The Industry
The New Zealand fishing industry is characterised by a quota system that limits the amount of fish of a particular type that can be harvested over a given period of time in any particular region. This places a limit on the total quantity of any species that is offered for sale in a given period. Sale of "wet fish" by the "harvesters" - those who catch fish or farm it - is strongly dominated by exporting. Suppliers prefer to export wherever possible because costs per kilogram are lower when fish is aggregated up into large lots in refrigerated containers for bulk shipping for export, than when distributed in low volumes to very dispersed locations around New Zealand. Demand is also more certain given that the markets to which the fish are exported (e.g. Asia) are significantly larger than the New Zealand market. Consequently, less than 10 percent of fish harvested in New Zealand is available to the domestic market.
As a consequence, supply of fish to the New Zealand consumer market (wholesale distribution, retail, restaurant, etc) is one where supply factors effectively determine both the quantity and types of fish available, and the prices at which this fish is sold. Suppliers thus have some market power in the New Zealand fish industry. From the wholesale and retail perspective, therefore, players with little ability to influence the price of the product must look to other factors to differentiate themselves from competitors. Greater margins will be available to those who can secure cost economies in purchase and distribution processes whereas others may choose to increase profits by increasing throughput, generally by offering a wider variety of fish types to end consumers.
Information, Economics, Technology and the Evolution of the New Zealand Fish Supply Industry
The current organisational forms in the New Zealand wholesale and retail fish industry have emerged as a consequence of the nature of the product, the status of information exchange about fish availability and quality, the geography of New Zealand and the size of the market. The model that has emerged is one of information brokerages, where information exchange mechanisms are used to link up buyers with suppliers.
The (relatively) small scale of the New Zealand market, the (relatively) small number of traders on both sides (i.e. buyers and sellers), and the large geographic spread of the country, has meant that even prior to the emergence of enabling technologies, open outcry "fishmarkets" were never economically feasible. Instead a brokerage model, with lower transaction costs than the "outcry" market could offer, emerged. Aggregation at a broker level reduces the transaction costs of retailers negotiating with individual suppliers, enables some scale economies in distribution to be captured (e.g. sharing transportation costs between end retailers, etc), and enables better price discovery.
Traditionally, brokers would buy fish from suppliers, in a classic wholesale model, and sell the fish on to buyers. Brokers effectively aggregate information about the offerings and prices of suppliers and provide this information to their customers, who then place orders with the broker to be fulfilled ultimately by the supplier. The broker thus takes on the role of the marketplace by acting as "introducer" and "clearing house", bringing suppliers and customers together, billing customers, paying suppliers, arranging delivery, guaranteeing title and quality of the fish to buyers and ensuring that suppliers get paid. Brokers earn a commission on sales, collected from both buyers and sellers, typically collected from the accounts passing through the clearing house.
Furthermore, although there are multiple suppliers and buyers, with wide variation in size of business in any one location, the perishable nature of the product makes location and availability a critical issue for buyers. Historically, suppliers sold to brokers who supplied customers in the same location (i.e. the same town) as this enabled lower cost communication of quantity, variety and price information from supplier via the broker to the end consumer. The suppliers also "knew" the broker, and therefore received an increased degree of certainty that fish supplied would be paid for than if the supplier was dealing with unknown end customers. It became the responsibility of the broker to "know" his customers, in order to be sure of payment himself, and therefore ultimate payment to the supplier. Physical proximity also enabled the broker to physically inspect the quality of the fish, reducing the risk of the end customer being supplied with unsellable product, and helped ensure that the fish would be fresh on delivery.
The introduction of improved communications (e.g. the telephone) and improved storage and transportation services (e.g. refrigeration, rail freight, air freight) enabled suppliers and brokers in increasingly more distant locations to trade, and enabled brokers to arrange supply to customers who were physically distant. Personal relationships between traders still remained important as a "guarantee" of payment to suppliers and of fish quality supplied to customers. The relatively small size of the New Zealand market means that mostly, market participants are known to each other, and that information about dishonest players would be quickly circulated around the industry. As communications to and about individual suppliers and end customers of brokers became more readily available (e.g. national business news distribution via newspapers, television, radio, paper, telephone and later electronic industry "grapevines"), in a small market the need for brokers to "vouch" for individual customers and suppliers became less important. The "clearing house" role was removed, and sellers invoiced buyers directly for sales arranged by brokers.
