Cash Cow
Meat packers and processors are in the money. But the good financial news isn't being shared by all segments of the chain
by Bryan Salvage, editor
The red meat industry is seeing green. "It seems like every company I talk to today in the meat [packing and processing] business is making good money, particularly IBP [Inc.]," says John McMillan, food industry analyst for New York-based Prudential Securities.
AMI President J. Patrick Boyle notes: "Our packers are actually making noteworthy profits for the first time during my five years at AMI. Processors are continuing to do well. The financial health of [packers and processors] is very good this year."
David Nelson, agribusiness analyst for New York-based NatWest Securities Corp., adds: "We believe that meat and poultry processors are excellent investment opportunities. A combination of factors is improving their operating environment, driving volume growth and creating ways to add value and expand margins."
Expansion good news
Nelson best summed up the specifics behind the good news during a presentation he made in September. He said that beef and hog supply expansion is allowing processors to buy their inputs at lower costs and use their capacity more fully and efficiently.
The livestock and poultry industries are consolidating and integrating, improving stability in the livestock and wholesale meat markets, reducing costly volatility and providing purchasing and pricing power for the remaining players.
U.S. per capita meat consumption (driven by poultry, most notably chicken) continues to grow slowly while export volume continues to expand rapidly, Nelson adds. Exports of higher value-added products will continue to grow as markets develop, and advanced U.S. meat production and processing technology will be adopted overseas.
Opportunities exist to turn commodities into value-added products.
"The improved quality and consistency of pork is getting companies interested in producing both case-ready and value-added products," Nelson says. "Beef's flavor still makes it the premium meat, but it has far to go in product consistency and value-added."
Nelson adds that meat and poultry companies' operating leverages are turning minor gross margin improvements into sizable bottom-line impacts.
As far as packers and processors are concerned, it's about time for some good news.
"The [meat packing and processing] industry was in tough shape for [several] years, but it appears to be turning into a profitable industry again," McMillan says. "Margins are increasing for meat packers and processors. The only [segments] getting hurt are cattle and hog producers."
Cattle and hog producers are suffering because of high supply that is resulting in declining livestock prices. But this wasn't always the case.
In recent years, they had done well financially compared to other industry segments, Boyle claims. Packers at that time operated on narrow and sometimes non-existent margins.
Processors adding value to branded products probably maintained their 2 percent to 4 percent historical profit margins, he adds. And the retail and foodservice industries were generally profitable at very small margins typical for those industries.
Things have changed
"In the past year, cattle and hog producers were not as profitable because of declining livestock prices," Boyle says. "Many producers are now operating on the margin; some may even be operating at a loss. They must adjust their business practices to try to make a profit at lower prices."
Pork producers expect large supplies of hogs to continue until the end of 1995. In late September, National Pork Producer Council officials met with leading packers to recruit their assistance in keeping pork moving through the consumer pipeline.
"There was a strong consensus among the packers to work constructively with us," says Russ Sanders, NPPC executive vice president and CEO.
Pork industry sales promotional activities and advertising campaigns were explained, and packers indicated a strong willingness to tie into both. Major retailers have been asked to keep the channels open and advertising space available for pork. New product opportunities were also discussed.
Dakota City, Neb.-based IBP Inc. will contribute $50,000 to NPPC if other sectors of the industry provide an additional $100,000. The money would be used to support NPPC's current promotional efforts to keep pork moving through the food chain in a period of large supplies.
"We believe it is time to step up efforts to move the expanded supplies of high quality pork available," said Gene Leman, executive vice president of IBP. "We are moving as many hogs through our plants as possible in order to provide market stability. We believe additional product promotion is also needed."
Sanders asks: "What kinds of niche markets can we get into when hams are less than 50 cents a pound? Can we create new products for markets that have been dominated by poultry, for example? We'll have a number of one-on-one meetings with individual companies on new product possibilities."
Barry Pfouts, NPPC vice president of consumer marketing, says NPPC's "The Other White Meat" advertising campaign has achieved an 83 percent awareness among consumers.
Other programs will be tied into that theme. The new "Other White Sale" program was designed particularly for the over-supply phase of the market. It includes persuading retailers to carry and advertise more pork; a special television commercial on the over-supply situation; and a major publicity program.
