The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

With $200B in annual purchasing power, millennials are on pace to outspend baby boomers by 2017. It is evident that it is increasingly vital for businesses to understand the differences in consumption preferences and patterns between millenials and previous generations, in order to capitalize on market opportunities. One of the key differences with the spending pattern of millennials is their preference for sustainable products, with 75% of millennials willing to pay premiums for sustainability. Community Supported Fisheries (CSFs) is an innovative and disruptive business model that can effectively cater to millennials’ preference for sustainability.

The CSF Model

The CSF model is an alternative business model for selling fresh, locally sourced fish. Traditionally, CSFs operate on a subscription-based model, receiving bulk payments at the beginning of the season from clients who sign up for weekly or monthly seafood deliveries. During the fishing season, fishermen who have agreed to be a part of the CSF catch, fillet, prepare, and package their fish and deliver them to pick-up locations, usually within 24 hours of the fish reaching the dock. For consumers, the CSF model provides easy access to fresh, high quality fish while supporting local businesses. At the same time, fishermen are able to cut out middlemen such as processors in order to earn higher margins.

CSFs are responsible for delivering products to customers at select drop-off locations, where consumers within a certain geographic area will congregate to pick up fish at a prearranged time. However, due to the distance from fishermen to customers, transportation costs account for approximately 40% of total costs for most CSFs. In fact, according to Dock to Dish, a CSF operating in New York, fisheries need almost 450 individual subscribers to cover operating costs. As individual subscribers may span a vast geographic area, many drop-off locations are usually necessary. These high transportation costs contribute to the difficulty of making the modern day CSF model profitable.

Sales and administration expense, inventory costs and other operational expenses are other costs associated with running a CSF. In a traditional fishing business, these costs can be partially passed on to middlemen. However, in a CSF, fishermen are forced to take on these costs themselves. Consequently, many CSFs struggle with managing these costs, due to the fishermen’s lack of business knowledge and experience. For example, the logistical side of the business overwhelmed Dock to Dish’s fishermen to such a degree that their costs amounted to twice as much as their revenues. While fishermen only needed to catch fish before implementing the CSF model, they must now also find, manage, and coordinate hundreds of customers just to break even. Consequently, Dock to Dish decided to implement a restaurant-supported model in an attempt to simplify business operations.

New Alternatives to Navigate Troubled Waters

The restaurant-supported fisheries model simplifies customer relationship management and eliminates the need to process fish. The majority of fine-dining restaurants cut and prepare seafood in-house, thus, CSFs no longer need to process the fish, which can amount to 27% of total costs. Shifting to such a model effectively increases purchase volume per customer and improves the predictability of demand compared to focusing on individual subscribers.

Partnering with a CSF is something restaurants can highlight to demonstrate their involvement in supporting local businesses as well as their commitment to sustainable seafood practices. For example, restaurants such as Le Bernardin in New York and Narisawa in Tokyo have earned and maintained Michelin stars based on their exclusive, locally-sourced seafood menus. Moreover, because deliveries from fishermen are usually made within 24 hours of making the catch, restaurants will be able to receive the freshest, highest quality seafood.

There are, however, limitations to restaurant-focused CSFs. Transportation costs remain high as CSFs must still deliver to an average of 14 restaurant locations compared to the average 15 drop-off locations for a traditional mid-sized CSF, leading to only a 7% decrease in transportation costs. Additionally, restaurants’ order volumes are limited by their average seating capacity of approximately 34 tables per restaurant. While catering to this capacity would be more efficient than targeting individual subscribers, further efficiencies can be reached if a larger business partner can be found. Therefore, while catering to restaurants decreases processing costs, serving customers on an even greater scale will be a more lucrative opportunity.

Adjusting the Sail

An untapped market, namely luxury hotels, exists for CSFs looking to simplify operations, lower costs, and stabilize cash flows. CSFs currently struggling with profitability can target luxury hotels within the top 15% Average Daily Rate bracket, a measure of the average rate paid for rooms sold. Targeting luxury hotels offers the same benefits as targeting restaurants, such as the elimination of processing costs. However, hotels have even greater demand for fish than restaurants on a per location basis. It is projected that just two luxury hotels can provide sufficient demand for a CSF to operate profitably. This would reduce transportation costs by 86% compared to the restaurant-focused CSFs by decreasing the number of delivery points.

