Russian Sea Group launching USD 1 billion worth plan to become world’s biggest vertically integrated fish holding

March 19, 2012 09:53

Russian Sea Group has announced an ambitious plan to become the world's biggest vertically integrated fish holding with complete production cycle from own raw material of both wild fishery and farmed origin to consumer packs, reports with reference to Expert Magazine.

The Group's CEO Timofey Tarasov says they are willing to develop into a sort of Coca-Cola in fish industry. Russian Sea has already won leadership in the sphere of fish processing and distribution, its share in aquaculture has been growing. And the Group's current strategic target is to get some 20-30% of the Russian market of wild fishery products which would let them become one of the biggest seafood producers of the world.

Such ambitious challenge of the Group's leader sounds brave against the background of financial problems which the group has been facing in the recent two years. The fish processing business has been suffering losses due to high prices for salmon species and weak demand for delicatessen products. The youngest division of Russian Sea Group, aquaculture, required big investments and it was left nearly frozen in crisis. The Group's all business relied on Russian Fish Company engaged in fish distribution.

In crisis the Group's owners have made a number of efforts to save the company. In particular, remarkable events for the group were its IPO in spring 2010 and management staff changes. Since October 2011 Timofey Tarasov serves as the Group's CEO after a successful career in Wimm-Bill-Dann (WBD is the market leader in dairy products and children's food in Russia. After acquisition of WBD by PepsiCo in 2011, Mr. Tarasov managed three WBD factories in Ukraine and successfully accomplished WBD's integration with PepsiCo's business in Ukraine.)

According to Mr. Tarasov, the Group actually stopped losing money some half a year ago, when the situation on the raw fish market changed - salmon supply went up, prices for raw fish went down and efficiency of the fish business recovered. At the same time, Russian Sea leaders concluded that their business should not depend on raw material purchased at market prices but they should rather build their own raw fish base and create a vertically integrated holding to be present in all sectors of the fish market.


Active development of the Group's existing divisions could hardly let it give a noticeable production boost to become a market player of global importance. Such could be achieved only via development of raw material production. The Group's CEO thinks that the fishing department could become the most profitable as nowadays EBITDA of fishing companies reaches 50% or several times more than profit from other sectors, namely processing, distribution and aquaculture.

Within these lines the Group has already started scrutinizing some fishing companies towards their further acquisition. The new holding is supposed to unite at least ten biggest fishing companies and some media sources already speculate that the Group could purchase Nakhodka Base of Active Marine Fishery and Arkhangelsk Trawl Fleet. However, the Group itself has not given its comment on the above.

Along with acquisitions the Group also plans to build new vessels. Last year it entered into a partnership agreement with the United Shipbuilding Company which should prepare a project on the construction of new fishing vessels specially for Russian Sea Group. Mr. Tarasov says it is their specific policy to build similar vessels under the same project in particular in order to avoid problems with crew training.

Evidently the new division should cost the Group a grand sum of money (maybe one billion USD), and Russian Sea so far confirms only agreement with several large banks which are ready to give big credits for the purchase of companies and vessels.

Under the current system of quota distribution between fishing companies with good capture records the above strategy of purchasing quota holders and simultaneously building new vessels to raise their fishing capacity may bring more fruits for the Group. Starting from 2019 shares of capture quotas may be fixed to holders for a period of 20 years (twice longer than the current 10-year period of capture quota shares) and Russian Sea is going to be there and get its piece of pie. Such strategy is actually in line with the general process of quota holders' concentration in the industry.

In 2011 Russian fishermen harvested 4.2 million MT of finfish and other aquatic species and the Group says with its plans in fishing sector it targets to contribute about 1 million MT to the national harvest. Though the target looks unreal as the world's biggest vertically integrated holding Pacific Andes from China harvests 450,000-500,000 MT per year, it may turn true if the Group purchases a dozen of Russia's biggest harvesters, for instance in the Russian Far East, such as BAMR, Gidrostroy, Oceanrybflot, etc. which altogether contribute some 800,000 MT to the national catch.

In 2012 Russian Sea plans to harvest fish in the North Fisheries Basin (Murmansk, Arkhangelsk) and in the Russian Far East Basin with catches to be shipped both to domestic and to overseas markets.

Focus on profitability

In 12 months of 2011 the consolidated revenue of the Group amounted to RUR 18,520.0 million (more than USD 600 million), 7.3% up on RUR 17,254.2 million in the same period of 2010. The rise of revenue in the chilled and frozen segment amounted to 7.5% and that in ready-to-eat segment - 6.5%. The revenue distributed as follows: Russian Fish Company - RUR 14.5 billion, Russian Sea fish processing company - RUR 4 billion and Russian Sea Aquaculture - not much so far.

The biggest business of the Group is Russian Fish Company selling ca. 170,000 MT of chilled and frozen fish on the Russian market and enjoying a market share of 10%. Its main competitors are Atlant Pacific, Defa Group and Dary Morya which are well behind RFC. About 80% of the market belongs to small wholesalers each with a share of about 1%.

The Group's market advantages could be explained by two factors: diversification of the fish range (salmons, whitefish species, other than finfish aquatic products) and a wide regional sales network with more than 40 branches covering ca.85% of the Russian territory.

In 2012 Russian Fish Company is planning to keep boosting its revenue, along with wholesale trade in large lots it is going to deal with small wholesalers in order to accumulate higher profit. Normally, large distributors sell raw fish and have no idea where it goes, while RFC is willing to trace the fish to end consumers. The idea is to earn more money in the distribution chain, said Mr. Tarasov.

Fish processing was the Group's most profitable business but recently, when in the period of world financial crisis prices for raw fish went up and consumer demand declined thus bringing losses to fish processors. Besides, competition on the market has been very strong. Along with Russian Sea Group, similar product range has been produced by such prominent Russian processors as ROK-1, Meridian, Baltiisky Bereg, Viciunai, etc. In order to win in the competition the Group has decided to focus on business efficiency and profitability thanks to value-added processing rather than on a rise of sales and market share.

The third division of the Group, namely Russian Sea-Aquaculture, is engaged in Atlantic salmon and trout farming. At present, the aquaculture market is strongly fragmented therefore the company has few competitors. They are mostly concentrated in Karelia where the annual trout production is estimated at 12,000 MT (a lion's share from Russia's total output of 20,000 MT of farmed trout). The company has been investing strongly into development of its aquaculture projects in Murmansk and Karelia. In particular, in late 2011 Russian Agricultural Bank provided Russian Sea Group the first tranche under the approved credit line with the total amount of RUR 2.8 billion for aquaculture development in Russia. Nowadays, the company runs 29 sites of the capacity ranging from 1,000 to 30,000 MT per each site. Three of them already culture fish. Last year proceeds from farmed fish sales jumped nine-fold.

According to Mr. Tarasov, the company can offer farmed salmon of better quality than popular Norwegian product as the fish grows on the same feeds, with the same equipment (making the cost price also similar to the Norwegian competitors), but it can be delivered to consumer in fresher form thanks to twice shorter distance to key markets. More specifically, chilled Atlantic salmon is delivered from Norway to Russia within six days, while from Karelia it can be shipped within one or two days.

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