Editor's Journal: 21st century business model
July 13, 2008
The new reality: The U.S. food industry’s role in the global economy is change personified. To offset escalating commodity costs, U.S. food producers are raising prices on just about everything in an environment of slumping housing values, rising fuel costs, and a weakening job market exacerbated by on-again, off-again talks of recession. This bleak picture is replicated on canvasses around the world â€” for without doubt the whole world is in economic chaos. Keeping up with these worldwide woes makes my head spin.
Where and when did this spiral begin? Looking back we know that changing political ideals moved boundaries worldwide in the early 1990s. Attitudes in the global marketplace also changed â€” especially concerning a broader acceptance of capitalism and all that it offered to the world of commerce.
No segment welcomed the chance to compete for a share of market in the growing world of commerce more than America’s beef industry. That new opportunity â€” owing in part to the fall of communism coupled with increasing appetites of foreigners for red meat, boosted by their growing ability to pay for it â€” came at a time when the U.S. beef industry was good and ready. By the mid-1980s, it had begun preparing to increase demand by emphasizing improvements concerning overall product quality coupled with new product-development initiatives, among many other modern business strategies. Several come to mind, fully prepared offerings being among the most innovative. You don’t have to cook a beef roast at home these days unless you want to. The payoff came in 1999, when consumer demand for beef increased for the first time in nearly two decades.
The U.S. beef industry represents more than 1 million businesses, farms and ranches. According to the National Cattlemen’s Beef Association, producers of meat animals were responsible for more than $65 billion in added value to the U.S. economy, as measured by their contribution to the national output, in 2006.
The table turns: Capacity outstripped supply in the early 1990s. There were several peaks and valleys in the intervening years. By 2005, beef slaughter and total production rates had dropped. This confirmed the onset of new operating challenges. The average weekly production hours in the overall processing industry fell, a decline basically tied to significantly reduced hours at beef processing plants. Other issues included underused capacity coupled with frustrating problems tied to rising energy costs, global trade, immigration and labor, expanded regulatory activity across the industry, recalls and myriad other food-safety issues.
The rhythm of the U.S. beef industry is defined by consolidation, meaning mergers and acquisitions. By 1996, the nation’s “Big 3” (IBP, Excel and ConAgra) claimed an estimated 62.5 percent of the total commercial cattle slaughter capacity. To be sure, concentration or consolidation is a fact impacting all sectors of the American livestock and meat industry, agriculture in general and, increasingly, the American economy as a whole. More than half of the top meat companies of 20 years ago no longer exist.
What’s the point? Under the new operating reality, weaker competitors may bemoan the competitive pressure driving change in the beef industry, but to what end. At issue is the heated controversy surrounding JBS S.A., a Brazilian company, which has made a bid to acquire major U.S. beef businesses: Smithfield Beef Group Inc. and National Beef Packing Co. JBS acquired Swift & Co. in 2007. It remains to be seen whether the U.S. government will sanction the deal, which has drawn mixed reactions from various fronts. However you slice it, these U.S. beef companies want to be acquired.
My best guess is that if the agriculture sector â€” particularly livestock and meat enterprises â€” is to not merely survive but also prosper it must operate with the ability to respond to market challenges and ongoing changing competitive conditions. Moreover, business must be able to respond to market signals while also being empowered to transmit market signals. Changes over the past several years have been made in response to external market conditions. They include raw material sourcing, risk management and scale of operation. America’s free enterprise system by definition is not altogether transparent. The 21st century beef-industry business model came about for a reason. Ignoring this essential truth could make all business enterprises operate under competitive constraints. That would not be good.