Tyson Foods has spent the past three years trying to transform itself from a commodity-based meat protein producer into a global food company. Front and center in this Tyson Foods “2.0” conversion is the company’s prepared food category, which comprised 19% of the company’s overall sales revenue in 2015.
The diverse portfolio of products includes pizza toppings, tortillas, soups, sauces, appetizers that are sold on wholesale basis to restaurants as well as at retail in some cases. The company takes raw materials from its chicken, beef and pork categories and often combines them into prepared entrees which can be sold at a higher margin than the typical commodity meat.
CEO Donnie Smith said while the prepared foods division is growing in overall sales (19% in 2015) it also produced 28% of the company’s operating margin last year. Profits are double the size of the segment and the company is just getting started, Smith and other Tyson Foods’ execs explained during a according to the Consumer Analyst Group of New York Conference held Feb. 16 in Manhattan.
The prepared foods segment operating income grew to $588 million during 2015, which was the first full year following the $8.5 billion acquisition of HIllshire Brands in October 2014. The segment posted an operating loss of $60 million in 2014.
Smith said when the prepared foods segment is combined with its chicken segment, which is is already 85% value-added margins (higher than commodity prices), the two categories generate 88% of the company’s overall operating income.
Smith said a benefit from going from a commodity-based protein company into a food company is more stable earnings. Over the past years Tyson Foods has grown its earnings per share by 18%. Earnings totaled $1.97 per share in 2012 and they are on track to reach $3.90 this year, Smith said.
MONEY FROM ‘SNACKING’
Part of the growth strategy involves launching more new consumer products than in recent years as Tyson Foods and Hillshire Brands put their combined assets and insights together. The marriage of the two food giants resulted in $322 million of synergies (savings) last year with another $500 million expected in 2016, Smith said.
Tyson said five new consumer brands launched in recent years have a combined $225 million in sales, which is up 50% from 2014. Those brands include Nature Raised Farm lunch meats and Hillshire Snacking.
Sally Grimes, global growth officer for Tyson Foods, remembers nearly three years ago at Hillshire wanting to do more with the Jimmy Dean brand, like expanding into a hickory smoked bacon product, which was the first effort for the combined companies. The result of the collaboration has been a success. She said 40% of the consumers buying this product are new to the bacon category.
Grimes also unveiled an upscale snacking item on which the teams collaborated. The product is an outgrowth of lunchable products introduced several years ago by a competitor. While Hillshire is known for its sausages, it wasn’t until it joined Tyson that it had the access to other raw materials needed. Branded as Hillshire Snacking, the small plates of smoked meat cuts are paired with various cheeses and cracker-like toasted bread appealing to consumers wanting an alternative to a sandwich or peanut butter and crackers.
Another product recently launched as a collaboration of the two companies was flame-grilled jerky snacks under the Ball Park brand, which Grimes says has tremendous “guy equity.” The company said it was the highest grossing snack product launch in the past five years. They did not give a specific sales number in their presentation.
Grimes also mentioned several other product innovations in the snacking category which will be unveiled in the coming weeks. The products leverage the equity of the Jimmy Dean, Ball Park and Tyson brands seeking to fill niches that appeal to the changing consumer. Grimes said when Tyson looks at launching a new product, the goals are to drive more sales as well as keep margins in the category steady or push them higher.
Robert Moskow, an analyst with Credit Suisse, said not all of the product growth initiatives are going to work, but the company has taken a quantum leap forward in its transition from a volatile commodity protein processor to a higher margin, more stable branded foods company.
“The Hillshire management is bringing a level of marketing sophistication to the business that Tyson sorely needed,” he said. “More ‘Guy Food’ for the world. Tyson said that it plans to double the size of its snacking line to over $500 million with more extensions of the sophisticated Hillshire line and with the introduction of Ball Park jerky.”
Moskow said Tyson’s efforts to “reclaim the origin story” and its “Keeping It Real” advertising campaign is an attempt to regain credibility with consumers who worry about hormones and artificial ingredients in the chicken category but perhaps aren’t able to pay $7 per pound for organic chicken.
While much of Tyson’s focus in recent years has been to shore up and grow its U.S. business selling off its Mexican and Brazilian Mexican businesses. Grimes, who is also the president for Tyson’s International Division, said there is a refocus with in the company’s China and India operations.
Grimes said this is another important growth engine for Tyson Foods in the years to come.
The prepared foods division is working with its business partners in China and India to develop product ideas for the freezer case as the focus is moving toward consumers and away from wholesale commodities. She promised to provide more details on this effort in the coming months.
Moskow expressed concern about international efforts by Tyson Foods.
“We received assurances offline that Tyson will proceed cautiously here without having to make major capital investments (like in cold chain distribution). Nonetheless we can’t but harken back to the other times that management leaned too far over its skis when trying to invest in emerging markets,” Moskow said.