Internet Mini Case 5

Tyson Foods, Inc.

Maryanne M. Rouse

Tyson Foods, Inc., produced, distributed, and marketed beef, chicken, and pork products,

including prepared foods and related allied products. The company's products were marketed and

sold to national and regional grocery chains, regional grocery wholesalers, meat distributors,

clubs, and warehouse stores. Institutional customers included military commissaries, industrial

food processing companies, and national and regional chain restaurants. Tyson also distributed

via international export companies and domestic distributors. The company's major export

markets included Canada, China, Japan, Mexico, Europe, Puerto Rico, Russia, and South Korea.

Approximately 12% of Tyson’s total sales were to a single customer, Wal-Mart Stores, Inc.

The IBP Acquisition

In August 2001, Tyson acquired IBP, Inc., (renamed Tyson Fresh Meats [TFM]), a major supplier

of processed, minimally processed, and prepared beef and pork products. The combined

company comprised two primary marketing groups: a food service and international group and a

fresh meats and retail group. Operations were conducted in five segments: beef, chicken, pork,

prepared foods, and other. Tyson held about 27% of the U.S. beef market, 23% of the chicken

market, and 19% of the pork market. Chicken accounted for 32% of fiscal 2004 revenues and

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59% of profit; beef, 45% and 14%; prepared foods, 11% and 15%; pork, 12% and 9%; other

sources of revenue were nominal.

Prior to the acquisition, IBP had begun developing the first national retail brand of both case-

ready red meat and quick-frozen steaks and pork chops under the Thomas E. Wilson brand. The

IBP acquisition also allowed Tyson to extend its line of branded convenience foods to beef and

pork via the Thomas E. Wilson brand of fully cooked family dinner meats. Found in the

refrigerated meat case, these products could be prepared in as little as five minutes. Varieties

under this brand included beef pot roast, seasoned pork roast, seasoned beef meatloaf, and

seasoned beef sirloin roast. Although Tyson initially embraced the Thomas E. Wilson brand as a

means of gaining market share in the fast-growing ready-to-eat segment, the company announced

only a year later - to the surprise of industry analysts - that it would drop the Thomas E. Wilson

name and replace it with Tyson as a first step in a branding strategy focused on creating a single

national protein brand. Communication and promotional efforts across product lines were built

around the “Powered by Tyson” strategy, a fully integrated marketing campaign designed to

position the company as a premier provider of protein.

Continued Restructuring

In August 2002, Tyson announced that it would close its company-owned and leased hog farms

and end contracts with 132 contract hog producers in Arkansas and eastern Oklahoma. The

company noted that transportation costs were a big factor in the decision to exit the pork

processing business: Competing companies had pork-processing operations closer to packing

facilities and consequently could avoid higher transportation costs for both finished hogs and

grain.
Tyson announced in mid-September 2002 that it had reached a definitive agreement to sell its

Specialty Brand, Inc., subsidiary, a leading producer of frozen food products, including handheld

Mexican appetizers and entrees, frozen filled pasta, and coated appetizers under the Jose Ole,

Fred’s for Starters, Rotanelli, Marquez, Posada, Little Juan, and Butcher Boy brands.

Industry analysts noted that Tyson had had a difficult year in 2004. It began the year with strong

demand and higher prices as McDonald’s, Wendy’s, Burger King, and other fast food restaurants

rushed to promote white meat chicken and lower-fat beef items, in an attempt to take advantage

of the growing popularity of the Atkins and South Beach diets. However, the huge demand drove

prices to a point at which both customers and food retailers began to cut back purchases.

Although there was usually a drop in demand for chicken and beef during the summer months

(July 4 to mid-September), Tyson’s drop in sales was greater than expected.

Chicken exports were further hurt by an outbreak of avian flu early in the year, and the mad cow

scare of late December 2004 continued to keep borders in Canada and Japan closed to U.S. beef

exports.

At the same time that higher prices dampened demand for beef and chicken, prices for the

soybeans and corn meal required to feed flocks and herds were soaring because of growing world

demand. Because beef prices weren’t high enough to justify the high grain costs, ranchers and

processors cut back on the production of beef and chicken, tightening demand even further.

Tyson, which derived 11% of its revenue from prepared foods, found itself in the awkward and

untenable position of paying more for the chicken and beef it used in its own prepared products at

the same time that customers were resistant to the higher prices of its unprocessed chicken, beef,

and pork that comprised the other 89% of its revenue stream. Finally, Tyson had speculated that

grain costs would continue to rise and invested heavily in grain futures. Grain prices had since

fallen, and the company had sold much of its grain at lower prices than expected.
 Finance

Tyson’s performance since the IBP acquisition had been uneven. Reported earnings in 2001,

although bolstered by the inclusion of nine weeks of post-acquisition operating results of IBP,

were negatively impacted by an oversupply of chickens for most of the year and increases in

operating costs: both cost of goods sold and operating expenses as a percentage of sales increased

for the year. For fiscal 2002, the company reported a 117% increase in revenue together with a

383% increase in net income compared to 2001; both revenue and profit growth were driven

largely by the previous year’s acquisition. In early 2003, Tyson closed two poultry operations and

began to phase out operations at a third plant. Later that year, the company sold off its frozen

appetizer business DFG. In the wake of the discovery of a single case of bovine spongiform

encephalopathy (BSE, mad cow disease), Tyson reduced its production of beef due to decreased

demand for U.S. beef overseas. In the first quarter after BSE was found in the United States, the

company announced charges of $61 million due to lost export sales. Although Tyson reported

sales growth of $1.2 billion, or 5.1%, for 2003, net income declined 12% from the previous year

due to higher live cattle prices, plant closings, and increases in grain costs in the chicken

segment; the BSE announcement; and accruals related to ongoing litigation.

