Operation China,Shanghai Market Research

(Oysters)28th March – 8th April 2010

James Calvert

Project No. 2010/713.3

Copyright Australian Seafood CRC and Tas Prime Oysters 2010

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PROJECT NO: Operation China, Shanghai Market Research (Oysters) 2010

PRINCIPAL INVESTIGATOR: James Calvert

ADDRESS:230 Hanslows Road, CAMBRIDGE, TAS 7170

OBJECTIVES OF RESEARCH TRAVEL GRANT To travel to Shanghai, China, as part of a research team to identify the supply chain, customer requirements and opportunities for the Australian oyster industry. To also gain greater understanding of the culture, business relationships and challenges which exist in the Chinese seafood market.

NON TECHNICAL SUMMARY: The 12 days spent in Shanghai was an exceptional experience and one that provided so much information and insight to the Chinese seafood market. The knowledge gained by the market research team will no doubt go a long way in assisting Australian seafood producers in understanding the needs and methodology of the Chinese supply chain and end consumers. There will also be the added benefit of having experienced Australian industry and researches passing on first hand information regarding prices, quality and future opportunities. Shanghai has a large market for Seafood and Australia is well placed with quality and reputation to capitalise on the growing demand. However pricing is the major barrier for the Australian oyster industry. The major topic faced by the team was the access to market via two main distribution routes, the “Grey Trade” and “Direct Trade”. The main challenges identified for Australian producers is deciding which market access route is going to provide the most profitable and sustainable market. The Grey Trade is using almost a black market distribution through ferrying product from Hong Kong to mainland China for on-forwarding. The Direct Market approach to all mainland China cities attracts a 14% VAT (goods & services tax) plus a varying range of import tariffs of between 9 – 16%. This adds an additional 27% (average) cost to the gross value of landed product versus “Grey Trade” arrivals. Oysters are not considered as a “high valued” product unlike Abalone, Lobster, Sea Cucumber, Shark Fin etc. This is mainly due to the massive local industry which is 200 times larger than the Australian industry and produces more than the remaining global production combined. Along with the massive local industry competition, oysters are associated with contamination and causing many deaths per annum which has a

detrimental effect for international “safe” product as consumers are not accustomed to eating “raw” oysters. Pricing is causing strong buyer resistance to Australian oysters. With the domestic product being 15% of our price and international imports also well under our price, it will probably be several years before China’s economy grows enough for us to become more competitive. This will only happen due to more disposable income for the Chinese consumers and also with a more western influence with dining habits. OUTCOMES ACHIEVED TO DATE The research team has gathered 175 market surveys from seafood wet markets, high end retail chains, high end Chinese restaurants, western restaurants and 5 star hotel chains. These surveys were asking participants for comments on Australia’s quality, reputation, current purchases (species specific) and price relevance. This information will be compiled and presented at a presentation in June 2010, at the Sunshine Coast University in QLD. A comprehensive supply flow chart has also been developed to show the two routes Australian producers can follow to access Chinese markets (Appendix 1) A full understanding of competitors pricing has been achieved and this has shown where the Australian oyster industry is situated, the highest price in the market.

OUTPUTS DEVELOPED AS RESULT OF TRAVEL GRANT: With a better understanding of the supply chain, the grant has provided the opportunity for our business, Tas Prime Oysters Pty Ltd, to focus resources at the market access channel that is best suited for our product. After the completion of the Shanghai China trip, our business participated in the Food Hotel Asia (FHA) Expo held in Singapore April 20 – 24 with the intention to source buyers from China (& other Asian countries) through both supply channels identified and determine which one would best suit our business. As the results have shown in the preceding months, we have begun negotiations with buyers but only through one supply channel, the “Grey Trade”. The reasoning behind using this channel was dictated by the buyers and the overwhelming excuse was price... When accessing “Direct Access” we are consistently 20% above our competition so the main recommendation is to target the “Grey Chanel” as the most established supply chain and the one Chinese wholesaler’s are comfortable using.

Background – Need Australian Oysters reputation has suffered over the past 12 months with many reports from executive chefs complaining about quality, consistency and customer service. There is a definite need for Australian producers

to research their markets, focus on quality and provide the necessary backup service for their clients. With only small niche markets currently available, it will be difficult to secure a viable market unless Australian producers can differentiate themselves from other global sellers. The evidence was overwhelming that unless you are prepared to form relationships (Guanxi) and commit to quality, you will struggle to find a long term secure market. The need for Australian producers is definitely understanding! We need to understand and respect the Chinese culture and commit our product for the long term. There is also a need for education of our product which could be conducted when working with 5 star hotels and high end western restaurants, the target market for our product. Again, unless producers are prepared to research these needs then price will be their ultimate undoing.

EXTENSION ACTIVITIES

Travelled to Food Hotel Asia (FHA) Expo, Singapore, April 2010 to promote our business and develop relationships and markets through Asia, in particular China (the lessons learnt on the trip proved vital!)