As transport became relatively cheaper (e.g. introduction of door to door courier services), even the role of brokers as consolidators of orders to specific locations became less important. The brokers' role became almost solely one of "introducer" hence reducing the costs of suppliers advertising their offerings to customers. Customer could ascertain the availability and price of fish from suppliers and effectively trade directly with each other on the basis of information they received from the broker. The broker is remunerated typically with a commission paid by the supplier.
The result is that, in New Zealand in 2004, there is effectively a single "marketplace" for supply of wet fish covering the entire country. Suppliers in Bluff, for example, trade with customers in Auckland, utilising a variety of communication methods. Typically, however, the exchanges are organised on the telephone or fax as a result of either information provided by a broker, or direct negotiation.
Daily Supply and Procurement Processes
Suppliers compile a daily list of all fish for sale, information about which is provided to brokers and customers. Orders are received typically over the phone, generating the creation of picking, packing, dispatch (e.g. liaison with couriers) and billing processes. Depending upon the systems employed by each supplier, these processes may be manual, computerised or a mixture of both. Throughout the day, stock status updates by fish type and quality must be maintained, and changes in prices and quantities communicated to brokers for those suppliers maintaining dual broker and individual customer sales. Typically, suppliers and brokers use manually managed computer spreadsheets for this process. Aged stock analysis is especially important given the very short shelf life of fresh fish.
Throughout the day, brokers must remain in communication with suppliers about the changing prices and quantities of fish available. Thus, when customers phone in, brokers can advise them of current supplier offers.
Customers (e.g. restaurant buyers, supermarket fish department buyers) generally begin the day by auditing current stock and assessing supply needs. For a typical supermarket fish department, this takes approximately an hour of buyer time each morning. Buyers then telephone brokers or suppliers to ascertain offers, negotiate prices and place orders. As the stated objective of retailers is to never be out of stock, at least ten suppliers may be contacted on average to secure delivery. Each confirmed order generates receipt and accounts payable activities for the buyer.
Information Costs of Supply and Procurement
For all participants, this process is costly in terms of time and the possibility of error. Phone calls are a significant cost, both in terms of call charges and time taken. It is difficult to isolate the actual amount of time taken for each call to determine the prescient facts, as some of the call content may comprise "relationship building" or social interaction tasks. It is estimated that each call from a retailer to a broker or supplier lasts approximately three minutes where buyers are fish specialists. Inexperienced staff, however, may take longer. The supporting processes generated by activity may be either manual or computerised. The processes also require subsequent exchange of information both within and between firms. All of these processes take time, and all involve manual transcription of information between media (e.g. paper to paper, paper to computer) at some stage. This can lead to errors and inaccuracies, which raise costs to all parties. For fish purchasers in particular, facing few other opportunities to manage their costs of fish procurement, the incentives to reduce these costs are presumed to be high.
As identified above, suppliers generally set the prices for fish in the New Zealand market. With the current processes, it is difficult to determine if fish buyers have in fact secured fish at the best price. Time budgets rather than full information of the offers determine the price paid. The buyer will typically end up purchasing a fish type at the lowest price or best combination of desired factors (price, freshness, delivery conditions etc) discovered during the time available to collect information. There may have been a better offer available, but the method of collecting the information means that not all offers are transparent to all buyers. The order in which buyers contact sellers and brokers will also influence the range of offers the buyer is exposed to, and hence the likelihood of striking the "best" deal. Hence employers of the fish buyers have little information from which to assess the performance of their buying staff. These employers must rely upon metrics such as market share changes and volumes of trade in order to determine whether the buyers are outperforming their competitors in the respective industries.
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