Tyson Foods recently introduced Tyson Day Starts, a protein-centric frozen breakfast handheld line of products, which was in direct competition with offerings from newly acquired Hillshire Brands.
BOSTON — On Aug. 28, Tyson Foods, Inc. acquired Hillshire Brands for $63 per share for an estimated total value of $8.5 billion. Since then, there has been quite a bit of focus on the price Tyson Foods paid to acquire Hillshire Brands. But Donnie Smith, president and chief executive officer of Tyson, put into perspective why his company was willing to pay a premium.
This past May, Tyson Foods introduced two new products in categories that were in direct competition with offerings from Hillshire Brands — a rolled breakfast sausage and Tyson Day Starts, which was a protein-centric frozen breakfast handheld line of products.
“As we did the math on how we would have to spend against those two launches, we figured we would have to outspend the category leader by 1.5 times,” Mr. Smith said Sept. 4 in a presentation at the Barclays Back-To-School Consumer Conference. “And so when we did the math on that it was going to cost somewhere around $2.5 billion over a, say, five-year period or so to build to get to a No. 3 to No. 5 spot.
“So when you look at what we were going to have to spend to be able to grow organically against these iconic brands it really brought into focus the fact that what it would be so much better for our investors if we would provide ourselves the opportunity to buy that No. 1 share and then link it to the raw materials and then grow both together.”
And Mr. Smith sees plenty of room to grow with Tyson’s newly acquired brands. He noted that fresh chicken has an 86% household penetration, that Tyson is the No. 1 brand in the category at 12%, and that the category is growing at about 6.5% per year.
By comparison, Jimmy Dean, in the frozen protein breakfast category, only has 38% household penetration, Jimmy Dean has the leading share at 23% and the category is growing at about 8.3%, Mr. Smith said.
“… So there’s a lot of room to continue to grow in breakfast and we hear a lot about how important breakfast is going to be,” he said.
Mr. Smith also updated investors at the Barclays conference on what he sees happening to beef, pork and chicken supplies in 2015.
“We do think the (cattle) herd will be down about 2% to 3% again in 2015,” he said. “Moving on to pork, as we get through the warmer season, the PED virus (porcine epidemic diarrhea) doesn’t replicate as quickly. We’ll have to see what happens when we move into the wintertime and you get a more moist, cool environment. I do feel like the biosecurity aspects that have been put into place on hog farms around the country will reduce certainly. Not sure it’ll eliminate, but it will reduce the PED effect going forward.”
With lower grain prices, he forecast pork production will be up 1% to 2% next year.“As we see the current pullet supply flock and breeder supply flock, it looks like, to us, that it would be about July of next year before the supply could increase,” he said.