Can the herring dance samba in Brazil?
The consumption of seafood in Brazil is increasing. If Norwegian herring is going to take part in this growth, one must adapt to the market, primarily because no value adding industry to further process and adapt the herring prior to consumption has been developed, as is the case in other large pelagic markets.
Greater purchasing power and public initiatives to increase the consumption are important explanations for the increased consumption. The market is expected to grow from 1.8 million tonnes to 2.4 million tonnes over the next few years.
This increased demand must be covered by both increased local production and greater import. What do Norwegian companies need to do in order for herring to be part of this growth?
Nofima, in collaboration with the Fisheries and Aquaculture Industry Research Fund (FHF), has looked more closely at the opportunities for Norwegian herring in Brazil. Distribution, product development and positioning are key elements.
The largest supermarket chains are currently the main sales channel for Norwegian herring in Brazil. Norwegian companies need to ask themselves whether this is the correct sales channel.
The combined purchasing power of the consumers who have been lifted out of poverty in line with the economic development in the country is huge. In order to increase the export of herring to Brazil, It is necessary to reach these segments to a greater extent than is the case today. Rather than emphasizing their limited income, emerging consumers as a group represent a sizable market for consumer products.
A challenge is the fact that the emerging consumer shops at smaller grocery stores near where they live or work instead of the largest supermarket chains, which are often located in the outskirts of the largest cities. Since many of these consumers do not have their own car and do not want to use time or money on collective transport, such a localisation is unfavourable.
Fish markets and markets represent another important sales channel for fish, where we have not observed herring. However, local pelagic species are sold at such sales outlets, indicating that such markets can also be a valuable sales outlet for Norwegian herring.
The herring’s potential and the opportunities in Brazil can be exploited to a higher degree if one manages to gain entry to more and also more relevant sales and distribution channels, such as fish markets and fishmongers.
Product development and adjustment are another major challenge, primarily because no intermediary to further process the herring prior to consumption has been developed, as is the case in other large pelagic markets, such as Russia, Germany and Egypt.
The supermarket chains primarily sell the herring thawed in the fresh fish counter. Norwegian companies and their clients have to a lesser degree developed frozen products. The development of new products adapted to the sales outlet could stimulate increased demand.
The consumers who buy their groceries at the supermarkets are often well off. They buy pelagic fish because it is healthy and they are in search of good offers. Large economy packs can contribute to increasing demand in this segment. The consumers who shop at the local grocery store often have more limited purchasing power and little freezer capacity at home. Consequently, they need to buy fish for each meal, which demands smaller packs.
These examples illustrate the need to adapt the products – even within the retail grocery trade.
The requirement for product development will naturally also depend on the sales channel. If one succeeds in distributing herring to both the fishmongers and to various markets, product development may be done onsite. This gives greater flexibility in relation to product format and one can exploit the fact that labour costs in Brazil are lower than in Norway.
The Brazilian sardines that the authors of the report observed at the markets were filleted on the spot in accordance with the customer’s wishes and preferences. The same could be done with the herring.
Thawing and local value creation
Norwegian companies export exclusively frozen round herring to Brazil. Parallel, the vast majority of the herring is sold thawed in the supermarkets’ fresh fish counters. This requires the fish to be thawed in one way or another before it is available to the consumers.
As part of one of the market visits to Brazil, we visited the distribution warehouse of one of the largest supermarket chains in the city of Sao Paulo in Brazil. This distribution warehouse had industrialised the thawing of the herring. The herring was thawed in air and water before it was distributed to the chain’s sales outlets.
This herring was of a far higher quality than the herring observed in other chains where, in all likelihood, it was thawed in far simpler conditions by staff with less knowledge.
One possibility for Norwegian actors could be to establish a partnership with one or more Brazilian companies to thaw the fish in an optimal manner prior to distribution. This can be one of several measures to solve some of the challenges encountered in the Brazilian market.
Since mostly fresh fish is sold at the markets in Brazil, it is probably easier to gain entry with thawed herring in fish boxes rather than frozen herring in 20 kg cartons. Parallel, optimal thawing could preserve one of the most important advantages of Norwegian herring; high and stable product quality compared to local pelagic species.
Despite the high quality of Norwegian herring, it has to a large extent been marketed as a substitute for Brazilian sardines, which are often of poorer quality. An important reason for this positioning is two three-month periods when local fishing comes to a halt, due to fish stock management.
