Tyson Foods grows foodservice division to a $12.6 billion business

Tyson Foods is a household name for branded retail products like frozen chicken tenders and Jimmy Dean sausage, in all commanding 42 miles of retail freezer aisle space in the U.S.

What consumers may not realize, though, is the chicken fingers on elementary school menus, the Philly cheesesteak sandwich at Six Flags Over Texas and the Quesalupa at Taco Bell also use Tyson Foods’ products, sold through its foodservice business.

Many of the trendy consumer branded products sold today in retail were first seen by Tyson Foods in the foodservice segment, given their top 100 restaurant customers feature customized products that match emerging trends. This relationship gives Tyson Foods insightful views into future retail trends, said Johnny Hughes, senior vice president of the company’s foodservice business.

Foodservice is a separate segment at Tyson Foods, and the business is growing alongside retail. Last year, Tyson Foods’ total sales revenue topped $38.3 billion, and almost one in every three dollars came from the company’s growing foodservice business that recorded 2017 sales of $12.6 billion.

Foodservice sales rose 6.74% last year thanks in part to the acquisitions of AdvancePierre and Original Philly Holdings, who each garner high foodservice market share in the sandwich and snacking categories. Tyson Foods’ foodservice volume growth outpaced competitors Hormel by two-to-one and Smithfield Foods by four-to-one, according to IRI data.

“Our multichannel approach on top of having chicken, beef, pork and a growing prepared foods segment give us a competitive advantage,” Hughes said. “Foodservice focuses on everything from [convenience] stores to schools, hospitals, restaurants and the U.S. military. We lean on the insights from our balanced portfolio that includes our branded retail business and the foodservice business.”

Hughes said the foodservice business is always looking to grow share in the fragmented sector of wholesale food and beverages sold away from home. Foodservice encompasses the U.S. restaurant industry, which garnered roughly $798 billion in total food and beverage sales last year, rising from $766 billion in 2016, according to Statistica. Institutional foodservice contractors serve schools, hospitals, universities and stadium vending are also part of the foodservice total market.

As of October 2018, institutional food contractors were sharing a $46 billion market, according to IBISWorld. The convenience store segment is a $550 billion industry also partaking in the foodservice sector. While 70% of convenience store sales come from fuel, the food sold inside the stores is where two-thirds of the profits are made, according to Nielsen.

Tyson Foods recently expanded its convenience store and vending business operations within the foodservice segment because of the growth and demand from consumers wanting to get foods on the go, Hughes said. The acquisitions of AdvancePierre and Original Philly Holdings give the company additional market share in the convenience-store space. The company also invested $113 million in research and development last year, part of which was focused on foodservice innovations around snacking.

Hughes said Tyson Foods has a national footprint with its foodservice business, unlike some competitors. Hughes has logged 26 years at Tyson Foods and said the segment has changed greatly over the past two decades. He said Tyson Foods has a rich heritage in foodservice, but it was mostly chicken products and tortillas after the Mexican Original brand was acquired in 1983. Tyson Foods is the second-largest supplier of tortillas and chips to the U.S. restaurant industry. Four years ago, the company acquired Don Julio Foods of Clearfield, Utah, a supplier of tortilla chips at retail. The company said at the time it would use Don Julio to complement the foodservice business it owns with Mexican Original.

Hughes said the lines have never been more blurred between foodservice and retail. He said Tyson Foods has the ability to play in both areas and does so effectively. He remembers not that long ago when Tyson Foods and the rest of the industry had put up silos in foodservice and retail. He said foodservice once had its own dedicated plants, which isn’t now necessarily the case.

Tyson Foods offers more than 7,000 items for purchase through its foodservice division which include breakfast sandwiches and burritos, pizza crusts and toppings, hamburgers for quick-service restaurants and baby back ribs at a casual dining restaurant. Hughes said Tyson sells to the nation’s top restaurant chains as well as mom and pop eateries in addition to all the major foodservice distributors in the country.

