The Economic Feasibility ofAssuring U.S. Grade A Quality ofFresh Seafoods to the Consumer

CARMINE GORGA, JOHN D. KAYLOR, JOSEPH H. CARVER,JOSEPH M. MENDELSOHN, and LOUIS J RONSIVALLI

Introduction

This study was conducted to deter-mine the effects on sales of guarantee-ing U.S. Grade A quality of freshseafoods to the consumer, recognizingthat benefits would accrue to both theconsumer and the seafood industry.The technology of achieving this goalwas already largely known at thebeginning of this study 3 years ago.What was not known was: I) Whetherthe technological conditions to achieveand to preserve the U.S. Grade Aquality of fresh fish fillets would beadopted by the industry; 2) whether theimplementation of those conditionswould, as expected, entail additionalcosts; and finally, 3) whether consum-ers would buy the product at theexpected higher prices.

To find the answers, a study wasconducted in three phases betweenNovember 1975 and September 1977with funds from the Northeast Fisher-ies Center's Gloucester Laboratory andthe New England Fisheries SteeringCommittee. The species under obser-vation were cod, flounder, haddock,ocean perch, pollock, and whiting.Cusk was included in Phase II. All

A BSTRA CT- Results o{a 2-I'ear stud I'demonstrated that, when the 'qualill' oj"fishfillets at the point oj"sale was of U. S.Grade A qualill·. benefits accrued to theconsumer, the retailer, the processor. andpotentialll' thefisherman. Sales tended toincrease up to 20 percent and, at most, theextra cost to assure U.S. Grade A qualill'was 10 cents per pound. Since the hij{hqualill' product commanded ahout 50cents per pound more than its non-

20

three phases involved a single proces-sor in Gloucester, and each phaseinvolved a different supermarketchain.

The findings of Phases I and II havebeen reported (Ronsivalli et ai., 1978).This work helped to determine theoperating parameters which assure theU.S. Grade A quality seafoods toconsumers; it also established that theacceptance of the program by both theprocessor and the supermarkets washigh, that consumers were satisfied andwilling to pay a higher price for U.S.Grade A fish, and that sales tended toincrease when the U.S. Grade A labelappeared on the package and thequality was, in fact, high.

This paper, although incorporatingthe major findings of the previous twophases of the study, is primarilyconcerned with the third phase of thestudy which covered the 21-weekperiod between II May 1977 and 30

Carmine Gorga, John D. Kaylor, Joseph H.Carver. Joseph M. Mendelsohn, and Louis J.Ronsivalli are with the Gloucester Laboratory,Northeast Fisheries Center. National MarineFisheries Service, NOAA, Emerson Avenue.Gloucester. MAO 1930.

j{uaranteed counterpart. it is concludedthat even i{the estimated added cost is inlarKe error. economicfeasihilit.l' has beendemonstrated. Private enterprise hasadopted the Kuaranteed U. S. Grade Aprocedures dn'eloped h.l' the j{overnment.Based on new sustained salesj"or a periodoj" more than I rear. currentll' valued atiJ.ooo.OOO, the hene/it-to-cost'ratio oj"theFederal im·e.\·tmeJll· oj" ahout $200.0'00 ismore thaI? /5:/. .

September 1977. The objective of thisphase was to study the economicfeasibility of assuring U.S. Grade Aquality at point of sale. The supermar-kets used as test stores were those of alarge northeast chain located inMilford, Gardner, Arlington, andMarlboro, Mass. The first two weretest stores which were supplied withUSDC graded fillets and the last twowere control stores which were sup-plied with ungraded fillets from theusual sources of supply.

ProcedureThe work started with the formula-

tion and publication of a U. S. standardto cover fresh, unfrozen fish for the firsttime. This was necessary because theU.S. Grade A label can be used only onproducts for which Federal standardsexist (Ryan, 1971). A detailed descrip-tion of the most recent official stand-ards is contained in the FederalRegister (1977).

In brief, for fish to be classified asU.S. Grade A, a number of criteriahave to be met. In addition to theobservance of U.S. Department ofCommerce (USDC) guidelines forsanitary control throughout the entirechain of production, especially impor-tant is a set of particular handling,filleting, and packaging techniqueswhich assure the existence of whole-some boneless fish fillets that are free ofdefects. These techniques lower theyield and contribute to raising the costof producing U.S. Grade A qualityfish. But, these Grade A quality fishcommanded higher prices in themarket.

