Peeyush AgarwalMichelle Berson

Michael GrantMelissa Meruelo

Dontae RayfordMark Watson

Pilgrim’s Pride: Leader in the US Poultry industryBlock 3, Group 10

The US Poultry Processing industryAlthough there are several substitute products, namely beef, pork, turkey, seafood, and non-animal alternative proteins (like tofu), US poultry consumption has been on the rise and is projected to continue3. According to the USDA, chicken is the most consumed meat in the US2. In addition, chicken is priced competitively against substitutes and benefits from dietary concerns as Americans focus on healthier lifestyles1,2.

There are about 40 players in the broiler processing industry, competition is concentrated at the top1. “Processors like Tyson and Perdue contribute about 65% of total industry revenue”2. Competition is strong, but companies are concentrate on selling to different channels like direct retail grocery chains, food servicing / fast food, institutional and export markets. The concentration of major competitors is further evidenced by industry consolidation from continued acquisitions and firms exiting the industry (bankruptcy). There is a low threat of new entrants because the industry is highly vertically integrated. A new domestic firm would need a substantial amount of capital, as well as access to contractual farmers who are operating at efficient levels without excess capacity.

Suppliers (farmers) have relatively low power. There is a low reliance on any one farmer because of “flock-to-flock contracting”; big firms capitalize on the fragmentation of the farm space. Farmers also face uncertainty on revenue streams, as they are impacted by weather patterns, disease, and feed costs for the chickens. The bargaining power of buyers is higher, and probably at a medium level. Producers sell to and thus rely on the national grocery chains and food service companies in addition to the end consumer. If tastes change or other substitutes become more attractive, buyers will have increased bargaining power. However, prices are also determined by availability of chicken, which is tied back to poultry production and not buyer power.

RTC = ready to cook

Edit as needed

Pilgrim’s Pride and its Strategy Pilgrim’s Pride Corp (PPC): #2 producer of chicken (whole and parts; fresh, frozen, and

prepared) in the world, with operations in US, Mexico, and Puerto Rico. Employs 38,000 with 4,100 contract growers. Customers include restaurants and grocers in its operating territories, including Wendy’s, Stouffers, Arby’s, Chick-Fil-A, Publix, and Wal-Mart. Total customers > 5,000.

Founded in 1946 selling animal feed and chickens to local farmers in Texas. Growth came through acquisitions, including a hatchery in 1950 before they started processing poultry in 1960, then another acquisition in 1969 before being listed on the NYSE in 1986 and expanding operations into Mexico in 1987. Acquisitions followed in 1990, 2001 (which enabled distribution and marketing across the US), 2003, and 2006.

Filed for bankruptcy in 2008 as a result of the chicken market “changing dramatically,” citing “high corn prices, an oversupply of chicken, and financial constraints.” Analysts blame debt from 2006 acquisition. PPC responded by cutting plants, jobs, and focusing on operational efficiency. JBS, the $33bn global leader in food processing, bought 64% of Pilgrim's stock in 2009, increasing ownership to 75.3% by 2012.

PPC’s current corporate strategy is: #1, innovation and risk management; #2, operational excellence; #3, export growth; and #4, effective management. Strategy #1 is very nebulous as stated by PPC, claiming added-value through “quality management,” “effective operator strategy” (sounds like #2), “risk management” (also sounds like #2), and “innovation.” Ultimately, the emphasis is on a fresh, quality product over cost ( WTP, P). Strategy #3 is more clearly defined and stresses operations efficiency through lower costs ( C) -- without equating lower costs to lower quality. But in terms of “the wedge,” cost is the focus in #2. Similarly, strategy #3 is also focused on C through “operational excellence,” chiefly through lower spending on operations and SG&A. Strategy #4 is market-based, as they hope to grow “value-added” exports to select international markets where poultry consumption is on the rise.

How Pilgrim’s Strategies Create Value

Cost Leadership (C)• Vertically integrated to drive organizational efficiency• $300M streamlining efficiency to SG&A realized in 2011, $120M realized in H1 2012• A continually improving operating cost strategy helps to partially offset the trend rise in COGS driven by rising feed costs• The mass demographic which PP targets is particularly price sensitive, making cost reduction pivotal to their success as a firm

Export Growth (V, WTP)• Recent examples of new markets:

–Successfully launched grillers in Saudi Arabia–Doubled volumes on sized legs to Japan–Entered Angola and the Middle East–Increasing fully cooked volumes into Mexico

• Volume growth helps offset the impact of margin declines, in dollar terms• Higher WTP for new markets where “value-added” chicken products are not as ubiquitous• Ownership structure through JBS enables broader export reach

Will depend on previous slide

..and value leads to even better strategies

..as well with operations and distribution strategies!•The company’s size enables it to operate at a high utilization. In FY07, the hatcheries, feed mills and rendering plans operated at 85%, 84% and 76% utilization whereas the chicken processing operations operated at 92.8% of capacity. •Pilgrim’s Pride serves restaurant chains, the US military, distributors, and food manufacturers. The company sells its products through grocery, club and warehouse stores.•Strengthen position in consumer poultry market with new product innovation such as frozen and full-cooked chicken products for busy families. PP has also championed ‘Farm-to-Fork’ production and processing capabilities.•Focus more on prepared chicken products to reduce feed cost by 49%. Hedging feed and corn financially to reduce their weight in the overall production cost.•FDA approvals of the broiler process to reduce litigation costs over time.

