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Sales of loins from Regal Springs tilapia in Costco Inc. are going so strong the retail giant is now selling the product under its Kirkland Signature brand.

The sales volume of the tilapia loins, which have risen from one million pounds in 2005 to an estimated six million pounds for 2010, are at such a level the line has the volume to come under the Kirkland brand, said Regal President Mike Picchietti.

Costco is now working direct with U.S.-based Regal, cutting High Liner Foods -- which acted as supplier up until the start of 2009 -- out of the arrangement.

“Going Kirkland is an honor,” Picchietti told IntraFish. “You don’t make Kirkland until certain parameters are met.”

The volumes have to be high enough, the source has to sustainable and rigorously reviewed by Costco’s team and the quality has to be consistent, he said. “When a product can get the a Kirkland label -- it is like the mafia -- you are a made man, you are a made product.”

This will also mean the product can be sold globally, he said. “We expect it to be in the U.K., in fact.”

The range has become so big that it became necessary for Costco to work direct with Regal, a loss for High Liner.

However, High Liner had five years of sales out of the business, said Picchietti. “When the ultimate buyer says, ok guys, everyone has had their day, the producer and the seller need to get together.”

"It was decided a year or two ago, but we wanted to make sure High Liner was treated properly," he said.

Dealing direct opens up communication between the buyer and producer, he said. “You need to be on top of a business of this size.”

It also means club store Costco can drive down costs and pass these on to its members, he said.

Supplying the loin business, which requires larger fish, is possible for a number of reasons.  Firstly, Regal Springs’ tilapia are grown in cages, which means they grow bigger than the pond-reared tilapia from China, the world’s major supplier.

Its tilapia are also reared on fishfeed and the company’s farm in Indonesia is on the equator, which means the water is warmer for 12 months of the year and, again, the fish grow larger than fish from China which is in the northern hemisphere.

These factors combined with Regal’s vertical integration make the loins possible and this model “pretty hard to duplicate,” said Picchietti, "especially when you consider our flavor advantage profile against China pond-raised fish."

“Regal had to differentiate itself from China who can sell fillets at a 30 percent lower price than Regal,” he said.

But producing and marketing the loin is only half of the story. You have to balance pricing by making the bottom half of the fish marketable, said Picchietti.

High Liner and Trident Seafoods are working with Regal Springs on processing and marketing the bottom half of the fish, creating value-added products.

“We call it a portion. It’s the same meat as the loin, just thinner,” said Picchietti. This makes it suitable for breading and for other value-added products where flavor is added.

The portion has an ideal surface to weight ratio making it ideal for marinades and breading, Picchietti added.

Despite losing the loin business, High Liner will continue to work with Regal on the portion business, he said.

Demone philosophical on loin business loss

High Liner CEO Henry Demone told IntraFish the company was a "victim of the success” of the loins.

Costco makes “no secret” of its policy to convert lines to private label Kirkland Signature once sales reach a certain volume, he said.

When sales volumes hit that level in the second quarter this year, Costco went direct to Regal Springs.

“Costco is sitting there saying, 'We are buying millions and millions of pounds of tilapia loins from High Liner who is buying from one supplier,'” said Demone. “They make no secret of their policy to go to Kirkland Signature when products meet a certain sales threshold.”

High Liner continues to have a “strong” relationship with Costco and also to supply value-added tilapia and other species into the club store.

“We continue to have a great business with them. It was one of those things when the SKU (stock-keeping unit) got so big,” he said.

Costco worked with High Liner and Regal Springs “very professionally,” during the handover.

“You don’t like to see it happen, but when these things happen you like to look forward and try and enhance the relationship. I think that has happened,” he said.

High Liner will continue to work with Regal Springs and Costco on selling the rest of the tilapia, aside from the loin. The use of tilapia as a raw material in other value-added products is also growing, he said.

Analysts covering High Liner are also positive, citing the strong prospects for new business development.

“New business is expected to make up the majority of the loss of the tilapia loin business,” said Michael Mills of Beacon Securities.

Mills is rating High Liner as buy with a target share price of $13.5 (€10.55), from its current level of $11.98 (€9.36). Analyst Robert Gibson, head of research with Toronto-based Octagon Capital Corp also rates High Liner as buy, with a target price of $13 (€10.16).