Early in this study it was decided thatfresh fish should be sold through

Marine Fisheries Review

Figure I.-Combined U.S. Grade A label used to identify particular species andblank label requiring hand-stamping for underutilized species.

Figure 2.-Handling sequence ofU.S. Grade A unfrozen fish fillets.

!I-LB PACKAGES

~MASTER CARTONS

!WEIGH

!RETAILER'S DISTRIBUTION CENTER

tRETAIL OUTLETS

! ~RETAIL STORAGERETAIL DISPLAY CASES

FISH FROM FISHING VESSEL

!PROCESSING PLANT

! ------GURRyFILLETS

I ------REMOVE SKIN SOME~ SPECIES

CHILL TO 32 of

is a significantly longer shelf life thanthe 3 days usually expected by manag-ers of retail outlets.

It is evident that the shorter the pro-duction/distribution time, the longerthe shelf life of the prod uct at the retaillevel, and the higher the probability ofselling the product as U.S. Grade A.The time required to produce anddistribute the product varies primarilyin accordance with the number of tasksto be performed (as indicated in Fig. 2),the availability of facilities for theperformance of those tasks, and theefficiency with which each processorperforms those tasks.

Combining these three factors in themost efficient manner, it has beenestimated that a prototype processorcan obta' n the following sequence ofevents: I) unloading of fish early in themorning, 2) completing the productionof 10,000 pounds in g hours, and 3)delivering fillets to the supermarketwarehouse during the same day (orearly next morning) for distribution tothe retail stores immediately thereafter.Delivery to the retail stores should alsobe so scheduled that they never remainwithout a stock of each desired species.

In the course of this study, the strictquality monitoring required that a

supermarkets in order to reach thelargest number of consumers and thatfish should arrive at the supermarketprepackaged for sanitation, customerconvenience, and to facilitate storehandling. Each tray was machine-overwrapped and heat-sealed in clearplastic film. A label (Fig. I) displayingthe U.S. Inspection sticker, the U.S.Grade A mark, the logo of the NewEngland Fisheries Steering Commit-tee, the species name, and the packingdate was affixed to each retail package.Ventilated master cartons were used totransport the trays from the processorto the retailer. The master cartonprevented damage during transit. Thetemperature during transit was con-trolled to about 32° F (O°C).

Temperature control throughout theentire chain of production and distri-bution was confirmed to be of extremeimportance (Ronsivalli and Charm,1975). When the temperature risesfrom 32°F (O°C) to 37°F (2.g°C), theapproximate fillet shelf life drops from14 to g da ys, and beyond 37° F (2. go C)it is shortened even more. Temperatureshould be kept at a near-constant 32° F(O°C) for optimum results. Thistemperature has been found to prevailwhen fish is unloaded from mostfishing vessels (Kaylor and Murphy,1970). In order to maintain thistemperature level throughout thesubsequent distribution chain, it wasnecessary for National Marine Fisher-ies Service (N M FS) technologists torecommend more stringent tempera-ture controls which the industry readilyimplemented. These included chillingthe fillets overnight (when they werenot delivered the same day that theywere processed), use of ventilatedmaster cartons, use of liquid CO 2coolant while in transit during hotdays, the avoidance of piling andcrowding of trays in the retail displaycabinets, and the maintenance oftemperature control in the displaycabinets.

As a consequence of these controlledconditions, through an analysis of 69reports from USDC inspectors duringPhase III of the study it was ascertain-ed that the quality level of U.S. GradeA fillets in the two test stores wasretaine'!)for a minimum of 5 days. This

J."fY /979 2/

---- DELIVERED----------RETURNED

............... SOLD

major departure from the normalinspection procedure be made. Fishwere not only inspected at the proces-sor but also at the retail level. Afterdetermining that fresh fish filletsretained their U.S. Grade A quality forat least 5 days at the retail displaycounter, it became obvious that exceptunder unusual circumstances, inspec-tion would be necessary only from thefifth day onward. Since this compre-hensive inspection procedure wasnecessitated by the study, its cost wasborne by the support funds for thestudy. Also, fillets that were found tofall below Grade A quality while ondisplay were removed and replace-ments were supplied at no cost to theretailer.

