In the five years through 2013, revenue for China’s poultry farming industry has grown at an average annualized rate of 7.7% to $75.3 billion and two U.S. meat giants are in the thick of it. Tyson Foods and Cargill each want their share of this burgeoning market expected to produce 20 million tons of chicken this year with revenue growth of nearly 10%, according to IBIS World.
The research firm anticipates over the next five years this industry transitioning to vertical integration will mature with revenue of $105.8 billion as China’s 1.3 billion consumers eat more chicken. In vertical integration the poultry company controls the chicken from the egg though processing and contracts with growers who house the birds during their maturation phase which is typically 47 to 50 days.
Springdale-based Tyson Foods has worked toward complete vertical integration of its China operations for more than a year. It's a move the company said will improve food safety standards in China while also helping grow topline sales.
Tyson CEO Donnie Smith recently said that roughly 50% of its chicken business in China is vertically integrated, and by the end of 2014 it should reach 100%. Tyson operates three ventures and employs about 4,300 people in China. The first venture, established in 2001,Tyson Dalong Food Co., operates two modern processing plants and a separate marinating facility.
In 2008, Jiangsu Tyson Foods Co. was formed near Shanghai, which is a fully integrated poultry complex where the company is sharing food safety and efficient processing methodology with Chinese consumers.
In 2009, Tyson acquired a majority interest in three poultry plants in the Shandong province. In 2011, Tyson purchased the remaining 40% bring the company’s total investment of $115 million with another $93 million for capital needs. Those facilities are known as Tyson Rizhao and Tyson Weifang.
Tyson Rizhao is a fully integrated poultry complex located in Juxian Industrial Park. Earlier this year, Tyson said it sold Welfang, one of its smaller chicken operations that processed fully cooked chicken products and exported to Japan and Korea.
Smith said the investment needed to bring Weifang inline with Tyson’s operational goals was too great and the best alternative was to sell it.
In China, Tyson processes chicken sold wholesale into food service for clients such as Yum Brands! and McDonalds as well fresh chicken sold in retail groceries like Wal-Mart and Sam’s, extending those longtime U.S. relationships abroad.
Tyson said it is processing about 1.3 million birds per week with a goal to reach 3 million per week by late 2014.
“We’re expanding the volume of company-controlled birds we produce for our poultry operations. This includes both company-owned birds raised by contract farmers and company-owned birds raised on Tyson-owned and operated farms,” Tyson spokesman Gary Mickelson said.
Like Tyson, Cargill has made substantial investments in China. Known for beef and turkey in the U.S., Cargill stretched its wings into chicken production with a $250 million green field investment last year in Anhui, China.
The large broiler facility includes a feed mill, farms, hatchery and processing plants, according to Michael Martin, Cargill spokesman. He said the facility will raise 65 million birds a year, one of the largest integrated plants in China when production is running a full capacity in the next couple of years.
Construction was completed this summer and production kicked off last month. The chicken raised by Cargill’s China operations are being sold via food service channels. The company estimates by 2015 the complex will employ 3,500 people.
“In a country that consumes about a third of the world's animal protein, we believe the product quality and integrity made possible through this model operation will help build confidence in China's food supply,” Cargill noted in a release.
Cargill said China’s chicken industry is beginning to modernize, much like the pork sector did 20 years ago.
The timing for Tyson and Cargill couldn’t be better given that China’s image has suffered from multiple food safety gaffes in recent years and these two International meat companies have strong food safety records, analysts said.
Earlier this year an Avian Influenza outbreak known as the H7N9 virus, devastated flocks, sickened more than 100 people and caused more than $6.5 billion in losses to China’s economy. Smith said the outbreak was troubling and detrimental to protein consumption in the short run. However, he said the unfortunate event had “absolutely validated our model for extreme biosecurity.”
Smith said, while many chickens in China are still raised by small farmers, Tyson is bringing technology and practices common in the U.S. to the Asian country. To keep birds healthy, Tyson uses ventilation systems in the houses, mills its own feed, controls access to farms and requires anyone entering or leaving the buildings to shower, he said.
Customers in China are willing to pay more for added food safety Tyson provides, he added.
Martin said the Chinese government continues to encourage the modernization of the poultry supply chain, including the construction of modern housing complexes, in order to improve food safety and disease prevention.
While China’s consumers are receptive to these brands, Tyson and Cargill each said expansion there has had its challenges.
Mickelson said the acquisition of land rights is vital for Tyson’s ability to expand and is not a simple process. He said Tyson has received great support from local and provincial governments in their efforts to virtually integrate all of their operations in China.
Martin said Cargill spent a considerable sum constructing roads and bringing the power infrastructure into Anhui before they could began building their complex operations.
Despite some hurdles, Tyson and Cargill are confident their recent and ongoing investments in China will pay off. Much of the growth will come from the burgeoning quick service restaurants (QSR) sector and emergent frozen/processed food sectors. QSRs are the major driving force for poultry demand thanks to a double-digit growth rate and menus biased to poultry, according to IBIS World.
YUM Brands and McDonald’s are the two fastest growing QSRs in China. Each have publicly said in recent months their business in China has been adversely impacted because of the food safety gaffes in the country’s poultry industry.
Tyson said chain restaurants are opening in China at a rate of more than 1 per day, which provides a substantial opportunities for them and other U.S. companies.
“China remains one of our key markets for international growth … Per capita poultry consumption in China is lower than it is in the U.S.; however, when you consider the overall size of the population in China, any increase is substantial,” Mickelson said.
Tim Ramey, an industry analyst for D.A. Davidson, said American processors like Tyson have a great story to tell about what they are doing to advance food safety practices in China.