Have hosted three Chinese buyers who came to Australia after making contact with our company at FHA Singapore

Gave a presentation at the Australasian Aquaculture May 2010 Conference, Hobart Tasmania. This was a presentation on the China oyster market identifying to fellow Australian producers, regulators, distributors etc the complicated supply chain, prices, competition and future opportunities.

Attended the “Operation China” report presentation by the market research team at Sunshine Coast University on June 3rd 2010.

Have organised to give an industry report on the Chinese market at the Shellfish Futures conference, St Helens Tasmania September 2010

PROJECT OUTCOMES (THAT INITIATED CHANGE IN INDUSTRY) The project has identified to the Australian Oyster industry that China may not be a viable proposition in the present and short term future and will allow producers to direct resources to markets that are currently more accessible and profitable. Also for those producers who are interested in China, the understanding of developing such a market with regards to relationships & quality. While China’s rapid economic growth should change this situation by around 2015, it has been identified that the small niche markets that currently exist would only suit the most quality, customer relation driven producers on a small scale. A market of +1 tons per week would be extremely difficult to find.

SUMMARY OF CHANGE IN INDUSTRY (WHAT IMMEDIATE CHANGES ARE EXPECTED FOR THE BUSINESS)? The most obvious change in strategy for our business is to try and differentiate ourselves from our competitors, this may be playing the green & sustainable profile that our country obviously enjoys but we cannot be seen as just another “oyster” seller. Due to economic reasons, the Grey Trade access will gain our short term focus while keeping a close

watch on the Direct Access. This is only recommended due to price competiveness. There are several Australian wholesalers/exporters which are currently landing small volumes of product into Shanghai. These suppliers are not committed to quality and long term relationships and, as a consequence, have damaged our reputation for the cause of a quick investment return. If industry has a desire to progress the China markets (and others), a cooperation approach needs to taken. Sharing of knowledge and maintaining quality can only be controlled by producers and not by wholesalers. Oyster industry members need to come together to form cooperative selling strategies and take back control of the quality of product and the servicing of clients. Chinese wholesalers would definitely prefer to be visited by producers/farmers rather than business “suits” looking to make a quick dollar.

WHAT FUTURE AND ONGOING CHANGES ARE EXPECTED? Our focus will now be on controlling our product greater than we have done in the past. As we need to identify ourselves as premium producers “who care”, our business will take a more vertical approach when it comes to selling our product. By doing so will allow us to protect our quality, reputation and also price. This will co- inside with a stronger client relation support and communication and has shown the need for our business to be more travel orientated for face to face contact and promotion. We are now restricting the Australian wholesale buyers from exporting our product so that we can maintain our reputation, provide longer product shelf life and gain more positive returns for our oysters.

HOW WILL YOU COMMUNICATE AND SHARE WHAT YOU LEARNT WITH OTHER CRC MEMBERS? I have already begun sharing the knowledge with many CRC members. I presented a complete China summary report which I was able to deliver due to the trip to Shanghai and also drawn from other government and personal sponsored trips (ACACA). This presentation occurred at the recent Australasia Aquaculture Conference which was held in Hobart on May 24 – 28th 2010. Another presentation has been organised for the Tasmanian oyster industry to be delivered at “Shellfish Futures” in St Helens, Tasmania on September 11 – 12, 2010. I have also offered to present the same report to the South Australian Oyster Growers Association at a time that is convenient for them but to date have had no response.

FURTHER ACTION REQUIRED IN REGARDS TO COMMERCIALISATION?(IP PROTECTION, LICENSING, SALES, REVENUE ETC) The only action required will be from an individual basis which will involve our business doing more research into Hong Kong and other Chinese cities. This research will be looking at forming relationships with selected buyers, developing a cooperative promotional program with

these buyers and looking at other ways to improve our product quality (socking densities, efficient handling techniques, completing our own export approved packing shed etc)

LESSONS LEARNED AND RECOMMENDED IMPROVEMENTS? One problem which was evident very early on in the trip was the lack of knowledge and preparation by all involved. This was mainly due to the late notice from CRC by confirming the trip only 14 days before we left. With more notice the teams could have communicated more which would have helped to identify what all participants wished to achieve from the trip. There was some confusion over the needs from the student researches and also the needs of industry. This was sorted out after the first week but more communication before the trip would have helped and this would have also freed up more time for research. Also with more prep time, teams could have pre arranged more meetings with relevant groups such as wet market management centres, 5 star hotel chefs etc. The more pre arranged meetings the better!! Having said all that ... Dr Jo Freeman had a difficult job of pulling everyone together and staying focused in the same direction, a position she handled well. The students were committed, energetic and proved to be great travel companions and presented themselves with politeness and dignity, well done by all.

ACKNOWLEDGEMENTSSeafood CRC Dr Jo Freeman – Sunshine Coast UniAll the research students involved – Sunshine Coast UniFellow industry members – Will Ferguson (Lobster) & Jonas Wolford (Abalone)Tas Prime Oysters Pty Ltd

APPENDIX (IF APPLICABLE)1. Supply Chain Matrix