No advertising or promotional effortwas made. However, throughout theprogram, the Gloucester Laboratoryfurnished the stores with informationalplacards emphasizing the high qualityof the product, and these were display-ed over the U.S. Grade A guaranteedfillets.

Temperature data were collected atthe test stores by laboratory personnel.Data on deliveries and prices concern-ing the two control stores wereprovided by the retailer. Other eco-nomic data were collected by labora-tory personnel directly at the test storeor plant level as an adjunct to thetechnological study. Data on costs andcost estimates were obtained throughad hoc studies.

Table 1.-Selected socia-economic characteristics of communities in whichtest stores and control stores were located during Phase III of the study.

Milford l Gardner l Arllngton 2 Marlborough.'

Total population 19,352 19,748 52,524 27.936Mean Income-' $9617 $9.069 $11.622 $10.408Forelgf"l stock from 7,264 8.918 6,134 7.318

Canada 801 5.311 1.394 2.433Italy 3,686 195 939 1,553Ireland 409 206 733 721U.K 324 193 530 473Poland 199 789 258

Other countries 1,845 2,224 2,538 1,880-'Te-st-st-ore-s- ----------------

2Control storesJFor al! families and unrelated IndividualsSourc13 US Census of PopulatIOn, 1970

150140130120

110Ul 100~ 90>- 80t: 70~

z 60~ 50a 40

30 :/20'; : .10 " ;'.i' ....... '..,l-._-...---~--~.~-..-.._-..Ol--'----C.----...L_'---'---'----'_.L-~~~~.L_-'---L._~-'------'-''''"'"''~~

i ~I 2 3 4 5 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21

TIME (wks)Figure 3.- Deliveries, returns, sales, and prices of cod fillets at the Milford store.

Economic Feasibility

Sales Trends

Sales trends, prices, costs, and profitmargins are analyzed below. Retailstores do not generally keep records ofthe amount of fresh fish discarded or ofthe fish that they often sell at discountat about Saturday noon. Hence, it wasimpossible to make an independentdetermination of sales trends inrelation to previous years. The esti-mates provided by the retailer indicatethat there was a 2 percent increaseduring 5 months of the study over thecomparable 5 months of the prior yearin the two test stores, and a 7 percentincrease in the two control stores.

22

For selected socioeconomic data onthe communities in which the stores arelocated, see Table I, A typical exampleof sales trends for one species isprovided in Figure 3. Estimatesprovided by the retailer during Phase IIof the study indicate that sales increas-ed by 20 percent (Machiaverna, 1977)and that in a similar program institutedby a 26-unit chain of supermarkets inPhoenix, Ariz., sales increased by 67percent in a period of 7 months(Zwiebach, 1978).

More important than any suchpiecemeal estimate, however, is the factthat there now exists an enterprise

which directly or indirectly was createdthrough the performance of this study.In a 2-year period, sales of U,S. GradeA fresh fish fillets have grown from anonexisting quantity to approximately30,000 pounds per week. Assuming anaverage retail value of $2.00 per pound,the new enterprise is currently valuedat approximately $3,000,000 a year.

Prices at Three Levels

Three levels of prices were observedfor each species: ex-vessel, processor,and retail prices. Ex-vessel prices weretaken from the New England FishExchange in Boston as they are the

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Marine Fisheries Re\'i~\

Table 3.-Retall prlc.s 01 ungraded flilels In control stor.s, 1977.

Date Cod Flounder Haddock Ocean perch Pollock

5/09 $1 79 $2.39 $2.59 $2.29 $1.8916 199 2.59 2.29 2.19 1.2923 179 2.39 2.59 2.29 1.8930 199 2.59 2.29 2.19 1.29

6/06 199 259 2.29 2.19 1.2913 159 2.49 2.09 1.79 1.2920 1.69 2.39 1.99 1.99 1.0927 169 2.99 1.99 1.99 1.29

7104 169 249 1.99 1.79 1.0911 199 2.49 2.29 139 13918 1.49 2.49 1.99 109 10925 1 49 259 1.79 1 79 99

8/01 1 69 2.69 149 189 10908 149 2.59 1.79 1.79 .9915 169 269 149 189 1.0922 1 49 259 1.79 1.79 9929 1 69 2.69 1 49 1 89 109

9/05 1 79 2.49 1.89 189 10912 169 259 1 79 229 1.2919 239 2.59 2.49 2.49 1.2926 229 249 2.39 239 1.39

Average $178 5257 5204 5197 51.25

Overall average $ 1 92

Source' Study data.