Tyson’s 7.7% sales growth for fiscal 2004 was driven by price rather than volume increases

(9.4% increase in average price, with a 1.5% decrease in volume). Cost of goods sold as a

percentage of sales decreased slightly for the year, as did both SG&A and interest expense,

allowing the company to report a record net income of approximately $403 million.
Annual reports and SEC filings are available via the company’s web site, www.tyson.com, and

www.wsj.com.

Competitors and the Industry

Key competitors in the sub-industry group of poultry, meats, and seafood processing included

Pilgrim’s Pride, a vertically integrated poultry processor offering a broad range of 600+ value-

added products, Hormel, Swift & Company, and Smithfield Foods.

Pilgrim’s Pride was the second largest poultry processor in the United States after Tyson and the

number two poultry company in Mexico (after Bachoco). Pilgrim’s Pride’s vertically integrated

operations included breeding, hatching, raising, processing, distributing, and marketing chickens

and turkeys. Prepared poultry products were sold under the Pilgrim’s Pride and Wampler Foods

brands to restaurants, grocery stores, and frozen entree processors; fresh chicken and chicken

parts were sold through the same channels. Although the company also produced table eggs,

animal feeds, and feed ingredients, it focused on prepared foods. The company’s product line

strategy was to increase its sales of value-added products (marinated chicken parts, turkey

burgers, etc.), which returned higher profits than whole chickens and turkeys. ConAgra acquired

38% of the company’s stock in exchange for ConAgra’s poultry business; Lonnie “Bo” Pilgrim

and his family controlled the remaining 62%. ConAgra had announced that it planned to sell off

a portion of its shares.

Smithfield Foods was the world’s largest hog producer and pork processor. The meat-processing

group produced (domestically and internationally) a variety of fresh pork and processed meat

products and marketed them nationwide in the United States and in 25 other countries under the
Fleetwood, John Morrell, Lykes, Patrick Cudahy, and Smithfield Premium brands. This group

had seven domestic processing subsidiaries and four international meat processing entities. The

hog production group provided the meat-processing group with approximately 50% of its live hog

requirements. In a steady effort to diversify, Smithfield had built up its beef and prepared foods

operations through acquisition. In 2002, the company announced that it planned to purchase

French meat processor Jean Caby for $466 million and merge it with its existing French unit SBS.

With operations in Australia as well as the United States, Swift & Company was the third largest

U.S. beef producer. Swift focused on fresh, branded, and value-added meats. Hormel Foods

Corporation was a multinational manufacturer and marketer of consumer-branded meat and food

products. The company was involved in the processing of meat and poultry products and the

production of prepared foods. The company marketed its products to food wholesalers, retailers,

and food service distributors.

Chicken had experienced greater growth in per capita consumption in U.S. markets than most

other meat categories over the preceding 25 years. During that time, chicken consumption had

increased 110%, while beef consumption had decreased approximately 41%. Consumption rates

had been influenced by consumer awareness of the health and nutritional characteristics of

chicken, the price advantage of chicken relative to red meat, the convenience of processed and

prepared chicken products, and concerns about BSE. Recently, however, meatpackers had begun

to invest hundreds of millions of dollars in a campaign to reverse a decades-long decline in red

meat consumption. IBP, Hormel, Smithfield, and others were developing and aggressively

marketing high-quality, prepackaged steaks, roasts, and chops under their own logos.

Key competitors in the broader food processing industry (consumer non-cyclical sector) included

ConAgra Foods, Kraft, Unilever, and Sara Lee.

The mature, intensely competitive poultry and meat processing industries were vulnerable to

weather, demand shifts, and global political events. For example, in anticipation of the Bush

administration’s decision to impose steel tariffs, Russia announced that it would prohibit the

import of chickens from the United States. (Russia noted that the ban would address concerns

about the use of antibiotics by U.S. processors; however, Russia was expected to export

approximately $1.2 billion worth of steel to the United States in the next two years - about the

same dollar value of poultry U.S. processors expect to export during the same period.)

In 2002, an American Cancer Society study concluded that the long-term, daily consumption of

red meat and processed meat such as bacon, ham, and sausage increased the chance of getting

certain types of colon cancer. The release of this study was followed in mid-January 2002 by the

Agriculture Department’s release of new federal dietary guidelines that recommended Americans

cut back significantly on the consumption of red meat.

Negative Publicity

While the entire industry had suffered some bad publicity relating to the unsanitary conditions of

plants, high illness and injury rates for poultry and meatpacking workers, and heavy-handed

tactics with growers and other suppliers, Tyson had been the subject of more negative news

stories that its competitors, including wage and hour suits filed by current and former employees;

Environmental Protection Agency suits alleging violations of various environmental laws,

including the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery

Act; a suit alleging violation of securities laws with respect to the IBP merger; and various patent

infringement actions. In addition, Tyson had been targeted for investigation of influence
peddling and charged with conspiracy to smuggle illegal aliens to work at a handful of the

company’s poultry plants.