"The Other Burger" program has been picked up by packers who are starting to grind pork. Retailers report that ground pork could be a "very strong new product entry," Pfouts says.
NPPC has presented potential products to the Federal School Lunch Program, which includes 92,000 schools and feeds 25 million children a day.
The word on beef
Beef supplies are expected to be plentiful during the next three to four years, according to Market Watch for Beef. Competition from poultry and pork will also be plentiful.
"All beef industry sectors will be forced to evaluate cost structures to continue delivering beef to consumers at competitive prices," the report states.
Coordinated systems focusing on delivering a consistent, high-value product to consumers at competitive prices (such as "Select Supplier" and "Strategic Alliances" ) will help reduce total beef production and marketing costs.
Production and marketing costs will receive even more attention as beef supplies increase in the next few years.
Meanwhile, work continues on merging four industry groups: the Beef Industry Council of the National Live Stock & Meat Board, Cattlemen's Beef Board, National Cattleman's Association and the U.S. Meat Export Federation.
The proposed alliance hopes to improve beef quality and consistency, strengthen domestic and international marketing, and allow for greater efficiencies and quicker, unified responses to industry issues.
Suppliers and purveyors
Business is good for industry suppliers because packers and processors are able to invest some of their money in equipment, plants and product development, AMI's Boyle says.
Meat purveyors are gearing up to implement Hazard Analysis and Critical Control Point programs, and are moving toward science-based food safety programs. They are also finding strength in numbers.
"An increasing number of purveyors are finding that membership in national buying groups helps them maintain a competitive edge by allowing them to distribute groceries and other related institutional items along with their traditional product line of portion-controlled meats," says Deven Scott, executive vice president of the National Association of Meat Purveyors.
In response to increasing demand for quality meat, purveyors are offering products with greater consistency and uniformity.
Case ready not quite ready
An evolution continues in the industry. Boxed beef has largely replaced carcass beef that was once shipped to grocery stores. The next step in this process will be case-ready beef.
"Case-ready meat is inevitable," Boyle says. "It may not be in 1995 or 1996, but the next step is to take those primals in the plant and cut them into case-ready products."
Not everything is coming up roses for the meat packing and processing industry. The battle against E. coli 0157:H7 in beef, maintaining and enhancing meat safety and inspection reform and dealing with the media are just several challenges facing it today.
But in looking to 1995, Prudential's McMillan puts it into perspective: "Right now, it looks good [for packers and processors]."
Marketing, Merchandising, Minimizing Costs Are Challenges
by Larry Aylward, managing editor
The meat industry vowed to enhance measures to procure safe food in 1994. And as 1995 approaches, the industry will make a similar resolution.
The 1994 intention was not forsaken. It's just that advanced methods to manufacture safer product will be an annual issue for producers.
"Food safety is an issue that will not go away," says David Mehlhaff, director and producer of communications for the National Cattlemen's Association. "Whether [the industry] is working on it in the legislative arena or at home, it is an issue that will be in the forefront."
Food safety is, foremost, a human issue. But it is also about an economic issue for the entire meat chain.
If production and consumption levels are any evidence, the public's perception of meat safety is positive.
Average per capita consumption of meat in 1994 will be about 229.5 pounds, including poultry and fish, according to USDA.
Commercial pork production for 1994 is estimated to be a record-breaking 17.3 billion pounds, although USDA predicts per capita consumption of pork at 51.3 pounds in 1994, compared to 51.6 pounds in 1993.
Beef supplies are at their highest levels since 1986, according to Chuck Lambert, NCA staff economist. Total beef production in 1994 is forecasted to be nearly 5 percent above 1993 totals.
"We will have real challenges in the industry for the next couple of years," Mehlhaff notes. "We will have large cattle numbers and beef tonnage. But there are only so many consumers out there, and we are all competing for the same dollar."
The National Pork Producer Council's "The Other White Meat" advertising campaign has augmented its popularity to help it compete for that dollar, according to Russ Sanders, executive vice president and CEO of NPPC, adding that marketing has helped increase production.
"We were formerly an industry that was comfortable producing 85 million head," Sanders says. "Now we are producing 90 to 95 million head, the animals are heavier and tonnage is up."
