Michael Brown and Bahige El-Rayes are partners and Sam Rowland is a manager in the consumer practice at Kearney, a global strategy and management consulting firm.
Our national meat supply is facing unprecedented challenges and news outlets are abuzz about the potential for shortages and rising costs affecting U.S. supermarkets. But with an understanding of the dynamics at play, there is arguably no time like the present for food retailers to focus on improving surety of supply and right sizing their cost structure for chicken.
Surging Retail Demand
Meat has become this month’s toilet paper in that consumers are rushing to stock up, some supermarkets are struggling to fill shelves, and the news cycle is pumped full of story after story about risks to availability. By the end of April, Nielsen was reporting weekly supermarket meat sales surging 41% as consumers are betting that they will consume the vast majority of meals at home for the foreseeable future.
Retailers are working tirelessly to secure supply and taking steps to insulate from a run on meat. The first week of May, both Kroger and Costco extended purchase limits to include chicken. Meanwhile, retailers are pulling back promotions and increasing price. According to Nielsen, weekly average retail meat prices were up less than 2.5% into February but as high as 8.6% each week in April.
Relatively Stable Supply
Headlines are abuzz with reports of record declines in U.S. meat production and the dozens of meat processing plants taken off line on account of COVID. However, the story is far from the same across proteins. Total weekly U.S. meat production was up through both March and April. May does begin to tell a different story, but the decline in chicken production is just 7%, far short of the 35% declines in both beef and pork.
A 7% decline is concerning, but 55% of U.S. production serves foodservice and export markets. The evaporation of foodservice demand appears to be the story rather than inability to supply — note that farms continue to cull flocks on this account well into May.
This isn’t to say there is no risk of supply disruption. To date, more than 50 U.S. poultry processing plants across 13 states have reported confirmed COVID cases. The distinction is that only 7 appear to have been severe enough to have disrupted operations either in reduced production rates or temporary facility closures, and a majority of closures have been under a week with facilities returning to service.
States with Poultry Plant Cases and Facilities with Disrupted Operations
Tyson has been most impacted to date with at least 5 facilities disrupted, the worst case being at the Wilkesboro, North Carolina facility where nearly 600 workers tested positive in early May. This story received significant coverage, but it’s important to understand key differences between poultry and beef or pork production.
Due to more standardized sizes, poultry processing is highly automated, which has potential to mute the impact of the virus. According to CDC data, across 39 poultry plants with a worker testing positive, only 2.3% of workers ultimately tested positive. However, across 11 such beef and pork plants, this figure was 12.7%. If this pattern holds, there may be hope that poultry disruptions will remain isolated.
All said, perhaps retail’s greatest supply concern should be the downstream impact of beef and pork constraints on demand for chicken as consumers substitute due to availability or price. Retailers need to prepare now for this potential surge to come.
Tail Winds for Retailers
All of the above dynamics necessitates urgent engagement with chicken suppliers to stay afloat near-term, but retailers will be amiss if they fail to see the urgency to act on longer-term opportunity in tandem.
Slack from Foodservice
Major chicken suppliers are seeing net-negative demand vesus prior years. Of total U.S. broiler production, foodservice typically accounts for 37% of tonnage and exports account for 18%, leaving retail representing just 45% of total demand.
As a result, even 40% growth in the retail channel can be offset by the substantial declines in foodservice demand. It is this balance that has triggered net sales declines reported by Tyson, but each producer will be impacted differently. Sixty percent of Sanderson Farms sales are to foodservice, leaving the third-largest producer particularly impacted.
Retailers need to be keenly aware of the supply market and the structure of their suppliers to tap into the demand slack left by foodservice. To name a few, retailers must understand their demand by bird and cut relative to other segments. They must have visibility to their suppliers’ production facilities and lines and understand what they serve, and retailers need to know which tradeoffs they can make to spec, freight lane, packaging, and cut. This requires advanced levels of collaboration with suppliers.
Declining Input Costs
There’s more to the story than supply and demand. Chicken producers have benefited substantially in past months from sharp declines on key input costs including feed and freight. Depending on the bird, cut, and level of processing, feed costs can represent anywhere from 25-50% of wholesale prices, and depending on location and distance, inbound freight can represent 5-10%.
