Resilience Series Part 3: Bakkafrost
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We’re now onto part 3 of our resilience series. We’ve already looked at TFF Group and Lotus Bakeries. Today, we’ll be studying Bakkafrost, one of the biggest salmon farming companies in the world.
Bakkafrost
Background
Bakkafrost is a salmon producer, founded in the Faroe Islands. Here is yet another family-run business that is extremely vertically integrated. This one might even rival TFF Group in that regard.
Bakkafrost was started in 1968 by Hans and Roland Jacobsen. Three years later, the third brother, Martin, joined the operation. The trio built two processing plants where fishermen would bring herring and then the brothers would gut and cut the fish to sell to fish markets. In 1979, the company pioneered salmon farming in the region and then in 1995, it started getting into the packaging business to sell to grocery stores and restaurants. This segment is called VAP (value added product) and it is rarely profitable but it bolsters the resilience of the company. Sometimes, slack is required in a system to give it flexibility. For instance, when COVID hit, this segment allowed the company to absorb some of the shock by shifting more production to grocery stores rather than Bakkafrost’s main fish market segment.
The company’s current CEO is Regin Jacobsen, Hans’s son and the CFO is Høgni Jacbonsen, Martin’s son. Talk about a family run operation!
Vertical Integration
What is most interesting about Bakkafrost to me is just the level of vertical integration. The company owns every piece of the entire operation besides the grocery stores. From the fish eggs (roe), to the farming, to the boats that catch the fish, to the processing plants, the packaging, a stake in a lumpfish farm so that salmon don’t get lice, and they even own a Boeing cargo plane so they can fly the finished product to their customers (I already regret making this joke but is anyone up for fly fishing?)
In 2014, the company released an expansion plan to create one giant state-of-the-art facility and to build a third wellboat. Prior to the delivery of this wellboat, the company had two boats with 75 tons of space, each, for fish. This new boat, which was finally finished recently, has a capacity of 1,000 tons. That’s one thing that all three companies we’ve profiled have had in common – they aren’t afraid to invest in capital expenditures. Owning the entire value chain costs money…a lot of it. But by gradually expanding, the company’s moat and control over the customer experience deepens significantly.
The company has three business segments, farming, VAP and FOF (fishmeal, oil and feed). Each of these segments strengthens each other. Let’s go through each step of the value to see this at work.
Fish feed
It starts with the company creating its own fish feed. It uses its own fishing boats to catch small fish that are the basis for feeding the salmon. Bakkafrost’s surrounding ocean is known for its nutritional content so that their own salmon grow healthily.
Broodstock
This is the breeding stage of the value chain. Bakkafrost has these huge trays of eggs that become alevins that then eventually turn into smolts, which is when the salmon go out to the ocean, in huge nets. When you think of broodstock, think of roe, or fish eggs (as an aside, caviar is not simply any type of fish egg, it’s sturgeon eggs. Otherwise, it’s considered roe.)
Hatcheries
After the fish eggs hatch, they grow into little tadpole-like creatures and then they get bigger and bigger. Until the fish reach the smolt stage, they are inside large indoor containers swimming around, getting fat on the in-house fishmeal.
Farming
Next is the farming stage, where the fish are transported from the tanks out into the ocean. They are fed multiple times per day until their cohort reaches an acceptable size and weight. On average, the fish live in these spacious nets for about 17 months until they are harvested. The harvesting boats have these huge tubes that suck the fish from the nets into large freshwater containers on the boat.
Boats
The company has a total of 15 vessels (8 in Faroe Islands and 7 in Scotland) but only a few of them are specifically made for smolt transport. A couple more are used for harvesting and a couple more are used for net cleaning and de-lousing. Yes, sea-lice is a big problem that needs to be monitored. Bakkafrost just received its latest well boat, which is a multi-use boat that has more space than all of its harvesting and smolt transport boats, combined.
Harvesting
Aka, killing. So yeah, there’s that. You had to see it coming!
Processing
This is where the fish are fileted. The whole plant is a system of conveyor belts with dead fish zooming around. Value added production is a whole other revenue segment because it operates a little differently. Rather than whole fish that are sent to markets, the company actually has the infrastructure to do skinless and boneless cuts and then sell these portions to restaurants and hotels, mainly in Europe. The VAP segment also has fixed, long-term contracts rather than selling on the spot market. While it’s not necessarily very profitable, it stabilizes the business and provides optionality. That’s why the company is committed to using 40% of its production volumes for this segment.
Packaging
Everything is done in-house. The fish that are being sold to fish markets are put on ice in huge styrofoam boxes that were designed by the company. And then shipped off to various customers.
Logistics and sales
The company is currently finalizing the process of buying a Boeing jet so that US customers can be serviced in less than 24 hours. Bakkafrost also has a team of salespeople that create direct relationships with all sorts of global fish markets, grocery stores, restaurants, and hotels. Each part of the process decreases dependence on other points in the value chain. That’s the company’s explicit strategy – to have the longest value chain in the industry.
Here is a great video that summarizes all of this (if you’re a visual learner like me).
Wrapping Up
Phew, that was a lot! But going through the entire value chain was important because you can’t understand the company without realizing that they want to own each and every piece of the ecosystem. Salmon fishing is hard enough and yields can be volatile based on conditions and breeding batches, so the company realized they could have much more control of the process and thereby save money in the long run. While it’s expensive to do this, it creates a moat.
Bakkafrost has an exceptional competitive position, but even this business isn’t bulletproof. The Faroe Islands government just passed a 20% salmon tax so Bakkafrost products just got 20% more expensive for customers. Management says that most customers haven’t been deterred but it’s a testament to never truly having control of everything. Salmon is a rather large economic player in the Faroe Islands so what better way to increase national revenue? In fact, fisheries account for upwards of 90% of the exports for the tiny nation and account for about 20% of GDP! So this is quite an important piece of legislation.
In light of the law, the company has announced it will be scaling back investment. Instead of building a new broodstock facility, it will repurpose one of its hatcheries. Bakkafrost is also putting its offshore farm idea on hold. This is on the back of the company doubling down on its Scotland operations too. I don’t think it’s a coincidence that the company has been so focused on Scotland and then the Faroe Islands law passed just a few months ago. I think management had been in talks with the government for a while. The problem is that the Faroe Islands operations are much more efficient so it will take several years to replicate the success in Scotland. But the tax change wasn’t the only reason that Bakkafrost is focused on Scotland. The company sort of grew out of the Faroe Islands. There is no groundwater available in the Faroes and they were running out of fjords to increase production. Basically, if they want to hit their growth and production goals over the next decades, they have to start expanding beyond the Faroe Islands. And that’s exactly what they’re doing with Scotland. Currently, Scotland is about half the size, in terms of production, compared to the Faroe Islands operations, but it will likely be a growth driver.
This is nothing mind-blowing but it’s another thing I’ve noted from this resilience series — these companies steadily diversify into other geographies and other business lines. I guess it’s just a natural consequence of compounding for decades — at some point you saturate one market so it’s time for the next one.
Bakkafrost was a fascinating company to study because of its commitment to vertical integration. This route is more expensive and inefficient but it does seem to create a much more resilient company.
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