Sanders admits competition will magnify at the retail level, but he adds that increased efficiency and utilization of technology to lower the cost of production will make pork even a more viable threat.
"Over time, pork should be more competitive with beef and poultry," Sanders says, adding that industry plans to invest more money in product development and merchandising.
Mehlhaff says the beef industry will affix its attention on consumer wants and needs in 1995. The industry is conducting studies regarding more uniformed product and tenderness.
In 1995, Sanders says the pork industry will concentrate on strengthening the link between producer and packer. The industry needs to be "quality-driven, not volume-driven," Sanders adds.
Beef and pork comprise most of red meat's concentration, but the lamb industry is trying to better its likeness through its yield grading program. This value-based purchasing structure for lamb began about a year ago.
"It takes time for a system like this to work," notes Rick Harbaugh, group marketing director for the American Lamb Council. "It will be an evolutionary process during the next five years. It will help packers and processors become more efficient."
Average per capita consumption of lamb is projected at 1.3 pounds in 1994, same as 1993.
Harbaugh says the lamb industry must also pay more attention to consumer demand.
"And we have to find a way to take some of the volatility out of the lamb market," Harbaugh adds. "This industry is extremely volatile."
Better marketing, increased efficiency and popular new products are important goals for producers from every red meat segment. But they should not forget the most important issue of 1995: food safety.
"Food safety is a continual issue," Mehlhaff adds.
Red Meat Regaining Its Strength At Retail, Foodservice
by Larry Aylward, managing editor
Despite a flurry of blows to its reputation, the red meat industry remains standing. If its 1994 performance in the retail and foodservice arenas is any indication, the industry's once wobbly legs are more stable.
The industry withstood 1994 reports linking red meat with prostate cancer and hot dogs with leukemia. In addition, meat inspection was scrutinized with reports by two television networks in October.
The industry experienced a 1.6 percent drop in sales of fresh meat at supermarkets in 1993 when compared to 1992, according to Supermarket Business magazine. Fresh meat sales were about $40.79 billion in 1993.
Although sales numbers for 1994 have not been tallied, an increase is probable. Lower prices, a more positive consumer attitude toward meat and leaner cuts of product have resulted in an increase of per-capita consumption.
USDA predicts per-capita consumption of red meat (beef, pork, veal and lamb) at 120.7 pounds in 1994, up from 119.4 pounds in 1993. Per-capita consumption of beef is projected at 68 pounds, compared to 65.6 in 1993, USDA estimates.
"Our meat sales are up," says Chuck Van Hoose, meat department manager for Akron, Ohio-based West Point Market.
A shift in attitude
"People are changing their attitudes toward red meat," Van Hoose adds. "I hear from our customers that physicians are recommending people eat meat for its protein and iron."
At the foodservice level, the multitude of fast-food eateries is rapidly growing and is nearly equal to the number of table service restaurants. Sales of fast food also comprised about half of all restaurant sales in 1993, the National Restaurant Association estimates.
Hamburgers, french fries and soft drinks were the top-selling menu items in the fast-food category in 1992, according to Consumer Reports on Eating Share Trends (CREST).
Hamburgers and cheeseburgers were consumed 21 percent of the time by fast-food patrons in 1992.
The study was conducted before the outbreak of E. coli 0157:H7 and the deaths of four children on the West Coast. But the negative publicity that followed the incident hasn't hampered hamburger sales dramatically.
"[Burger King underwent] a slight dip in sales and customer traffic immediately following the incident," says Michael Evans, spokesman for the Miami-based chain. "But within a few months, sales were back to normal levels."
At the sit-down restaurant level, steak is alive and well, and ribs showed positive growth, says Ron Paul, president of Chicago-based Technomic Consultants, an agency that tracks foodservice trends. But not every restaurant patron is ordering a filet mignon, Paul points out.
Steak consumption decreased 4.5 percent a year from 1991 to 1993, according to a CREST study.
"But on a more qualitative basis, there has been good growth in the steak specialist category," Paul adds. "If people are going to eat red meat, they want to go where they think they can get it at a higher quality and more assured level."
But beef is not in a high-growth mode at the foodservice level, Paul adds. "Chicken and poultry are surely growing at a more rapid rate," he says. "But some people are returning to red meat, primarily away from home."