Strategic Growth via Acquisitions..•WLR Foods Inc. (7th Largest poultry company) enabled Pilgrim’s Pride (PP) to access chicken processing facilities in eastern US, which allowed them to deliver poultry products within one day to markets accounting for approximately 40% of the US population. •ConAgra Foods – Making PP second largest domestic chicken producer behind Tyson. Also gave access to Southeastern US, which is where many of its poultry farmers are located•Gold Kist – 3rd Largest company in 2007- this acquisition made PP as the world’s leader in chicken production.

Perceived Quality: Chicken is a commodity and despite slight deviations in the quality of the taste, industry position depends on how well each company markets their brand, thus the customer’s perception of quality.Geographic Distribution: Geographic distribution is a major driver of competition in this industry, as it is clear that the global operations are industry leaders

Geographic Distribution

Company 2011Tyson Foods, Inc. 165.86Pilgrim's Pride Corporation 130.82Sanderson Farms, Inc. 53.95Perdue Farms Incorporated 53.54Murray's Chicken 38.80Ready-to-cook pounds, millions

Strategic Group Map

Size of the circle is driven by ready to cook pounds:

20% of Tyson and Pilgrim’s Pride sales are international. Focus is on mass production and sales into several channels – retail grocery, food service, frozen foods.

Certified Humane label certified. Unparalleled taste and low fat content. First and only to be certified as ‘Lean’ by the American Heart. Focused in the NY tri state area.

SF: 12.5% of sales were to export markets. Advertisement emphasizes 100% natural, freshness, and lack of salt.

Perc

eive

d Q

ualit

y

Regional Int’l

Low

Hig

hPerdue products are USDA verified; chickens are raised cage free, all-vegetarian diet, with no animal by products

Make sure this is all set / make adjustments & additions as needed

NAFTA

The mature, saturated US market has entered consolidation phase. Whereas Pilgrim’s Pride originally leveraged an acquisition strategy, the company has now shifted to focus more on international markets where it can grow its footprint. •With nearly half of all exports concentrated in Mexico, company also looking to open up positions of strength in new Asian markets such as Japan, Saudi Arabia and South Korea

•Mexican producers have faired less favorably •Issues like bird flu have adversely impacted local producers•Protections around corn by Mexican govt. alleviates feed cost pressures, providing only slight advantage to local producers•Forced to compete with PP on both local and intl. fronts

•Major traction – reaching 70% of Mexican population•Over 10% of total revenue from sales to Mexico•Plants in Mexico located in and servicing Central states•Northern Mexico serviced via imports from US

Capitalizing in Mexico: Advantages gained from exports

Sustainability of Strategy: In the short-term, Pilgrim’s Pride may maintain an advantage if it can beat competitors to critical export mass in growing Asian markets. As incomes world wide continue to grow, many will likely turn to chicken as a healthier protein source. However, in the long-term, Pilgrim’s Pride will find itself confronted by new local competitors and may suffer in the event of policy shifts, as can be observed through poultry trade interactions with China.10

Some key takeaways

• In the US, consumer trends towards healthier lifestyle will play nicely for poultry producers. Success also depends on price per pound in retail grocers compared to substitute proteins.

• With increases in income, specialty and value added products such as sustainably sourced meats, prepared foods and marinated meats will become more attractive. There is a growing concern around the issues of sustainability and worker and animal welfare. Future success for companies will depend their ability to market and address social needs8

• International trade will continue to be relevant, with export markets growing in importance. Increases in global income levels will increase demand for poultry exports. However, success will “depend heavily on animal health and meat quality”3 which may cut into profitability

• Innovation will mean efficiency improvements and packaging innovations, not just expanded product lines and portfolio diversification2,7

Please add/ remove

Appendix: Citations

1. Information on the Poultry industry from http://www.wattagnet.com/ such as the 2012 USA Broiler Rankings report2. Information also used from IBIS World Industry reports 11235 (Chicken & Turkey Meat Production in the US3. ), 31161 (Meat, Beef & Poultry Processing in the US)4. http://www.pilgrims.com/company/company%20fact%20sheet%2010_8_12.pdf5. Tyson 2011 fact book http://www.tysonfoods.com/About-Tyson/History.aspx6. http://murrayschicken.com/7. http://www.wattagnet.com/Innovation_in_poultry_industry_must_evolve_to_meet_current_economy.html8. http://www.wattagnet.com/Chicken_marketing_101__Happiness_is_a_sustainable_bird.html9. Restructuring Pilgrim’s Pride – As prepared for Professor Laura Resnikoff’s Turnaround Management Course at Columbia

Business School Dec 8, 2008 10. http://www.nytimes.com/2011/09/21/business/global/us-files-complaint-over-chinese-chicken-tariffs.html?_r=0

Add your own if applicable