Table 2.-Relall prices of U.S. Grade A fillets In telt Itorel, 1977.

Dale Coo Flounder Haddock Ocean perch Pollock Whiting

5/11 $1.99 $1.99 $2.99 $1.99 $1.5716 1.79 2.59 2.49 2.19 1.9923 1.79 2.49 1.89 1.99 1.49

6/01 2.19 2.39 2.99 1.79 1.6907 2.19 1.99 2.89 2.39 1.6913 1.69 2.99 2.59 2.19 1.9920 1.99 2.99 1.89 1.79 1.5927 2.59 2.79 2.09 1.79

7/05 2.19 2.59 2.79 2.19 1.5911 2.39 2.79 2.79 2.49 1.6918 2.49 2.69 2.69 1.89 1.4925 2.49 2.59 2.89 2.09 1.09

8/01 2.09 2.99 3.49 1.99 1.79 $1.4908 2.49 329 2.99 2.19 1.09 1.4915 1.49 3.49 2.29 2.39 1.69 1.3922 2.19 3.49 1.85 1.79 1.3929 1.39 3.19 2.39 1.99 179 1.49

9/06 3.29 2.79 3.29 2.79 1.7912 2.89 2.79 299 2.19 1.99 1.4919 3.29 3.29 309 1.99 1.99 1.4926 239 3.49 239 1.99 1.09 149

Average $2.25 $2.85 $2.73 $2.12 $1.65 $1.47

Overall average: $2 32 (m order to make data comparable with data in Table3,thiS figure excludes the average of WhIting.)

Source" Study data.

only ones available. Processor andretail prices were recorded for eachdelivery. (Detailed retail prices aregiven in Tables 2, and 3; ex-vessel andprocessor prices can be calculated fromTable 5.)

Analysis of data concerning thethree price levels (Fig. 4 is one typicalexample) reveals that with a fewexceptions, the three price levels tendedto move in parallel for all species. Sincefillets represent only about one-third ofthe total weight of the fish from whichthey are removed, their cost must betrebled in relation to the ex-vessel costof the fish. This trebled cost must bepsssed on to the retailer who passes iton to the consumer. This accounts forthe difference between processor saleprices and ex-vessel prices beinggenerally larger than the differencebetween processor sale prices and retailprices.

Two observations stand out inrelation to retail prices: I) With theexception of whiting, retail prices forall species had a tendency to increase(Table 2); and 2) with the exception ofthe price of whiting, the spreadbetween the minimum and maximumprice was quite large - from 90 centsfor pollock to $1.90 for cod (Table 2).

These two observations acquiregreater significance when prices of fishare compared with retail prices of aselected group of other products. Thetrends of these prices are shown inFigure 5. These prices were collected inthe test stores for each week in whichprices of fish were observed. Two factsstand out in relation to meat andpoultry prices: I) With the exception ofsirloin steak and whole chicken, priceswere rather stable during the course ofthe observations; and 2) the relativespreads between minimum and maxi-mum prices were consistently andmarkedly narrower than price spreadsfor fish. This last phenomenon hasbeen isolated and is shown in the"window" of Figure 5 on selectedcomparative prices.

Comparisons among various retailprice spreads are considered to be sosignificant that they have been plottedagain and are shown in a differentformat in Figure 6. Selected compari-

~

J'jl" 1979

sons make it possible to draw two moreobservations: I) With the exception ofwhiting, the highest price spreadsconsistently occurred for seafood

products; and 2) the prices of seafooditems were generally higher than thoseof chicken and beef.

These observations go a long way to

23

4

Figure 4.-Ex-vessel price of head- on/eviscerated cod and prices of cod filletsat processor and retailer levels.

build wide consumer confidence andloyalty for seafood products. Inaddition, if the per capita consumptionwere inversely related to price, thenpoultry, which has a lower price thanmeat, would have a higher per capitaconsumption, but it does not. It ispossible, therefore, to conclude thatprice of fish is not the major determi-nant of sales, but perhaps much moreimportant is the erratic behavior ofpnces.

