One such company in the midst of a growth period is Western’s Smokehouse, located in Greentop, Mo. Sam Western, president, estimates that the company enjoyed around 10 percent growth in 2011. The company’s snack stick business has performed particularly well.
“We’re introducing our products into new markets, and they’re being accepted very well,” he says. “Also, our private-labeling business is really flourishing, so it’s an exciting time for Western’s.”
For the industry as a whole, the outlook isn’t as positive. Kenneth Perkins, analyst at Morningstar Inc., a leading provider of independent investment research, notes that high commodity costs continue to have an adverse effect on the industry.
“Most meat processors have seen their profit margins come under pressure, as pricing has only partially offset higher input costs,” he says.
Perkins notes that processors can only increase their prices so much before the market fails to support it. Therefore, they are turning to other ways to maintain profitability, including reducing supply-chain inefficiencies and cutting back production.
“We maintain a conservative outlook and don’t expect a full recovery in margins in the near-future,” he says.
Western’s Smokehouse is planning an expansion this year, which would add two ovens, two rollstock packaging machines and an automatic hanger to its operations. Western notes that finding a bank that was willing to finance the project was a greater challenge than he had seen in the past, even though the company has an excellent financial record.
“The banks aren’t lending money. They’ve pretty well battened down their hatches, so to speak,” he says. “We had real difficulty finding financing for that, even with our existing bank. It seems like your history doesn’t count for as much as it used to.”
Western also points to the regulatory aspect of the industry as another potential challenge. The USDA’s regulations are putting an increased burden on all processors, but the smaller ones are particularly vulnerable. The proposed “Big Six” E. coli ban would affect the major packers, but it would trickle down to smaller processors as well, both in terms of commodity costs and additional testing costs. He questions the need for redundant inspections.
“Something gets inspected once and then goes through the [raw meat supplier’s] own inspection and quality control. Then it comes to a plant like ours, and we have to go through the whole thing again,” Western points out. “It’s burdensome on the small people and the big companies too.”
For the upcoming year, Western recommends that processors continue to keep an open mind, look for new ways to market products and focus on new product development.
“Don’t stay in your little box and expect things to happen,” he adds. “In this economy, that’s not going to happen, so [you] need to be a little more aggressive.”