Building Beef Business
October 1, 2004
Building Beef Business
by Barbara Young,
Editor’s note: Meat is on the menu big time these days, triggered by a laundry list of factors, not the least of which being the introduction of an array of new products with mass taste appeal, coupled with sophisticated and targeted marketing and promotional campaigns.
Although the red-meat category retains its stronghold on consumers’ palates, beef suppliers face daunting operating challenges. As the saying goes, however, when the going gets tough, the tough get going.
This report focuses on successful business strategies designed to market beef products in the domestic and international arenas, despite the current operating environment fraught with food-safety and related issues, regulatory demands, along with various other unusual market forces, whether related to raw material costs, the impact of inclement weather on grain production and pricing, among others. Companies featured include Cargill Meat Solutions, Swift & Company, Tyson Fresh Meats, and American Foods Group.
USDA’s Economic Research Service (ERS) Report for September 2004 predicts beef production will decline nearly 7 percent from a year earlier — greater than previously expected “due to a slower pace of cattle placement and marketing.” Meanwhile, feedlot inventories remain higher resulting in an over saturation of raw material. The downward spiral escalated in December 2003 on the heels of news concerning the discovery of BSE (bovine spongiform encephalopathy) in the state of Washington. The bottom line, as ERS reports, is that while the wholesale retail price spread remains record wide, both cattle feeders and beef packers are losing money. That being the case, the beef industry finds itself in a regrouping mode. Belt-tightening is the order of the day for some businesses while others explore new marketing opportunities.
Swift & Company’s three-legged stool
BSE is a critical issue confronting the beef industry, to be sure, especially its impact on American meat processors cut off from markets abroad. Of significance is the continued closure of the U.S. border to live Canadian cattle contributing to unseasonably high prices, coupled with continued closure of key export markets including Japan, Korea, Egypt, and Russia. The pressure is off, however, thanks to the recent agreement between the United States and Japan, clearing the way to resume beef trade arrangements. The agreement calls for the re-establishment of a beef verification program similar to what was in place in 2003, but with new requirements.
“Both the United States and Japan have agreed that their respective food-safety systems are sufficiently robust to assure that the potential of additional cases [of BSE] in either country will not interrupt future trade,” reports Philip Seng, U.S. Meat Export federation president and chief executive officer.
The first quarter was the last strong quarter for the U.S. beef industry before BSE was identified in the United States late last year,” notes John Simon, president and chief executive officer, of the Greeley, CO-based global marketer of beef and pork. “The unusual weakness in beef this quarter and the resulting unusually strong performance by Swift Pork and Swift Australia make year-to-year comparisons difficult. It also illustrates the effectiveness of our three-legged stool business model – built around beef, pork, and Australia – which positions the company to succeed even while BSE-related challenges to international commerce continue to affect the entire U.S. beef industry.”
Swift’s business strategy paid off, enabling the company to rebound with a record fourth quarter in May, ending its 2004 fiscal year with a net income of $35.2 million on sales of $2.6 billion. “Thanks to outstanding pork sales and a strong finish to the year by the Australian beef segment, our three-legged stool model worked in the fourth quarter the way it was designed,” boasts Simons. “Swift Australia and Swift Pork continue to grow and capitalize on opportunities that develop in the marketplace. In fact, each of the three business segments (beef, pork, and Australia) experienced growth in EBITDA (earnings before interest, taxes, depreciation, and amortization) of roughly one-hundred percent or more compared to the fourth quarter of last year.”
A recent change aimed at expanding value-added beef production at its beef-processing operation in Greeley represents the fourth leg in the multiple-step business strategy adopted two years ago to position Swift as the world's premier meat company.
Under the plan, expected to be implemented by mid-December 2004, the second shift in the Greeley beef plant will be realigned from "primary processing" of livestock to "further processing" for the creation of higher-margin, value-added products. The volume currently handled by the second shift will be processed at the company's beef plants in Grand Island, NE; Cactus, TX; and the first shift at Greeley. The transfer of beef production to untapped capacity at plants in Nebraska and Texas will also bring fresh beef products closer to the majority of Swift customers located east of Colorado, enhancing the speed and efficiency of the delivery process.
"Enhancing the Greeley facility is a very cost-effective way to expand our presence in the growing value-added beef product market,” Simons explains, adding that it also is a perfect fit with the firm’s new Customer Solutions/R&D facility in Greeley, scheduled to be completed in March 2005. "This enhancement will give our customers who visit Greeley a true perspective of the depth of our beef-production capabilities, from the plant floor to new product development."
Combined beef and pork segments benefit the company’s value-added products strategy, which includes the introduction of a new line of La Herencia branded beef and pork products targeting Latino consumers. A licensing agreement with Specialty Foods Group will facilitate the distribution of these products to consumers in Latin America.
“The U.S. beef industry continues to experience volatility, and that will continue as long as the Canadian border remains closed to live cattle and key trading partners keep their borders closed to U.S. beef exports,” Simons predicts. “However, there are several reasons for optimism, including improvements in our sales margins even though volume was down in the quarter; new opportunities in the Mexican market; and Swift’s continued leadership in food-safety processes and technology.”