These observations suggest that,even assuming a priori a higher cost ofa guaranteed quality program ofseafood sales, the higher cost is nobarrier to the introduction of theprogram to the market. It is better,however, to observe this issue of costsin a separate section and in a morecomprehensive fashion.

Cost Estimates andthe Efficiency Level

This section reports on those costswhich could be determined within thescope of this study. Costs also varyfrom plant to plant, and especially inrelation to the efficiency level of theoperation. Especially as a consequenceof inspection costs, the capacity of thewrapping machine, and transportationcosts, the minimum efficiency level forthe U.S. Grade A fillets is obtainedwhen the production schedule reachesthe level of 10,000 pounds per day. Noeffort was made to determine the upperlimit of this range.

Information on costs was obtainedthrough ad hoc surveys. The basicinformation, assumptions, and calcu-lations for the cost estimates developedin this study are provided in Table 4. Itwas not possible to obtain directinformation concerning overhead costsnor was it possible to estimate themwith any degree of accuracy. Sinceindependent calculations would needto be too broad to fit the specific cases,they would have very little theoreticalor practical value. Entrepreneurs knowtheir own overhead costs and can usetheir costs where appropriate. Thefollowing paragraphs, therefore, at-tempt to provide information which anentrepreneur eventually interested indeveloping a quality control programdoes not have. "

"""

~ ......

././

pattern of prices and the occasional orseasonal unavailability of particularspecies of fish make it rather difficult to

__chicken, whole__ -chicken, cut-up.........chicken, legs_ .•. _chicken, breas!s.......hornburger, 14 % fa!__....._boneless sirloin lip

.. - .. _.. _........ ...... ......./ , ,/

",/./.- ................ _.-._ ..-.. '-'-

/ ........, ...... ". ".~

---RETAIL PRICE

- - - - PROCESSOR'S PRICE............ EXVESSEL PRICE

o1 2 3 4 5 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21TIME (w~sl

Figure 5.--Prices of selected beef and chicken products and pricespreads of these and fish fillets.

3

..........

...........0 I I I I I I I I I I I

I 2 3 4 5 6 7 8 9 10 II 12 13 14 15 :6 17 18 19 20 21TIME (wksl

3

wuocCl.

explain the low growth rate in salesobserved during Phase III of this study.The evidence suggests that the erratic

24

Prototype Processor Costs

Cost estimates given in this sectiondo not relate to the actual costs of theprocessor collaborating in this study.The preparation of U.S. Grade A fishfillets represents only one among manyoperations conducted in that plant. Inaddition, the Guaranteed QualityProgram is still in continuous evolu-tion. The costs of that plant, in otherwords, even if they could have beendetermined with any degree of confi-dence at any particular time in thisstudy, would be of little general value.For the majority of costs listed in thisstudy, it has been deemed moreappropriate, therefore, to try to reachestimates based on a prototype pro-cessing plant which has obtained aminimum efficiency production sched-ule of 10,000 pounds per day. It shouldbe noted that the estimate is onlypossible from observations during thisstudy. In order to obtain an under-standing of the costs involved at theprocessor level to assure U.S. Grade Aquality, cost estimates are given forproducing U.S. Grade A and ungradedfillets.

Table 4.-Cosl estimates for producing one pound oftillets when production capacity Is 10,000 pounds perday.

U.S Grade A fillets Ungraded fillets

Ex-vessel price '$0.29 Ex-vessel price $029Gurry '063 Gurry '0.55Master case 008 Wooden boxes 003Tray, pad. film 0.057 Tm cans, wax paper 004Speclalrzed filleting '004 Filleting '0.03SpecialIzed packing '004 Random packing '003Wrapping machine '0001Inspection '0006Transportation '002 Transportation '002Overhead Overhead

Total '$1 16 Total '$099

As can be seen from Table 4, it costsabout $1.16 per pound to produce U.S.Grade A fillets and about 99 cents perpound to produce ungraded fillets.Thus, it appears that a processor wouldincur an additional cost of 17 cents perpound in order to meet the morestringent requirements imposed by theGuaranteed Quality Program.

Prototype Retailer Costs

Direct labor costs for a prototyperetailer are estimated to be about 15cents per pound, and since about 7cents per pound is saved when filletsarrive at the market in prepackagedform, as was done throughout thisstudy, "net" labor costs amount to 8cents per pound of product.

