Hormel's points of differentiation

by Keith Nunes
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The meat and poultry industry has undergone a dramatic transformation during the past decade, as the market’s leading companies have transitioned from selling commodity oriented products to branded, value-added items. With its Jennie-O and Spam brands, Hormel Foods Corp., Austin, Minn., has been a leader in the market, but others have horned in on this segment.

"We feel we are in a really good situation to compete," Jeff Ettinger, chairman, president and chief executive officer, told Food Business News. "We have chosen to have vertical control of supply in both turkey and pork. We gear our level of supply to that level of support from our value-added business. We have never tried to be a big commodity player, a seller to other operators.

"By the same token, we don’t want to be dependent on those operators for buying raw materials. For the scale we have we run our facilities at good capacity utilization. We are able to obtain the hogs we need to keep those plants full, so we don’t see any disadvantage in that regard."

To differentiate itself in the market, Mr. Ettinger said the company focuses on the development and production of "higher value-added" products.

"If you just look at classic ham, hot dogs or raw bacon, those are products that have been around long enough that there are a lot of companies making similar products," he said. "That means it is a lower tier value-added item. They are still value-added items consumers enjoy, but they are not the higher order. Now if you get into dry sausage, for example, that takes more unique (processing) capabilities. Others include refrigerated entrees, microwavable, shelf-stable entrees and ethnic items. Those to us might be higher order value-added that we have had more success with than many."

Two successful product lines Hormel Foods has introduced during the past few years include its Jennie-O Turkey Store Oven Ready product, and the recently launched Hormel Natural Choice line. Launched in the fall of 2004, the Oven Ready product allows consumers to take a whole turkey from the freezer and cook it. There is no thawing involved. What makes the product unique is Hormel’s "fool-proof" packaging technology that allows the turkey to be cooked in the package.

Hormel Natural Choice is a line of deli products that feature no preservatives, artificial flavors, color, nitrates or nitrites. The products are processed using high-pressure pasteurization, a technology that allows the company to maintain product shelf-life but forego the use of preservatives.

A petition submitted to the U.S. Department of Agriculture by Hormel Foods this past October seeking to define the labeling term "natural" was the impetus for the agency to begin the rulemaking process in an effort to develop a definition for what constitutes a natural product.

With regard to product development, Mr. Ettinger said Hormel is trying to develop a strong point of differentiation up front.

"We try to have proprietary systems or push for unique flavors," he said. "Secondly, that is where the confluence of products and brands is so important. We think we have brands that are logical vehicles for these products. With our marketing and advertising, we will many times feature our newer items. Jennie-O Turkey is a good example. We spent quite a bit of our advertising budget for Jennie-O Turkey Store supporting the Oven Ready product line, which in terms of shear dollar scale is still relatively new in its life cycle. It’s only on its third holiday season. So, on a spend vs. results area, if you were just trying to justify it just on that product line you might not do that. But we recognize that the Oven Ready innovation really plays well with our overall brand.

"That is what we want our brand to stand for. We want consumers to think of us as delivering clever innovations so it has a spillover to our entire portfolio and not just our Oven Ready items.

"When we develop new products the two things that have to be there are flavor and convenience. And then a third thing is addressing the health and wellness equation. We do believe our Natural Choice line addresses that quite well. Not only did we just roll out new items, but we are studying it in other parts of our business to see what would be logical extensions."

Differentiation by acquisition

During 2006, Hormel Foods acquired three companies: Valley Fresh, Inc., a processor of canned chicken; Provena Foods, Inc., a pepperoni manufacturer for the food service segment; and Saag’s Specialty Meats, a sausage processor. The goal of the acquisitions, Mr. Ettinger said, is to enhance current operations rather than transform the company.

"We really look to acquire companies that are anywhere from $20 million to over $300 million," he said. "The Turkey Store deal was our biggest at $330 million. Not that we wouldn’t do a deal higher than that, but we are not seeking a transformational deal and we have had good success with these smaller deals.

"We look for companies that have product lines that complement businesses we are already in, and in each of those cases they are all slightly different stories. With Valley Fresh, we were already in the chunk canned ham, chicken and turkey segment. We were a leader in the ham and turkey segment, but those are not leading parts of that segment, chicken is. The Hormel branded chunk chicken was only a No. 4 or 5 brand. Valley Fresh came on the market and they did have the leading share. Canned chicken is right next to our other canned items, like our stews, chilis and Spam, so it was a very nice fit for us as far as being able to reduce our cost of goods and give us a stronger market share.

"Saag’s is a product that is more the classic, branded higher-end product we think is somewhat regional, but we hope to carry across the U.S. with our national sales force. That is one we do expect to expand.

"Then Provena was really more of a capacity play and somewhat more of an orientation toward the food service side of the business. They don’t really have a retail brand and we already have the dominant retail share with Hormel pepperoni. There we had been considering the expansion of one of our own plants and the business became available. We actually got more capacity for the money than if we built our own plant. In addition, it came with a book of business we can grow from, so it was a nice fit as well."

Clouds on the horizon

In the wake of higher input costs, Hormel Foods is in the process of expanding its operations by integrating three recently-acquired companies and creating a differentiated product line. In February, the company issued its first-quarter results for 2007, for the period ended Jan. 28, and posted net income of $75,325,000, equal to 55c per share on the common stock, compared with $69,276,000, or 50c per share, for the same period during fiscal 2006. Sales for the quarter were $1,504,083,000, which compared with sales of $1,415,933,000 for the same period during fiscal 2006.

Mr. Ettinger said the sharp rise in the grain markets has added a new dynamic to Hormel’s business.

"We anticipate higher grain costs will continue to burden our turkey operation and we are working hard to find ways to offset this extra expense, including through advances in pricing," he said. "At this time, we are maintaining our fiscal 2007 guidance of $2.15 to $2.25. Our guidance range for the second quarter of fiscal 2007 is 47c to 53c per share.

With regard to input costs, Mr. Ettinger does not foresee lessening pressure anytime in the near future.

"The key driver for us is corn and more recently soy meal, following it up with some questions about acreage," he said. "Unlike a single year equation, where corn is being driven by weather or carryover stocks, we see all of the ethanol plants coming on line, a number of them are in our region of the country. We don’t see any signs of a wavering in terms of national policy as far as subsidizing ethanol facilities. So we feel we need to run our business prudently and we need to factor that in how our pricing needs to be going forward. We anticipate costs to be at the level we have today."

This article can also be found in the digital edition of Food Business News, April 3, 2007, starting on Page 26. Click here to search that archive.

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