## MANAGEMENT’S DISCUSSION & ANALYSIS (CONT’D) 

In the long-term, further enhancing policies related to sustainability, environmental and social compliance both within High Liner Foods and its supply chain may add to High Liner Foods’ costs and reduce margins. 

## 8.12 Industry Consolidation 

Senior management accountability: Keith Decker, President and COO; Mario Marino, President and COO, Canadian Operations 

Board oversight accountability: Board of Directors 

Grocery retailers, wholesalers and food processors in North America have consolidated and continue to consolidate. In Canada, five major food retailers control, in aggregate, more than 72.5% 2  of the retail food sales market. In the U.S. retailers are also consolidating. Ten retail operators now control approximately 66% 3 of U.S. retail grocery sales. Grocery retailers typically charge suppliers listing or “slotting” fees for shelf space on a per product basis for new products, and also require money to support product advertising and promotions. Arising out of these consolidations we have experienced demands from customers for increased listing and promotional incentives and improved payment terms. However, as a supplier of Canada’s leading frozen seafood brand and a leading supplier to the U.S. food service channel, we expect to remain an important supplier to grocery retailers and food service distributors. We are focusing efforts on brand strength, new products, procurement activities, and superior customer service to ensure we outperform competitors. Consolidation makes it more important to achieve and maintain a brand leadership position, as consolidators move towards centralized buying and streamlined procurement. We are in a good position to meet these demands, since we offer quality, popular products under leading brands and have the ability to meet the customer service expectations of the major retailers. Given our brand strategy, customer consolidation is an opportunity for High Liner Foods to grow in step with customer growth. 

Consolidation of customers is expected to result in some consolidation of suppliers in the U.S. seafood industry. The supply of seafood, especially in the U.S. food service market, is highly fragmented. Consolidation is needed to reduce costs and increase service levels to keep pace with the expectation of customers. We are always looking for acquisition opportunities to leverage our current strengths. 

## 8.13 Increase in Seafood Production from Asia 

Senior management accountability: Paul Snow, Executive Vice President Procurement 

Board oversight accountability: Board of Directors 

For more than a decade, many seafood companies, including High Liner Foods, have diverted production of certain primary produced products to Asia, and China in particular. Asian processing plants are able to produce many seafood products at a lower cost than is possible in North America and in other more developed countries. 

These plants are also able to achieve a better yield on raw material due to the use of more manual processes and they produce excellent quality. Land-based seafood primary processing plants in developed countries, such as Norway, Iceland and Canada, have found it extremely difficult to compete with Asian processors, especially when they compete with them for the raw material on global markets. We anticipated this trend ahead of our many competitors. It was part of our rationale for exiting the primary processing and fishing businesses, and the trend allowed us to develop opportunities that are now contributing to our growth strategy. We chose to work closely with selected Asian suppliers to become an important customer, especially for cod and haddock suppliers. We have made it possible for these suppliers to meet our exacting quality and manufacturing standards and in turn we have access to the variety and volume of seafood products, including a significant amount of wild-caught product from the Atlantic and Pacific oceans that we need to fulfill our brand strategy. We have taken advantage of this trend and moved a significant portion of our processed shrimp production from U.S. co-packers to Asian suppliers. Although we have not seen this trend significantly affect products produced in our North American plants, we continue to look at alternate options for the production of highly labour intensive product. 

## 8.14 Competition Risk 

Senior management accountability: Mario Marino, President and COO, Canadian Operations; Keith Decker, (Interim) President and COO, High Liner Foods (USA) 

Board oversight accountability: Board of Directors 

High Liner Foods competes with a number of food manufacturers and distributors and its competition varies by distribution method, product category and geographic market. Some of High Liner Foods’ competitors have greater financial and other resources than it does and/or may have access to labour or other products that are not available to High Liner Foods. In addition, High Liner Foods’ competitors may be able to better withstand market volatility. There can be no assurance that High Liner Foods’ principal competitors will not be successful in capturing, or that new competitors will not emerge and capture, a share of the Company’s present or potential customer base and/or market share. 

In addition, it is possible that some of High Liner Foods’ suppliers or customers could become competitors of High Liner Foods if they decide to distribute their own food products. Furthermore, if one or more of High Liner Foods’ competitors were to merge or partner with another of its competitors, the change in the competitive landscape could adversely affect High Liner Foods and its results. Competitors may also establish or strengthen relationships with parties with whom High Liner Foods has relationships, thereby limiting its ability to distribute certain products. Disruptions in High Liner Foods’ business caused by such events could have a material adverse effect on its results of operations and financial condition. 