Changes In The Hotel Scene

There is an increasing number of younger, sustainability-conscious visitors to luxury hotels who put less emphasis on brand heritage and more on experience. Millennials are now the largest group within the American workforce and are nearly twice as likely to travel for business as baby boomers. As a result, hotels must update their value proposition to account for this change in customer demographic. Due to the intense competition in the hospitality industry, hotels must offer more novel and higher quality guest experiences to increase ratings and attract more millennial visitors.

Food & Beverage Operations (F&B) are critical to the success of a luxury hotel, comprising a third of an average luxury hotel’s revenues. F&B can be broken down into restaurant operations within the hotel, room service, and banquet catering. Hotel F&B demand is driven primarily by three factors: average restaurant capacity, the number of restaurants per hotel, and demand from banquets. Overall, a single large hotel with more than two internal restaurant operations requires approximately six times as much raw ingredients as a single restaurant.

Within the luxury travel sector, maintaining high ratings is a difficult endeavour due to the high expectations of reviewers, changing consumer demands, and the disproportionately negative impact that a few poor reviews can have on a hotel’s success. Luxury hotels are incentivized to highlight their ingredient origins as a means of enhancing their marketing efforts and further connecting guests to their locale as it builds a “justification of purchase”. Such a connection made by hotels is incredibly important to millennials, who believe that sustainability, naturalness, and craftsmanship are integral to a luxury experience.

Taking The Bait

With luxury hotels looking to differentiate from competitors, F&B stands as a major function where changes can be made to improve guest experiences. Strong F&B is one of the key drivers of a hotel’s revenues, profits, and overall reputation - something that is critical for luxury hotels to maintain and gain market share. The locally-sourced, fresh fish that CSFs offer is especially relevant to the millennial demographic that luxury hotels strive to attract, providing a competitive advantage to their F&B operations.

Compared to serving restaurants or individual subscribers, targeting luxury hotels enables CSFs to reduce expenses by 46% or 62% respectively, ultimately making hotel-supported fisheries profitable with approximately a 68% profit margin.

In addition, a study showed that offering locally-sourced seafood can drive a restaurant’s rating up by between 0.25 and 0.5 stars. This jump in ratings is attributed to the increased level of perceived “authenticity” that comes with locally-sourced seafood. Such increases correlate to 3-5% increases in the Average Daily Rate.

Action Plan

When approaching hotels, CSFs must highlight their ability to deliver fresh fish that travels from boat to drop-off location within 24 hours - something that no other supplier can achieve. Due to seasonal changes in seafood availability, payments should be arranged in seasonal contracts and collected on a weekly basis to stabilize cash flows. Hotels should also be made aware that CSFs offer shorter notices for order changes and greater selection of fish as compared to typical national food distributors.

To successfully transition into serving luxury hotels, CSFs will need to hire and allocate dedicated agents to manage customer relations. As the number of clients decreases when moving to the hotel-supported fisheries model, the importance of servicing each client grows. Acquiring external competencies to help manage the financial aspects of running a CSF is important, especially when the fishermen in the CSFs have no prior business background. Each agent will be in charge of generating sales leads as well, and the number of agents can be increased as more hotels are taken on as clients.

In the long-term the CSFs in the country should develop a certification, similar to the Rainforest Alliance Certified™ Seal, which can be given to businesses that source fish from CSFs. This will help CSFs gain legitimacy when trying to acquire potential partners. As well, hotels will be able to better advertise the fact they partner with CSFs, by putting the certification on their menus and promotional items.

Set Sail

Traditional CSFs and restaurant-supported fisheries should consider shifting their focus to becoming hotel-supported fisheries, as the simplicity and profitability that fishermen gain through the model, combined with the autonomy that they retain, provide an attractive alternative for the community. If successful, the impact of hotel-supported fisheries may be felt throughout the foodservice industry and amongst various consumer demographics. If fishermen are able to establish and validate themselves in the luxury sector, they will be able to maximize awareness for CSFs across a larger group of consumers, and reinforce the quality of their farm-to-table products.

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