As stressed above, U.S. Grade Afillets which are not sold by a presetdate should be frozen while still of U.S.Grade A quality and sold as U.S.Grade A frozen fillets. When this isdone, additional savings accrue whichcan be at least as high as 10 cents perpound. Yet, this step was not sufficient-ly explored in the program as devel-oped so far. If retailers elect not tofreeze the unsold items, they mustinclude the normal cost of returns;namely, 8 cents per pound. In that case,the total retailer costs can be estimatedto be 16 cents per pound. It must be

_ ..hiting

__chicken breasts

__cut-up chicken

__chicken legs

stressed that overhead costs are notincluded in this estimate.

Cost to Insureu.s. Grade A Quality

In order to obtain a clearer under-standing of the costs involved toproduce U.S. Grade A fillets, they haveto be compared with the costs involvedin producing ungraded fillets. Tofacilitate direct comparisons, some ofthese calculations have already beendeveloped in Table 4. It is better,however, at this point to recapitulatethe issues and to separate them.

So far, it has been observed thatprocessor costs to prod uce U. S. GradeA fillets are 17 cents higher than forproducing ungraded fillets. At the re-tail level, the situation changes. Here,there are saving in direct labor costs of7 cents per pound due to the establish-ment of the Guaranteed QualityProgram: Packaging and wrapping inretail trays is no longer done as forungraded fillets at the retail level. It isdone at the processor level. Thus, thedifference in costs between the twooperations observed at the processorlevel (17 cents per pound) is reduced bythe amount of savings in labor costs (7cents per pound) experienced by theretailer. The difference in costs betweenthe two operations can therefore be

I Average pnce per pound for the SIX specIes observeddunng thiS study20n the baSIS of following fillet Yields. Cod. 29%. flounder28%: haddock, 38%, ocean perch, 27%, pollock, 36%,whiting 30%JOn the baSIS of following fillet Yields Cod. 37%, flounder30%; haddock, 41%. ocean perch. 27%. pollock, 44%,whiting, 34%4Estlmate based on assumption of 200 pounds per hour at$8.00 per hour5Estlmate based on laboratory expenence of 275 poundsper hour at $8 00 per hour6Estlmate based on assumption of 180 packs per hour at$7 70 per hour'EstImate based on laboratory experience of 240 packsper hour at $7 70 per hour80etaded calculatIOns are available upon request Laborcosts In the operation of the wrapping machine areestimated to be 31 cents per pound9To these costs must be added respective overheadcostsSource Study data

lull,1979

___whole chicken

____ hamburger, 14 % fat

boneless sirloin tip _

______ pollock

________ ocean perch

-----------flounder

____________ haddock

_______________cod

o 2 3 4PRICE ($)

Figure 6.-Price spreads of U.S. Grade A unfrozen fish fillets andselected meat and chicken products.

25

Table 5.-Mark-ups (Overhead costs have to be subtracted from these values).

Processor mark-ups over Retailer mark-ups overEx-vessel prices with Yield factored In processor sale prices

Ocean OceanDate Cod Flounder Haddock Perch Pollock Whiting Cod Flounder Haddock Perch Pollock Whiting

5/10 $062 $068 SO 56 $065 $069 $052 SO 59 $057 $05016 058 060 070 036 099 084 084 07323 062 071 029 049 089 029 064 049

611 058 071 050 SO 54 063 076 079 104 066 0626 063 058 058 065 082 052 099 090 06213 059 015 062 026 1 06 039 084 07320 066 054 059 062 065 062 099 009 058 05227 016 059 050 084 089 067 060

7/6 059 055 059 065 076 079 089 070 05211 061 047 059 054 066 076 086 089 084 05618 049 055 062 072 064 1 19 089 089 061 04925 059 059 056 068 058 092 093 104 074 009

8/1 065 053 025 057 070 059 086 1 14 064 054 $0508 062 047 061 056 065 079 103 094 070 002 05015 041 050 -003 046 060 -034 103 074 075 050 04022 008 050 065 075 069 103 057 048 04029 048 053 041 025 068 -051 1 06 014 059 053 050

9/5 054 050 080 059 070 1 05 086 104 087 05312 $076 086 093 109 070 061 05019 060 048 057 061 068 076 099 103 094 064 061 05026 -003 128 033 061 052 076 076 103 074 057 001 050

Average$049 $057 $051 $057 $064 $076 $066 $090 $078 $070 $049 $048

Overall average. Processor mark-ups. $059 RetaIler mark-ups, $0.67

Note Negative numbers relate to sales at a lossSource Study data

estimated to be about 10 cents perpound. This estimate represents theadded cost of the Guaranteed QualityProgram as determined in this study.