Over the last year, corn costs are down 17%, soybean meal down 8%, and refrigerated freight costs down 13%. If these tail winds were passed through to wholesale prices, that could mean 3-5% lower chicken cost for retailers.
Retailers need to be proactive and work with suppliers to see upside. This requires a clear understanding of your suppliers’ cost structure that can account for critical differences between cuts and levels of processing, collaborative partnerships with your suppliers, consideration of innovative costing models ranging from open book costing to automatic grain-based cost adjustments, and robust knowledge of commodity markets and the financial strategies producers deploy.
Increasing Line Speeds
Chicken processing is highly automated with variable costs as little as 10-15% of wholesale prices. The most important variable in keeping these costs down is the speed of line operation.
Eighteen months ago, the USDA introduced a waiver structure allowing processing speeds at authorized plants to increase 25% from 140 birds per minute to 175. Citing increased retail demand from COVID, the USDA issued 15 additional waivers this April alone, the single largest issuance to date.
Large producers were quick to jump at the opportunity. Tyson received six additional waivers for a total of 13, Wayne Farms received six for a total of eight, and Foster Farms received its first. Pilgrim’s Pride meanwhile had previously been issued waivers for seven of its plants and another 16 producers now have waivers for at least one plant.
Retailers should be well attuned to the individual plants that serve their demand and which of those have or have not received waivers and increased processing speeds. In tandem, they should seek clear visibility to the level of processing costs required for each cut and spec they order.
Head Winds to Manage
Don’t expect to reuse last year’s playbook. There is no doubt there can be significant upside from the above tailwinds, but they must be couched in an increasingly collaborative model of engagement with your suppliers that focuses on fair costing, surety of supply, and win-win solutions to short-term headwinds.
Risk of Disruption and Increased Labor Costs
Retailers should be adopting a risk-management mindset. This requires a precise understanding of where each segment of your supply is processed, what proactive measures have been taken at these plants, what proactive contingency plans are in place in the event of disruption, and the degree of risk exposure and diversification.
Alternative plants of supply are more critical now than ever. While disruptions have been limited to date, that may change and it will pay dividends to have proactive contingency plans in place. Don’t wait for a plant to go offline to start working a plan.
Likewise, transparency is more valuable now than ever to monitor the key drivers of labor cost and whether such headwinds will erode cost advantage. Are your suppliers providing incentive pay? Tyson, for example, has reportedly offered two $200 bonuses to its workers. Have they slowed processing speeds to socially distance their workers or have they perhaps even increased speeds as a result of new USDA waivers?
Potential Short-Term Costs to Secure Supply
There are steps you can take short term to reduce risk, and best in class retailers are working to do so proactively and with a clear understanding of cost implications.
Tapping into slack capacity from foodservice lines can be key to meeting volumes, but requires due consideration to the cost of line changeovers, packaging bottlenecks, and impacts to freight. The optimal approach will, for example, reoptimize delivery schedules to ensure full truck loads even if volume scatters across plants. Alternative short-term supply models should also be costed and considered, for example receiving bulk and tray packing in-store or partnering with local co-packers to do so centrally.
The best approach to managing this headwind may very well be re-evaluating your supply base for the short and long term. A supplier who was courting your business last year may now be sitting on excess foodservice capacity and have the greatest willingness to invest and retrofit lines, especially if long-term business is at stake.
Rivalry from Rising Export Demand
Lastly, remember that our world is global. The export market represents approximately 18% of U.S. broiler production and can be highly volatile, placing pressure on domestic supply and demand. Prior to COVID, export volumes were up 2-3% but this jumped to 14.8% in March. Much of this increase is helping to offset dramatic declines in domestic foodservice demand, but retailers must remain highly attentive.
There’s no doubt that chicken supply and demand are in a precarious balance, giving rise to greater need for retailers to be proactive and collaborative with their suppliers. But don’t let the headlines fool you — with the right strategies, short-term turbulence can be effectively managed and leading retailers will seize the opportunity to drive long-term advantage.