Overfishing is creating problems for Japan’s seafood industry –
Despite earnings growth and rising stock prices, Japanese seafood companies are less financially healthy than they appear. To avoid the impact of overfishing and maintain growth, they must shift to sustainable strategies, writes François Mosnier, financial research analyst at Planet Tracker.
Does the apparent financial health of Japanese seafood companies mask deep concerns about overfishing? Planet Tracker examined the financial data of the world’s largest seafood companies and concluded that some are maintaining their earnings and inflating their stock prices through management strategies that are reaching their limits. In fact, we believe that the financial data of the companies most exposed to seafood are starting to reflect the environmental reality of the oceans.
More than 55 percent of the world’s oceans are exploited for industrial-scale wild fishing, covering an area four times that of land-based agriculture. Seafood production is almost entirely dependent on natural resources which, due to overfishing, are dwindling. The biggest seafood companies source their supplies from all over the world, so their impact on the world’s oceans is huge.
Among the top 100 seafood companies in the world, Japan is the most represented country. However, between 2010 and 2019, wild catches declined in the country, as did aquaculture production and seafood imports. Changing consumption trends and pressure on marine resources have led to this decline. decline, which led to an 85 percent drop in Japan’s share of world seafood production, including aquaculture, between 1985 and 2017, from 13.4 percent to 2.2 percent .
These findings are part of a Planet Tracker survey of the financial condition of the Japanese seafood industry. We analyzed over 800 financial data points for 70 Japanese publicly traded companies exposed to seafood, producers of seafood. food to retailers and restaurants.
The biggest seafood companies source their supplies from all over the world, so their impact on the world’s oceans is huge.
Surprisingly, despite the decline in the production, consumption, imports and farming of seafood, the profits and share prices of these companies increased between 2010 and 2019. Yet our research reveals that this ‘is the result of unsustainable management strategies. Foreign expansion, acquisitions, vertical integration, cost reduction and debt reduction have all enabled companies to bypass natural capital constraints imposed by declining production and consumption of fish in their domestic market.
The proportion of assets held abroad by these 70 companies almost doubled between 2010 and 2019, reaching an average of 10%. As a result, foreign income grew eight times faster than domestic income. Overall, the revenues of these companies grew by an average of 2.1% per year.
As interest rates paid by companies halved and companies deleveraged, net income rose and stock prices rose 75% on average. In other words, investors have implicitly rewarded Japanese seafood companies for using management (rather than sustainability) strategies to offset the financial impact of overfishing.
Businesses are starting to pay the price
Other financial approaches to growth are still possible, although debt interest levels can no longer be substantially lowered and there are limits to both vertical integration and cost reduction. More importantly, our in-depth analysis of the financial data of the 70 companies revealed that natural constraints are having an impact.
Domestic sales by seafood retailers and wholesalers declined, and restaurants with high seafood exposure saw sales and margins decline. In contrast, the most diverse grocery retailers experienced solid revenue growth.
Such trends have led industry capital spending to more than double as a percentage of sales between 2010 and 2019, indicating that companies are looking for ways to rejuvenate revenue growth through investment. Yet while seafood retailers and wholesalers actively invest outside of seafood, their operational cash flow from this declining resource is insufficient to cover investment costs, resulting in increased debt. to finance investments.
In addition, the companies most exposed to seafood are the most exposed to very long-term debt. About 91 percent of seafood producer debt is due in 2030 and beyond, but visibility into fish production and therefore profit generation over the next decades is limited; undermining confidence in their debt servicing capabilities.
It’s time for companies to act
However, sustainable growth is possible for the Japanese seafood industry. Planet Tracker has found five key drivers that can positively impact financial performance while encouraging both growth and sustainability. These are:
- In the short term, improvements in profitability can be achieved through the implementation of traceability systems, and in the longer term through the disclosure and reduction of the environmental costs of aquaculture.
- Income growth can be achieved through the development of closed cycle aquaculture operations, sustainable food, plant-based seafood, laboratory-grown seafood and credible certified products, as well as a reduction in bycatch and ghost fishing.
- Operational cash flow can be improved by reducing food waste
- At the same time, a reduction in overfishing can improve yields through the participation of fishing companies in a blue bond system, where investors finance temporary cash losses caused by the temporary and significant reduction in the volumes of wild catches. A blue bond is a debt instrument issued to raise capital from impact investors to finance marine and ocean projects that have positive environmental, economic and climate benefits. Fishing fleet owners should also gradually abandon and depreciate their bottom trawlers (one of the less durable types of fishing vessels due to their impact on the seabed) to make the sector lighter and more sustainable.
- Finally, research shows that the market rewards companies that demonstrate high performance in corporate sustainability. With this in mind, companies should disclose the volumes of seafood processed by species and origin. They should also implement independently verified sustainability policies that inform corporate and M&A strategies.
There are already signs that Japanese seafood companies are warming to some of these recommendations. For example, members of SeaBOS, a group of ten of the world’s largest seafood companies, including four from Japan, have agreed on a number of sustainability goals in October 2020 to be achieved by the end of 2021. SeaBOS represents more than 10 percent of the global market. seafood production, which makes its impact substantial. That said, it is essential that other seafood companies follow suit.