In particular, it must be noted thatthe cost of returns cannot be consider-ed as an additional cost imposed by theGuaranteed Quality Program. Evenunder current practices, retailers tendto discard about 5 percent of thedeliveries; and since these percentagesare assumed to be identical, the cost ofthis item is nearly identical in bothcases.

Indeed, there is the potential thatinstead of suffering the cost of returns,one may obtain additional savings in aGuaranteed Quality Program which isefficiently run. As stressed throughoutthis study, fillets which are not sold oneday before the U.S. Grade A shelf life isscheduled to end should be frozen andsold as U.S. Grade A frozen fillets.(This efficiency measure can hardly betaken with ungraded fillets whosequality may not be suitable for freez-ing). If returns are in fact sold as U.S.Grade A frozen fillets, the cost of pro-ducing U.S. Grade A fillets becomes atleast identical to producing ungradedfillets. The additional cost of 10 centsper pound, attributable to the Guaran-teed Quality Program, is offset by the10 cents per pound that can be saved byfreezing fillets before they reach the endof their U.S. Grade A shelf life andmerchandising them as U.S. Grade Afrozen fillets.

This result should come as no sur-prise. By increasing efficiency andreducing waste of resources, the ulti-mate economic purpose of technologyis to lower costs-or at least to keepthem stable.

Gross Profit Margins

This section deals with profitmargins for processing and retailingU.S. Grade A fillets. It should bestressed that since there are no esti-mates on overhead costs, what can bedetermined are only "gross" profitmargins. They are given for both theprototype processor and the prototyperetailer by the difference betweenmarkups and costs. (Data to makecomparisons with gross profit margins

26

for ungraded fillets were not availableto this study. This lacuna is not crucialbecause those profit margins aregenerally known to the trade.)

As can be seen from Table 5, theaverage markup for the prototypeprocessor is calculated to be 59 centsper pound, and the average markup forthe prototype retailer is calculated to be67 cents per pound.

On the basis of the given costestimates, the prototype processorwould experience a gross profit marginof 35 cents per pound (59 cents minus24 cents) and the prototype retailerwould experience a gross profit marginof 51 cents per pound (67 cents minus16 cents).

The reader is reminded that: I)These estimates refer to gross profitmargins because they do not includeoverhead costs; and, 2) they refer to aprototype processor and a prototyperetailer because cost estimates devel-oped in this report relate to an estimateof a prototype situation. The actualretailer and the actual processorinvolved in this study may have

obtained a greater gain or a lower one;we do not know. Finally, it is to berecalled that ex-vessel prices in Glou-cester are generally 2-3 cents per poundlower than Boston prices, on which thisanalysis is necessarily based. There-fore, if the above gross profit marginwere to be applied only to Gloucesterprocessors, it would need to be raisedby 6-9 cents per pound because whenthe yield is factored in, each cent in ex-vessel price automatically counts forapproximately 3 cents.

Cost-Benefit Analysis of Study

The total cost incurred by this studyover a 2-year period was $218,000. Thiscost has to be assessed in relation tobenefits which, as of the date of thiswriting, can be measured as follows:

I) A large northeastern chain of 234stores has implemented for the secondyear in a row the Guaranteed QualityProgram in nearly all of its stores.

2) A small but aggressive NewEngland supermarket chain has im-plemented the Guaranteed QualityProgram in all of its 21 stores.

'0

Marine Fisheries Rel'iek

3) Two of the nation's largest chainsare now testing the program in anumber of stores.

4) A large northeastern chain hasdemonstrated interest in the Guaran-teed Quality Program and is conduc-ting pilot tests on its own.

5) Two suppliers, one in Gloucesterand the other in New Bedford, are nowproducing U.S. Grade A fillets. Othersuppliers from New Bedford, Boston,Providence, and Gloucester havedemonstrated an interest in the pro-gram and two of these are alreadynegotiating with supermarket chains.

