction
programmes on efficiency in fisheries: the case of Australia’s multispecies Northern Prawn Fishery”,
Journal of Agricultural Economics 63, 425-443.

Smith, H. (2016), “Gulf delivers for tiger prawn trawlers with demand to lift prices”, Cairns Post, viewed
27 May 2017 <http://www.cairnspost.com.au/news/cairns/gulf-delivers-for-tiger-prawn-trawlers-
with-demand-to-lift-prices/news-story/03e494e37e40bed91dc3dbae14715101>

Volpe, R. (2014), “National brands, private labels, and food price inflation”, Journal of Agricultural and
Applied Economics 46(4), 575–591.

Ward, T. and Phillips, B. (2008), Seafood Ecolabelling: Principles and Practice, Wiley-Blackwell, Oxford,
United Kingdom.

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