INNOVATION PIPELINE
Tyson Foods was among the first meat companies to build a research and innovation facility dedicated to new product development. The company opened the Discovery Center in Springdale in January 2007, the brainchild of then CEO John Tyson, who is now board chairman. Tyson Foods spent $45 million to build the 100,000 square-foot facility, which was the first of its kind the industry as it included a USDA approved pilot processing facility that could allow the company to take an idea to market in a week’s time.

The Discovery Center features 18 commercial kitchens and employs more than 200 people. The company has 64 food scientists who are Certified Culinary Scientists (CCS) in addition to five chefs who are Certified Research Chefs and seven dietitians who support the company’s healthier foods initiative. Tyson Foods said its Discovery team together represent more than 2,000 years of tenure with the company, and 3,200 years of experience in the food industry.

More than 1,700 customer visits were made to the Discovery Center during its first 10 years, according to the company. Another 1,500 non-customers also visited the facility in that time.

“The products developed in the Discovery Center can be found in retail stores, quick-service restaurants, fine dining establishments, schools, military bases, fast-casual restaurants, convenience stores, delis, and in people’s homes,” the company noted in its Discovery Center 10th Anniversary Fact Sheet. “Basically, anywhere you eat food we have influenced the protein that is on your plate.”

The foodservice segment notes the following brands were developed in the Discovery Center: Tyson Red Label, Taco Bell Quesalupa, Tyson brand K-12 product development to meet Healthy Hunger-Free Kids Act, and convenience store products that incorporate the Jimmy Dean, Hillshire Farms and Ballpark brands. Last year Tyson Foods was an innovation award winner named by convenience store customer Kum & Go.

The foodservice segment also has benefited from other work done in the Discovery Center around food safety and shelf life. Tyson Foods said having the Discovery Center has helped it stay on top of new trends impacting its business. Prior to having the Discovery Center, the company operated three separate smaller research and development facilities. All of the company’s scientists must complete annual training in addition to the 75 hours of training every five years required by their certifications as culinary scientists and chefs.

Tyson Foods also recently opened another research and innovation center in Chicago. The small lab employs a team of seven professionals chosen to focus on snacks and product development. The work is in addition to efforts by culinary experts who work in the Discovery Center in Springdale. The innovation team in Chicago will focus on using byproducts like spent grain from brewers or vegetable pulp from juicers to try and create new products that could go to market within six months.

OPPORTUNITIES AND RELATIONSHIPS
Aside from snacking, Hughes said there are other emerging opportunities for foodservice in “new vending.” He said entertainment venues like movie theaters are serving up a lot more than popcorn, and the company is exploring ways to grow sales in that area. It can offer a host of products from chicken tenders to steak sandwiches, burgers and deli sandwiches, or maybe sausage and biscuits or breakfast burritos for the moviegoer who wants breakfast any time of day.

Hughes said hospitality vending is also a growth area as micro-markets are popping up in hotels across the country. He said consumers could easily buy and heat up a sandwich in these markets similar to the way they do in convenience stores. Micro-markets inside hotels could also carry higher margins by offering a convenience to hotel customers who are hungry at any hour.

Hughes said as consumers are snacking more often and dining less, Tyson Foods is trying to capture share as it migrates. The company’s extensive research and development capabilities and speed to market options allow the massive company to be more nimble in the effort.

He said the Discovery Center has allowed Tyson Foods to deepen the relationships it has with foodservice customers. While most of the company’s largest competitors have opened some form of a discovery innovation center in recent years, Tyson Foods’ speed to market has been proven invaluable to its customers as far back as the Great Recession of 2008.

During the last recession and prolonged recovery, foodservice sales took a big hit and discretionary spending was curtailed amid high unemployment. Tyson Foods worked closely with its foodservice customers to revamp menu offerings and also kept new products flowing into the pipeline. When grain prices spiked in 2009 and drove up ingredient costs, Tyson Foods was again able to work closely with its customers on product development and new prototypes to help mitigate the exposure.

Tyson Foods also collects consumer research on its products and consumer food metrics such as likes and dislikes, spending dollars and convenience demand. Its foodservice customers have the ability to glean consumer marketing insights from Tyson Foods when they are working on product development together at the Discovery Center.