6) Personnel in all of the retail storesinvolved in this study have beenenthusiastic about its procedures andresults. They have indicated, forinstance, that consumer complaints,which are a normal occurrence, dis-appeared completely during the testperiod.

The series of activities has resulted ina gradual but constant expansion ofsales either directly under the U.S.Grade A label or through the adoptionof techniques quite similar to thosedeveloped in this study. At present. inaccordance with USDC inspectors'reports, such sales have reached a levelof about 30.000 pounds per week. Atan average retail price of $2.00 perpound, this amount corresponds to anaverage of $60,000 per week or$3,000,000 per year. A specific study ofthese sales would reveal not only thatthey substantially represent a newproduct on the market, but also thatthey do not displace existing fisheryproducts; such a study would alsoreveal other benefits such as increasedemployment and value added. There-fore, the benefit to cost ratio of thisstudy, based on retail sales alone, isapproximately 15: I. As this enterprise

JuIJ' 1979

is expected to grow, this ratio will growwith time.

A more detailed analysis than iswarranted here would reveal theexistence of many other actual andpotential benefits to be derived fromthis study. In particular, five potentialbenefits need to be mentioned-eventhough no attempt is made to quantifythem: I) Elimination of consumercomplaints, 2) elimination of financialloss to consumers, 3) higher sales, 4)enhanced image of industry, and 5)facilitation of introduction of under-utilized species.

So far, at least two processing firmshave found it advantageous to adoptthose advanced technological methodsand processes which have been ana-lyzed in this study; and experienceshows that such technology can easilybe incorporated into other processingplants. But, more importantly, if someof the economic benefits of the intro-d uction of this program are passedalong to fishermen, the introduc-tion of further technological advancescan eventually affect all processeswhich are related to the harvesting offish.

Finally, the implementation of thisprogram tends to eliminate the lossesthat are normally associated withspoilage throughout the distributionchain, thus resulting in greater utiliza-tion of our seafood resource.

In summary, as a result of this study,the notion of the assurance to theconsumer of high and consistentquality of seafood products has beenintroduced to a small segment of theindustry. And the program, althoughdeserving continuous monitoring andspecific assistance at various criticalpoints, is receiving increasing andwidespread acceptance.

AcknowledgmentsThe authors wish to acknowledge

their gratitude to the following personsand organizations, without whosecollaboration and assistance this studycould not have been prepared: TheEmpire Fish Company, Inc.; theDeMoulas Company and the manag-ers of the test stores; The Stop & ShopCompany and the managers of the teststores; Jake Dykstra, New EnglandFisheries Steering Committee; VernonB. Rix, USDC Inspector, NMFSNortheast Region; Henry McAvoy,Marketing Specialist, NMFSNortheast Region; J. Perry Lane,Frederick J. King, and John J. Ryan,NMFS Gloucester Laboratory; andSalvatore J. Favazza, late ExecutiveSecretary, Gloucester FisheriesCommission.

The authors also wish to acknow-ledge partial financial support for thisstudy from the New England FisheriesSteering Committee's Task Force onFisheries Development.

Literature CitedFederal Register. 1977. Fishery products; clari-

fication and recodification of U.S. GradeStandards. Fed. Regis!. 42:52749-52787.

Kaylor, J. D., and E. J. Murphy. 1969. Com-mercial feasibility of irradiating haddockand cod fillets-I. Quality of haddock aslanded at Boston, Massachusetts. U.S. FishWild!. Serv., Fish. Ind. Res. 6: 139-145.

Machiaverna, A. 1977. Grade A labels boostfish sales by 20%. Supermarketing 32(7): I.

Ronsivalli, L. J., and S. E. Charm. 1975. Spoil-age and shelf life prediction of refrigeratedfish. Mar. Fish. Rev. 37(4):32-34.

___ . C. Gorga, J D. Kaylor. and J. H.Carver. 1978. A concept for assuring theLJuality of seafoods to consumers. Mar. Fish.Rev. 40( I): 1-4

Ryan, J. J. 1971. Theoretical and practicalconsiderations in the development of gradestandards for fishery products. [Fr. andSpan. abstrl In R Krell7er (editor), Fishinspection and quality control: p. 31-34.Fishing '\ews (Books) Ltd., Lond.

Zwiebach, E. 1978. Bashas' flying fish planfreshens section's sales. Supermarket !'iews27( 18), Sect. I.

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