Product diversity is Tyson’s strength
Tyson Fresh Meats is a subsidiary of AR-based Tyson Foods Inc., positioned as the world’s largest processor and marketer of chicken and red-meat products. Tyson Foods, boasting revenues of more than $23 billion with approximately 110,000 team members and 300 facilities and offices in 27 states and 22 countries, also produces a wide variety of brand name, processed food products. Unfavorable market forces, such as BSE, affect Tyson’s beef business along with other beef industry operations. Tyson’s ability to deal with adversity is tied to its manufacturing capability and a history of high performance as a marketer, however.
“While it’s been a challenging year for the beef business, our poultry and pork operations have performed well,” reports Gary Mickelson, director of media relations. “This year has demonstrated the advantage we enjoy by being involved in the production of multiple proteins. All our proteins — beef, chicken, and pork — have benefited from the high-protein, low-carbohydrate diet phenomenon. For example, we believe more people are once again making room for protein, such as bacon and sausage, at breakfast.” Mickelson also attributes the demand for chicken and pork to other factors. Consumers eat more chicken and pork in the face of higher beef prices, for example, coupled with increasing pork exports. Through the first nine months of fiscal 2004, international pork sales increased 65 percent. “Some of this is due to customers — such as those in the Far East — buying pork to make up for the temporary loss of U.S. beef,” Mickelson says. “However, we’ve also experienced increased interest in hams and pork trimmings from Russia and Mexico, where the product is used to make processed meats.”
Even though chicken and pork act as equalizers somewhat, marketing challenges impose hardship in some cases, as Mickelson explains. “We’ve been encouraging our export customers to turn our chicken and pork products to fill the void left by the temporary beef ban,” he says. “However, there have been limitations. As noted in our third-quarter earnings release, chicken exports this year have been hurt by import restrictions by various countries caused by the avian influenza outbreaks in the United States.” Moving forward, Tyson recently unveiled a fully integrated marketing campaign with the theme “Powered by Tyson” to communicate the company’s brand strength.
Partnering to succeed: American Foods Group
“Our customer partnering philosophy is pretty unique to the industry,” explains Mike Zimmerman, director of case-ready development. “Basically, we meet with our customers, listen to their needs, and go to work on a program. We offer many packaging and shelf-life formats.”
American Foods Groups, a private company owned by Carl Kuehne, president and chief executive officer, specializes in custom designing case-ready beef and pork programs for many retailers and convenience stores across the nation, as well as foodservice customers. The company harvests approximately 2,000 head of cattle per day in Green Bay, WI, turning out several million pounds of ground beef and boxed beef weekly.
Concerning the current business operating climate, Zimmerman says it definitely has not been business as usual. “We’ve obviously lost some of the markets due to BSE, and you have to replace that business,” he says. “We have always felt we were very good at partnering with customers, and that is the best channel for additional sales. It has forced us to ask more questions of our customers and look for new ideas and initiatives to add value. We are becoming better merchandisers, not just sellers of boxed beef.”
To that end, the company is working on “many” new product initiatives, including developing kosher and Halal products. “Our customer base has a growing need for Hispanic items, and we are responding with a line of seasoned case-ready beef and pork targeting Hispanics,” Zimmerman reports. “We have several other new seasoned products underway designed to save the consumer time, but yet allow them to still play a role in the cooking process.”
Customer driven: Cargill Meat Solutions
Cargill Meat Solutions, headquartered in Wichita, KS, was born as a beef company that now operates as a global umbrella organization — parented by Minneapolis-based Cargill Inc. — for marketing beef, pork, and turkey in a range of cuts, ingredient formulations, packaging options, and distribution channels.
“Overall, we just want to help our customers differentiate themselves and grow their businesses,” reports Norman Bessac, vice president of marketing. “If we can help make our customers successful, we will be successful.” To that end, Cargill Meat Solutions (CMS) offers support to its customers with programs and products tailored to individual needs. Recognizing that not all retailers and foodservice operators are the same, CMS offers customized programs. Products are marketed globally in both retail and foodservice channels.
“CMS is poised for success in these channels both domestically and internationally, as it has invested heavily in operational excellence through vigorous capital investment,” Bessac says. “Within foodservice, we’re seeing an increased interest for pre-seasoned, pre-marinated, and pre-cooked products — items that help operators save on labor and training while better controlling quality and minimizing waste.” Although BSE and other market forces challenge meat-industry business, Bessac says CMS is forging ahead. “BSE has not impacted our marketing strategy,” he affirms. “We continue to focus on gaining loyal customers throughout the world.”
To strengthen product-marketing initiatives, CMS continues to focus on the “needs and wants” of it international customer base. “For example, Japanese consumers are extremely particular when it comes to the flavor and color of their pork,” Bessac says. “To better meet demand, we developed CVP (Cargill Value Pork). Unlike traditional pork bred to be lean, CVP is bred to have marbling characteristics.”
CMS also uses CO2 stunning and a blast-chill process that help meet Japanese color standards. NP