Challenges, opportunities
Customer service and merchandising are keys to retail success. Customers want to know more about red meat, and employees at meat counters should be trained to answer questions.
Merchandising should be partly based on aesthetics, as demonstrated by San Francisco-based Andronico's Market, which offers red meat, poultry and fresh fish orderly positioned amidst crushed ice in tidy-looking meat cases.
"Our philosophy is: If you don't find it here, we will get it for you," says Wayne Dillaboy, Andronico's meat department manager.
The industry faces challenges at the retail and foodservice levels. At retail, customers will continue requesting leaner cuts.
And a more creative flux of value-added products can only benefit a supermarket's business, Van Hoose points out.
At foodservice, suppliers must further educate operators in handling, cooking, preparation, presentation, pricing and overall merchandising, Paul points out.
Opportunities exist at the foodservice level for ethnic foods. Ninety percent of restaurant menus included ethnic entrees in 1993, up from 84 percent in 1988, according to a National Restaurant Association report.
In the fast-food arena, the best merchandising tactic appears to be a continued emphasis on value. In 1991, three out of four patrons of fast-food outlets said price of a purchased meal met or exceeded their expectations, according to NRA.
Meat Exports Continue to Ride Strong
By Ken Krizner, Senior Editor
Exports continue to be a jewel in the meat industry's crown. Beef product exports saw a 13 percent increase in quantity (506,215 metric tons) and 5 percent increase in value ($1.7 billion) in 1994 (through Aug. 30) as opposed to the same period in 1993.
Meanwhile, pork products saw a 22 percent increase in quantity (165,747 metric tons) and 10 percent increase in value ($374.4 million).
Lamb and mutton products saw a 3 percent increase (7,476 metric tons) in quantity and 6 percent increase in value ($11.6 million).
Here is a look at some of the United States' top meat export markets, according to the U.S. Meat Export Federation.
Japan
This nation continues to be the No. 1 importer of U.S. beef products, increasing its levels by 3 percent (243,148 metric tons), although losing 4 percent in value ($1.02 billion) in 1994. Nearly 60 percent of U.S. beef exports continue to go to Japan.
On the pork side, Japanese imports registered small increases of 1 percent in quantity (54,806 metric tons) and 2 percent in value ($229.6 million).
Commonwealth of Independent States
The market for high quality meat products is in place.
The increases might sound impressive-a 1,196 percent increase in quantity and 2,996 percent increase in value for beef products, and a 705 percent increase in quantity and 376 percent increase in value for pork products. But this is relatively uncharted territory for U.S. meat processors.
Recently, 20,000 tons of pork products were sent to the commonwealth through the Export Enhancement Program, and Russians have taken a liking to beef livers.
A USMEF project in Moscow and St. Petersburg two years ago registered a desire for high quality meat products, a desire that cannot be met by Russian meat processors.
"The demand is there," notes Mark Gustafson, USMEF senior vice president. "But there is an economic issue: Does the commonwealth have the money to pay for the product?"
European Union
The surprise of the year is the EU. It increased its import of beef products by 15 percent (8,206 metric tons), accounting for a 14 percent increase in value ($21.8 million).
With issues such as hormones and inspection still outstanding, why the increase in U.S. beef imports?
"The European Union is desperate for quality beef products," Gustafson notes. "People in Europe especially like variety meats, like liver and tongue. The market has great potential."
Mexico
The North American Free Trade Agreement has been a boon for pork and beef processors.
Pork exports jumped 31 percent in quantity to 75,708 metric tons and 36 percent in value to $89.3 million. On the beef side, exports jumped 33 percent in quantity to 74,501 metric tons and 54 percent in value to $179.4 million.
South Korea
Despite a dispute over import quotas, meat exports to South Korea remain strong, posting an increase of 356 percent in the quantity of pork products, and an increase of 58 percent in the quantity of beef products.
Pork exports totaled more than $7.8 million in 1994, and beef exports totaled more than $147 million.
The future
USMEF expects a 20 percent increase in growth in 1995 from the top four U.S. meat importers-Japan, Canada, Mexico and South Korea.
Gustafson says up-and-coming import markets include China and Hong Kong. USMEF also expects increased demand from Taiwan and the EU.