This positioning is further strengthened by the choice of name, as Norwegian herring is often sold as Norwegian sardines. Industrial actors say that the name change from Norwegian herring to Norwegian sardines was successful, primarily because a limited number of consumers knew about herring. When the choice of name emphasised that it was a pelagic fish with several similarities with Brazilian sardines, consumers and the sales staff in retail knew how the herring could be prepared.
However, the Brazilian authorities are interested in protecting the local industry. If Norwegian herring threatened local value creation it could provoke trade barriers.
There are several tariff barriers designed to protect the national value chain for pelagic products in Brazil, particularly within the canning industry. The competition from the international canning industry threatened local profitability. Consequently, the authorities increased the tariff rate on canned products from 16 to 32 %, with the WTO regulation. This example is by no means unique.
The tariff rate for frozen sardines is periodically reduced from 10 to 2 %. The purpose of this tariff reduction has been and is to secure the supply of raw materials for the local canning industry in periods with limited access to locally caught sardines.
Tariff rates are not the only trade barriers we have seen in the pelagic industry. There are also examples of so-called non-tariff barriers to trade. This is a joint term for all non-tariff measures that can limit international trade, such as various forms of price regulation mechanisms, measures relating to customs and trade administration and various technical regulations.
These measures may be legitimate public regulations designed to protect the environment, secure quality or protect public health etc. However, such measures may also be misused for protectionist aims or lead to unnecessary bureaucratic schemes.
Norway and Brazil are both members of the World Trade Organization (WTO). Even though the WTO’s agreement on technical barriers to trade states that the members shall not develop national regulations that restrict international trade, and that the international standard shall apply where one exists, Brazil has a set of rules for canned sardine production that imposes far more limitations than the international standard.
The Brazilian authorities’ interpretation of national rules gives scope of action to accept other species than those specifically mentioned in the set of rules if the industry has a requirement for it, or to close the market for species that are not specifically mentioned, if this is desirable. This gives a high degree of uncertainty, particularly for Norwegian companies that have marketed the herring as an alternative to local sardines.
An important element is that this applies to canned products. Fewer examples exist for thawed and frozen products.
Rising herring prices creates challenges
The increase in herring prices in recent years has led to a reduction in exports. In 2008 Norwegian companies exported 2073 tonnes of frozen round herring to Brazil. In 2011 this amount dropped to 988 tonnes. During the same period, the price had increased from NOK 3.88 per kilo to NOK 5.68.
Sardines are a relatively cheap product in Brazil and if the price difference between herring and Brazilian sardines becomes too big, both industrial buyers and consumers could perceive that the gap is too great.
At the same time, Brazilian buyers have many alternatives if they are looking only for frozen pelagic fish. Every year a total of 10 – 20 million tonnes of pelagic fish is landed globally that has many similarities with Brazilian sardines.
It would therefore be practical to also identify other segments and position the herring in a way that gives a basis for better profitability.
The well-off consumers who buy herring because it is a healthy product are not influenced in the same way as the middle class which buys herring because it is an economical source of protein.
In order to succeed in this segment, the companies need to communicate the health benefits of eating herring to an even greater extent, in the same way as the Brazilian authorities communicate the health benefits of regular seafood consumption.
Pelagic fish that live in cold water are healthier than pelagic fish that live in warm water. This is something that Norwegian companies and their organisations must be better at communicating.
Another market possibility is to identify consumers of European and possibly also Asian origin in Sao Paulo, Brazil’s largest city, who consume herring for historical and religious regions.
The consumption in this segment will in all likelihood be influenced less if the price of herring increases than among the consumers who eat herring because it is an economical source of protein.
Market development – a long-term task
The pelagic industry is a cyclic industry with a history of large variations in the catch volume. Parallel, market development is a long-term task. Periods with high prices should therefore not halt the work to identify new markets for pelagic fish.
Herring is a cheap source of protein, which is financially available to a great number of Brazilians. But growth in the Brazilian market will not occur on its own. It relies on the Norwegian companies exploiting the opportunities and adapting to the challenges in the Brazilian market.
The attached reports look at the issue in greater detail and provide Norwegian companies with market knowledge, so that they have a broader basis of information on which to make their strategic decisions.