Tyson Powered By Value-Added

With slimmer profit margins on fresh meat, Tyson Foods Inc. of Springdale is looking to its value-added segment — everything from pre-cooked bacon to case-ready meats — where profits can be three to four times higher.

Tyson had a net profit margin of about 1.5 percent last year, but the company won’t divulge the difference in profit margin for fresh vs. value-added products. Tyson spokesman Gary Mickelson said the company’s pre-cooked bacon, for example, is about 2.5 to three times more profitable than fresh bacon.

Tyson rolled out more than 400 value-added products in 2004, and plans to make value-added 40 percent of its sales by the end of 2005. Its goal of 38 percent was achieved at the end of fiscal 2004.

Value-added products accounted for $10 billion of the $26.4 billion Tyson rang up in sales in 2004. Based on that number, Tyson’s goal is to make value-added $10.5 billion worth of sales in 2005.

“If you can establish a differentiated product that stands on its own taste merits and unique qualities and you can build a brand around it, then you have delivered value to the customer,” said Greg Lee, chief administrative officer and international division president for Tyson Foods. For Tyson, added value means added profit.

A report on Tyson’s second quarter 2005 earnings by David Nelson, analyst for Credit Suisse First Boston, indicates that Tyson’s value-added segment will be crucial to the company’s success.

In the report, Nelson said Tyson’s fiscal 2005 earnings per share won’t be up much compared to 1995.

“This is why [Tyson’s] efforts in value-added are critical and progress is being made,” he wrote.

Lee said value-added products will give Tyson a higher margin, and in turn “average up” the margin for the company. Value-added can compensate for some of the effects of the commodities cycles, he said.

Nelson noted that Tyson’s pre-cooked bacon sales rose 167 percent, dinner meat rose 45 percent and case-ready meats climbed 18 percent in the last year.

Tyson’s value-added line includes anything from case-ready meats such as cuts of beef and pork that are pre-packaged and ready for the retail grocer to place directly into the meat case, to fully-cooked dinner meats such as chicken breast and beef steak strips. The company is also the No. 1 manufacturer of pizza toppings.

Ad Campaign

Tyson is betting more than $30 million more that it will get a return on its annual $65 million spending budget for consumer advertising.

Bob Corscadden, senior vice president and chief marketing officer for Tyson Foods said the company was spending $25 to $30 million annually on consumer advertising before unveiling its $75 million “Powered by Tyson” campaign in August. Tyson does spend a portion of its budget on trade advertising, Corscadden said.

He said Tyson expects different rates of return on a marketing investment, depending on the product.

For example, he said, marketing chicken nuggets in the U.S. will have a higher rate of return in the short term because it is an established product.

“What I can tell you is that some projects are seen more as exploratory and business building, and the rates of return are going to be lower,” he said.

Corscadden said the “Powered by Tyson” campaign marked the first time in three decades that the company has been able to have one tag line and communications strategy that works for both the food-service and retail grocery customer. He wouldn’t be specific about the amount Tyson could spend on one given product.

Sales in the prepared foods segment increased 7.3 percent in fiscal 2004. Of that, food-service prepared food sales increased 13.2 percent. Overall, chicken sales increased 13 percent in 2004, beef sales showed nearly no change and pork segment sales increased 28 percent. Food-service chicken sales increased 11.3 percent, retail chicken sales increased 16.2 percent and international chicken sales increased 14.5 percent. Case-ready beef increased by 18 percent and pork by 28 percent in 2004.

Margin Inspiration

Tyson operates four test kitchens devoted to product development that test on average 20 sample products per day. The kitchen staff usually tests one product per day in the sensory lab, running five-person test panels every fifteen minutes, said Charles Wyche, senior director of research and development for Tyson Foods.

The kitchens employ a total of 56, with each kitchen assigned its own staff. The entire research and development department at Tyson headquarters employs 85.

Different lab equipment is emblazoned with the logos of familiar fast food chains, including Subway and Burger King. Boxes of samples line the hallway. Some are labeled to be shipped to different food-service customers, including McDonald’s and On the Border.

Depending on technology requirements, Wyche said the tweak of a new breading system, for example, could take from three months to a year to develop.

Wyche said product development for retail takes longer because of packaging and advertising needs.

Not only does Tyson test for taste, but it tests the manufacturing process in its USDA-inspected pilot plant located adjacent to the kitchens. The plant is really a doll house sized version of a full-size Tyson operation. Tyson tries to be able to produce everything the company makes on a smaller scale, although it doesn’t trouble-shoot processing problems in that facility, Wyche said.

For example, the pilot plant processes 20 to 30 pound batches, whereas a regular plant can process batches up to 5,000 pounds per hour, Wyche said. The belts in research and development pilot plant are seven to eight inches wide, and the regular plants use a 40-inch belt.

The Discovery Center project being constructed outside the door of the current test kitchen facility will include a 63,000-SF building that will house 18 test kitchens, in addition to office space for 125 people. When the Discovery Center opens, it will employ 150 in research and development.

The entire Discovery Center project will include 285,000-SF of building space valued at $85 to $95 million. The project is scheduled to be complete by early 2007. It recently added a four-story, 174,000-SF office tower to its plans, which more than doubled Tyson’s expenditures on the project.

Christine McCracken, senior managing director of FTN Midwest Securities Corp., said the red-meat industry has just begun to tap its potential sales in case-ready and value-added products.

Poultry products are getting close to maturity, she said.

Mickelson said Tyson’s 2001 acquisition of IBP Inc. improved Tyson’s case-ready beef operations, as well as its prepared foods capacity. Mickelson said the acquisition also enabled Tyson to apply many years of its development and marketing experience in chicken to the beef and pork business, much of which was displayed in its 2004 value-added products rollout.

Border Battle

“Beef is expected to continue to recover through the year due to gradually improving supplies,” Nelson said. “We agree.”

His report indicated that Credit Suisse First Boston doesn’t expect the border situations with Canada and Japan to impact fiscal 2005 results.

Lee said an agreement between the U.S. and Japan is still in the working stages.

“We have sort of a skeleton agreement that calls for 20-month and down cattle [the age of the cattle or younger], if you could age-verify those, and part of the process is establishing what the protocol would be on that,” Lee said.

Beef segment sales fell by 4.5 percent in the first six months of fiscal 2005, which ended April 2, although second-quarter results showed a 2.9 percent increase in sales.

Lee said protocol is just one hurdle the U.S. beef industry will have to overcome to open up Japanese borders. Lee said Japan was the single-largest destination for the U.S. beef industry, as well as for Tyson.

“The fact of the matter is that there is a lot of other conversation going on,” Lee said. “There are different elements of the Japanese community that maybe are still not comfortable with the whole idea of any cattle that haven’t been tested, or what’s been described as an age-verification program, or some other detail they might choose to point to around the prospective agreement.”

He said the 20 versus 30-month issue has become a function of the number of available cattle and what is needed to segregate them.

“In real terms, what it does is limit the number of animals so then you would have to take some steps to try and ensure you were tracking everything and meeting all the protocols to satisfy what’s necessary to make them eligible, which again is not completely defined,” Lee said.

Lee said trade could be re-established by the end of 2005, but he emphasized the uncertainty of the situation.

When asked if Tyson has had to re-think its investment strategies to combat the loss of an export market, Lee said looking to the longer term is more important.

“You have to decide what is going to be the longer term structural change in the industry before you would make significant changes in your infrastructure,” Lee said. “While trying to determine exactly what normal is maybe going to look like downstream, I believe we need some more definition. For example, we have increased the amount of slaughter capacity.”