Adapting to a new reality

by Keith Nunes
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The rapid, unprecedented rise in feed costs during the past 18 months has forced meat and poultry processors to adapt. Internally most, if not all, companies have executed efficiency programs in an effort to better manage costs while others have shuttered facilities, sold assets or trimmed portions of their product portfolios that do not fit their core business strategy.

Externally, meat companies, both large and small, also have embarked on initiatives to diversify their businesses in an effort to minimize the impact of lost sales due to the need to raise prices while also dealing with the ramifications of a difficult economy. Tyson Foods, Inc., Springdale, Ark., the world’s largest meat processor, has taken several steps to adapt to the new reality of higher commodity prices and a sluggish North American economy.

In an interview with Food Business News back in February, Richard L. Bond, president and chief executive officer of Tyson Foods, said he saw "tremendous opportunities" to invest in China and India.

"India is an area where some people will tell you it will have a greater population by 2050 than what China has," he said. "It is those types of opportunities that lead us to believe we can, through acquisition and organic growth, have substantial growth as we go into 2010 and beyond."

Since February, Tyson Foods has made acquisitions and entered into joint ventures in China, India and Brazil with the intent of diversifying its business opportunities around the world. In early September, Tyson Foods finalized a joint venture agreement involving poultry operations in eastern China. The agreement is with the Shandong Xinchang Group, a processor with estimated 2009 sales of $345 million.

"Poultry is the second leading meat protein source in China behind pork and continues to make significant gains in consumption," said Rick Greubel, group vice-president and international president for Tyson Foods. "This joint venture will enable us to help meet China’s appetite for poultry, which has been growing faster than the existing domestic supply."

The agreement is Tyson’s third joint venture poultry operation in China. The company also has majority interest in a chicken further processing facility in Zhucheng, Shandong, and majority interest in a poultry complex being developed in Haimen City in the Jiangsu Province near Shanghai.

In June, Tyson Foods also purchased 51% ownership of Godrej Foods, Ltd., based in Mumbai. Godrej Foods is a subsidiary of Godrej Agrovet, Ltd., one of India’s leading agribusinesses. The joint venture between Godrej Agrovet and Tyson is called Godrej Tyson Foods. Annual sales for the venture initially are expected to be approximately $50 million and are anticipated to grow as operations are expanded. The venture includes two chicken processing plants that have a combined production capacity of 60,000 birds per day and approximately 1,000 contract production workers.

Smithfield Foods, Inc., Smithfield, Va., also further diversified its business this past summer with the merger of its international subsidiary Groupe Smithfield Holdings, S.L. and Campofrio Alimentacion, S.A., Spain’s largest meat processor. The merger, combined with Smithfield’s other European and Eastern European businesses, gave the company leading market shares in the countries of Spain, France, Belgium and Portugal as well as additional market presence in The Netherlands, Romania and Russia.

Focusing on value

As consumer concern about the state of the economy has increased along with the prices of many staples, such as food and fuel, meat and poultry processors have also shifted their attention to providing value-oriented products and concepts to their customers. Tyson Foods’ Food Service division has embarked on several efforts.

Through its "Ideas @ the Heart Value" marketing effort, the company has promoted several initiatives to food service operators, including offering money-saving smaller portions as well as developing to-go menus. In its marketing effort, Tyson noted consumers are discovering that smaller portions bring out the best in the foods they eat, creating a more exciting dining experience.

"Within the current economic state, our customers are struggling to grow both the top and bottom lines of their businesses due to declining sales and increased cost," said Gary Baxter, director of food service brand and customer marketing for Tyson Foods. "The food service industry has historically emerged much more quickly from tough economic times compared to other industries, and we see no reason why this time should be any different. We at Tyson Food Service are committed to helping operators find ways to respond to consumer demand for affordable items without compromising quality."

Tyson’s marketing efforts coincide with data showing the economic slowdown is affecting food service customer traffic. According to food service market researcher Technomic, Inc., Chicago, it is likely that as many as 74% of consumers will visit both quick- and full-service restaurants less often, according to a survey of consumers completed in September. More than 50% of consumers — and more than 70% of higher-income consumers — plan to spend less when they do visit either type of restaurant.

Technomic’s research indicates that consumers are concerned about the loss in value of their home equity, stock portfolio and retirement investments and their credit-card debt, said Bob Goldin, executive vice-president, Technomic.

"As a result, they indicate clear intentions to reduce spending in a variety of ways," he said. "Restaurants will most certainly feel the effects of the pull-back."

When asked how this will impact meat and poultry suppliers to the food service industry, Mr. Goldin said, "Like all other suppliers, meat and poultry supplier volumes will be pressured. Further, we expect restaurants to move toward lower-cost cuts — where and when possible."

Tyson Foods is not the only major meat processor that has shifted its focus to providing value-oriented products. Cargill Meat Solutions, Wichita, Kas., introduced a line of value cuts this past July. The line features products such as Cabrosa Steak, Cordelico Sirloin, Delombre Petite Tender, Maranada Steak, Marbello Steak, Rigosa Roast, Savran Steak or Roast, and Solenta Sirloin and is targeted at retailers in an effort to overcome consumer resistance to trying new cuts of beef.

A new direction for sustainability

While the challenges facing large meat and poultry processors are many, smaller companies also are facing adverse market pressures. The economic downturn in the United States has affected the white table cloth food service segment and forced beef companies to adapt.

"We’re expecting changes; in fact we are already seeing them," said Eric Brandt, managing partner of Brandt Beef, Brawley, Calif. "Fortunately, the places we sell, New York, Boston, etc. have a lot of European tourists. Now that the summer season is ending, it is hard to say what will happen.

"I think we are going to see a slowdown. We can’t afford to lower prices. We need to be raising prices for the cost of the animals that are coming through. What we are going to try to do is diversify and try to find higher-end markets across the country. We are going to try to keep our volume up."

Compared to Tyson, Smithfield and Cargill, Brandt Beef is a very small company that caters to a very specialized market. To maintain its business, Mr. Brandt is not focusing on selling certain cuts of beef. He is focused on selling the whole carcass.

"We have an executive chef on our staff, Tom McAliney," Mr. Brandt said. "What he is trying to do is get chefs around the country committed to sustainable agriculture and using the entire animal. In order for us to not raise our prices, we have to create value out of the whole of the animal. That does not mean we have to produce value-added items on a mass scale, but we do have to get chefs who understand cooking to understand all of the opportunities they have for creating unique, high quality meals."

Mr. Brandt calls the companies strategy "sustainable eating."

"We have the Brandt Beef head to tail chart, which goes beyond the traditional beef chart to provide preparation ideas for cuts from the entire animal. We are talking about sustainable eating, and it focuses on different cooking methods. We can utilize these different cuts, for example the Teres Major, Cullote steaks and Bavette steaks. Another example of sustainable eating is tongue tacos. We just served these tacos at a charity event and people raved about them. Other ideas include cheek meat ravioli. We are talking about selling the whole animal."

Mr. Brandt’s goal is to get customers to buy the whole animal instead of specific cuts. If he achieves his goal he will improve his operating efficiency by not having to sell parts of the carcass in a piecemeal fashion.

"It is just interesting to see how this will roll out," Mr. Brandt said. "Five years ago, people only wanted to buy a ribeye, a New York or London broil. Now, we are working with top chefs and high-end retailers to support this sustainable eating philosophy. It is exciting to see people try something new and less expensive. That, to me, is fun. To teach a family of four to eat for $40 instead of $100 is where we are going."

This article can also be found in the digital edition of Food Business News, October 28, 2008, starting on Page 36. Click here to search that archive.

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