Swimming in Blue Ocean Waters – Assuring Seafood Quality, Promoting Sustainability and Addressing Market Needs through Vertical Integration

by Norbert Sporns, President and CEO
HQ Sustainable Maritime Industries Inc.

"Blue oceans" are untapped and uncontested markets, which provide little or no competition for anyone who would dive in, since the markets are not crowded. A "red ocean", on the other hand, refers to a saturated market where there is fierce competition, already crowded … [The] idea is to do something different from everyone else, producing something that no one has yet seen, thereby creating a "blue ocean". An essential concept is that the innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.”

--Wikipedia on Blue Ocean Strategy by W. Chan Kim and
Renée Mauborgne, 2005

Consumers are eating more seafood than ever. In 2006, US seafood consumption reached 4.9 million pounds or 16.5 pounds per person (NOAA Fisheries Service).

In its 2007 Seafood Report, Glitner Bank, a leading expert on the industry, reported that 86 percent of the seafood consumed in the United States is imported, and that China is the leading provider, producing approximately 35% of the global seafood supply. The report also found that while shrimp, canned tuna, and salmon are the most popular selections, tilapia is in sixth place, but represents the fastest growing market segment.

These statistics represent a dramatic increase and global trend: In 2002, imports accounted for roughly 45 percent of seafood consumed in the U.S. Seafood imports included shrimp (946 million pounds), Atlantic salmon (413 million pounds), and tilapia (148 million pounds). To put these imports in perspective, the U.S. consumption of red meat and poultry now stands at 187.5 pounds per person.

Meanwhile, wild ocean fish stock is declining due to over-fishing, pollution and global warming. One study warned that without intervention, commercial fisheries could collapse within 50 years (Science, Nov. 2006). While better resource management and fishing restrictions could correct the decline in ocean fish stock, aquaculture is already augmenting global seafood supply and will continue to grow with demand.
In November 2007, the United Nations Food and Agriculture Organization (FAO) predicted that a growing global population will require the production of an additional 37 million tons of fish by 2030 to maintain current levels of consumption. The UN concluded that aquaculture is the only way to meet that demand.
The FAO also noted that while aquaculture provides food rich in protein, fatty acids, vitamins and minerals, it also greatly improves food security by creating jobs and raising incomes. For example, fish farming in Asia directly employs some 12 million people.
But the agency stressed that the aquaculture industry must integrate responsible stewardship of natural resources like water, land, seed and feed, as well as sound environmental practices. “We’ll need better planning and management of the sector in order to mitigate the adverse consequences on the environment,” said FAO director-general Jacques Diouf.
Of all species to consider for aquaculture production, none surpass the environmental benefits and market appeal of tilapia.
Tilapia, the popular name for numerous freshwater species native to Africa (belonging to the family Cichlidae and order Perciformes), has been an ideal species for aquaculture production since the days of ancient Egypt. A longtime favorite of ethnic markets, the fish has grown with the aquaculture industry and is a now mainstream selection.

Tilapia is omnivorous, but lives well on plant matter alone. There’s no need for additional feed meal, which can contain additives and deplete other fish stock. They are fast growing fish, reaching up to a pound in just five months. It is also a highly social species that thrives in highly populated groups.

Tilapia also enjoys a lower fat content than other seafood, and its mild flavor provides producers with an opportunity equivalent to a “blank palette.” With adjustments in processing, the fish can become a versatile substitute for cod, flounder, and other traditional selections. As a result, many researchers predict it may become the most important species of the century.

Vertical Integration and Tilapia Aquaculture

Vertical integration is a business model that provides centralized control of all phases of operations – breeding, stock growth, feed, harvest, production, distribution and marketing. This comprehensive approach to food production originated in the 1960s with US chicken producers, such as Tyson Foods and Perdue Farms. Vertical integration is a proven method to provide the multiple revenue streams (i.e., egg and meat production) as well as the best assurance of quality.

With advances in technology, vertical integration practices are becoming more widely available to aquaculture producers. The model not only allows for increasing capacity and production, it also provides a reliable way to assure and control the highest quality product.

The model also provides flexibility to adjust production methods for flavor, specific market sectors and more.

HQ Sustainable Maritime Industries (HQS) has developed vertically integrated operations in Hainan, China, as a model of environmentally responsible and sustainable aquaculture. Hainan, an island in the South China Seas, offers a temperate climate that is ideal for tilapia farms, especially since its pristine, pollution-free environment is protected by the Chinese government. Only tourism and agribusiness is allowed; industries that pollute the air and the water are prohibited. Additionally, the water for HQS ponds is supplied through aquaducts that capture rainwater.

In this ideal setting the company can control all aspects of production and best maintain its core commitment to providing the highest quality fish filets, free of toxins and additives.

HQS works with a network of cooperative farmers that are trained and monitored by the company to grow tilapia in a chemical-free, clean environment. In lieu of additives, farmers learn to control the environment and develop fish stock through natural methods:

• Introducing bottom feeder fish to remove detritus, which prevents disease and maintain oxygen level (avoiding the need for antibiotics) during the grow-out.
• Introducing predator fish to reduce female population, manage the number of males and eliminate any sick animals which could otherwise contaminate the pond, thus naturally maintaining health and optimum growth levels.
• Providing ponds with consistently high levels of oxygen to discourage the growth of algae. This strategy greatly enhances the resulting pure flavor of the fish and offsets the occurrence of ‘off-flavor’ that results from poorly maintained water.

HQS currently produces approximately 20,000 tons live weight of tilapia through its network of cooperative farms, sending its harvested fish immediately to its own state-of-the-art processing plant where harvested fish are immediately processed into frozen filets and commercial products.

The products are then distributed worldwide to both consumer and commercial markets. The company has developed its ”TiLoveYa” brand as a series of consumer products in United States and several other nations. HQS provides products for the fast-food restaurant and service industries.

Regardless of application, HQS’s vertical integation model allows all products to consistently exceed FDA and all other regulatory requirements for purity and quality. The company’s socially responsible, environmentally conscious practices challenge the industry standard, encourage sustainability, and serve as a new baseline for evaluation and improvement. A feedmill will soon be added to complete the operations.

Assuring Quality and Global Sustainability

Until June 2007, the tilapia segment of the seafood market had been dominated by a commodity mentality, which discouraged innovation and differentiation. However, pricing is no longer the sole concern. With the raised awareness regarding food safety flowing from this summer’s press reports , there is now a universal need to verify that all consumer seafood is healthy, safe and of the highest quality.

Many multinational companies who once promoted a ‘price only’ philosophy are now becoming major players in restructuring the industry, requiring that seafood suppliers provide third-party certification that their operations adhere to quality standards. The environmental impact of company operations is also a concern for retailers. As one indicator, Wall-Mart issued its first annual Sustainability Report in 2007, citing a commitment to sell only products that sustain natural resources and the environment.

These new priorities offers a strong competitive advantage for tilapia producers, especially those with a vertical integration model.

HQ Sustainable meets several certification standards. The company holds HACCP certification from the U.S. FDA and the EU Code assignment of quality. The company has also been certified to Best Aquaculture Practices, a designation of the Aquaculture certification Council (ACC), an industry-sponsored certification program for food quality and best practices. Although these standards start by certifying processing plants, eventually farm, feed mills and fry breeding installations will also be certified. This will only further enhance the importance of vertical integration.

Additionally, HQS is working to meet organic certification programs in domestic China and in the West. In China, the certification requires an annual audit and the usage of international organic standards, deployed and certified in China by the Ministry of Agriculture. Organic certified food products are treated like health foods in China and marketed through regular food distribution and health food channels. The value of organic certification is high as Chinese and International consumers gravitate to higher standards with their implicit higher degree of food safety and reduction of potentially harmful residues.

The use of organic labeling in the United States is currently in development by the USDA and is expected in 2009; specific standards for tilapia production will be included.

In the meantime, HQS is working with the World Wildlife Fund, Environmental Defense Fund, Monterey Bay Aquarium and other NGO’s and industry leaders to develop an eco-standard for tilapia aquaculture. This standard will address key environmental concerns associated with aquaculture and educate the public on the environmental impact of their buying decisions.

Value-Added Markets.

In addition to quality, consumers want a variety of choices. When dealing with a global market, those choices expand with each nation, culture and region.

Traditionally, the term “value-added” has been used in connection with additional processing. Flavored filets, for example are traditional value-added products. HQS produces a range of flavored products from Lemon pepper to Cajun spice blackened tilapia filet products.

HQS has partnered with Newly Wed Foods Inc., a world leader in food ingredient technology, to create a new flavoring process. This process introduces flavoring while the product is still fresh, instead of at the later freezing stage. The earlier introduction results in better juiciness and taste, but the technique requires a unique understanding of the processes and materials involved.

With Newly Weds, HQS has successfully produced tilapia in a block format that successfully replicates the taste and texture of ocean-flavored pollock. This “sea-flavored” product is now available to selected fast-food and service industry clients, providing a cost-effective and environmentally sustainable alternative to a diminishing species.

Another potential value-added market would be Isumi Dae, a Japanese term indicating low bacteria count and a flavor that approximates red snapper. In this treatment, flavor is usually achieved with tilapia as a result of finishing the fish in brackish water to transform the freshwater taste to more of an ocean flavor. Flavor is not from an additive but a result of a different process of farming and high quality processing. HQS is able to achieve this taste without recourse to brackish water and the additional costs and mortalities brought on by the additional transfer of fish from one pond to another. Through its unique pond management techniques as described above the superior flavors are achieved without brackish water finishing.

Adding value is a response to market demand and educating the public remains an important part of the process. Marketing and branding at its best is about such efforts and positive reinforcement of good consumer practices. “TiLoveYa” is a fun label for a product with a serious mission: to eliminate all toxic residues in its products, to provide the consumer and retailers with the best available product.

Eco-labeling and third party audits of best aquaculture, food processing and environmental standards must go hand in hand with patient, repeated efforts at increasing consumer awareness of the opportunity to choose between price only and value added products.

With the vertically integrated base, a myriad of other value-added opportunities abound:

• Creating niche products with specialized feed additives, such as omega 3 enriched or vitamin E enriched
• humane methods of farming, superior pond raised or cage-free production
• best environmental practices such as fish-meal free product, or 100% carbon-offset product, where the producer has invested in off-setting renewable energy..

In Blue Ocean Strategy, authors W. Chan Kim and Professor Renée Mauborgne wrote:
"The only way to beat the competition is to stop trying …In red oceans, the industry boundaries are defined and accepted, and the competitive rules of the game are known. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. ...The creators of blue oceans…focus on making the competition irrelevant by creating a leap in value for buyers … thereby opening up new and uncontested market space. …Value innovation is based on the view that market boundaries and industry structure are not 'given' and can be reconstructed by the actions and beliefs of industry players. …. As you shift your strategic focus from current competition to alternatives …you gain insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value elements that reside across industry boundaries"