What Happens to Price After the Food Fight?

The past few weeks have been all but mundane in the world of retail food products. Two big chicken producers, Pilgrim’s and Tyson Foods, have waged a food fight over acquiring Hillshire Brands for retail market dominance.

HillshireBlogPicGet Your Score Card Out

On May 27, Pilgrim’s Pride (PPC) offered to buy Hillshire Brands Company for $5.6 billion, then two days later Tyson Foods (TSN), offered $6.2 billion for Hillshire.

Pilgrim’s is the second-largest chicken producer in the world. They employ approximately 38,000 people and have the capacity to process more than 36 million birds per week for a total of more than 9.5 billion pounds of live chicken annually. Pilgrim’s is owned by JBS S.A. the largest animal protein company in the world.

Tyson Foods, Inc. is one of the world’s largest producers of meat and poultry with over $34.4B in annual sales, they process over 41,000,000 chickens, 135,000 cattle and 391,000 hogs per week.

Formerly part of Sara Lee Corp., Hillshire Brands (NYSE: HSH) is a leader in branded foods. The company generates nearly $4 billion in annual sales and has approximately 9,000 employees. Hillshire Brands’ portfolio includes iconic brands such as Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee frozen bakery and Chef Pierre pies, as well as artisanal brands Aidells, Gallo Salame and Golden Island Jerky.

Hillshire Brands has also recently been on a buying spree of their own to enhance and increase their presence in leading retailers. Just last month, Hillshire completed its acquisition of Van’s Natural Foods from Catterton Partners. Van’s is a leading better-for-you brand with simple/clean ingredient food brands in frozen breakfast and snack foods, including waffles, pancakes, cereal, crackers and snack bars. Van’s frozen breakfast and snack foods are available at grocery stores, mass merchandise stores and natural food retailers nationwide.

A few weeks after the Van’s deal, Hillshire announced plans for a $4.2B acquisition of Pinnacle Foods a leading producer, marketer and distributor of high-quality branded food products. Pinnacle’s name brands, such as, Birds Eye®, Armour®, Open Pit® and Vlasic®, are found in more than 85% of American households.

How Much is Hillshire Worth?

Hillshire Brands knows how to innovate new products and market them. Acquiring Hillshire would give either bidding company increased scale and presence in Frozen, Refrigerated and Dry retail spaces – a move which would help further vertically integrate their businesses and be in the center of retail stores.

Pilgrim’s and Tyson also know that commodity meat is a low margin business compared to the margins that are made on prepared foods. Hillshire’s strong portfolio of retail brands stands to improve their gross margins and boost profits for shareholders.

Pilgrim’s offered $5.6B / $45 per share – a 25% premium over Hillshire’s stock price the day of the announcement, a multiple of 12.5x Hillshire’s EBITDA. Tyson’s then raised the stakes to $6.2B / $50 per share – at a 35% premium over Hillshire’s stock price the day of the announcement, a multiple of 13.4x Hillshire’s EBITDA. Pilgrim’s responded (as of today) in smackdown fashion with a $6.7B / $55 per share counteroffer.

Both companies also want Hillshire to call off its planned $4.2B acquisition of Pinnacle Foods and are willing to pay the $164M breakup fee. It would appear they generally consider Pinnacle’s products to be outside of their core interests.

How Will This Affect Consumers?

The Hillshire deal may be good for shareholders of the companies who invest for positive returns, however it may not be a case of what’s good for the goose, is good for the gander, for retail shoppers. We may be paying higher prices when all is said and done.

Over the last year, consolidations in the food service industry such as, Sysco’s acquisition of US Foods and Smithfield’s sale to the Chinese have the potential to prove equally problematic for consumers. Both of these deals portend to reduce competition, giving consumers less choice and less opportunity to vote with their dollars. These types of scenarios are not limited to the food industry either. The airline industry is often taken to task on limited choices due to price fixing.

2014 marks the 100th anniversary of the Federal Trade Commission Act and the Clayton Act, two laws passed in compliment to the first anti-trust law, the Sherman Act of 1890. These laws were passed to guard against monopolistic practices: to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down and keep quality up. In my opinion, the consolidation of companies means less competition which I believe drives higher prices.

You can’t help but wonder if trends like these continue whether food companies will reach the pinnacle of being “too big to fail” like the retail banking industry during the financial crisis of 2007-2008. Will less choice, higher prices and bail outs, ultimately become the status quo?

From the desk of John Cecala | |Website LinkedIn @BuedelFineMeats  Facebook

 

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Dollars & Cents vs. Dollars & Sense

Let’s compare and contrast two stories in the recent news about pork production.  One is a story of dollars and cents, and one is a story of dollars and sense.

Dollars & Cents

3D chrome Dollar symbolLast September, Smithfield, the world’s largest pork producer sold itself to the Chinese for $4.7B. Smithfield raises about 15M pigs per year producing over 6B pounds of pork sold under popular brand names including Farmland, Armour, Cook’s Ham, Krakus Ham, Patrick Cudahy and John Morrell. When the sale to Chinese went through, Smithfield’s CEO stated: “This is a great transaction for all Smithfield stakeholders, as well as for American farmers and U.S. agriculture. The partnership is all about growth, and about doing more business at home and abroad. It will remain business as usual — only better — at Smithfield.”

‘Business as usual’ is a telling comment. Smithfield is notorious for factory farming; incorporating the use of inhumane gestation crates, confined animal feeding operations and environmental pollution.

To quell some of the220px-Gestation_crates_3 negative press, Smithfield is “recommending that its contract growers phase out the practice of keeping female hogs in small metal crates while pregnant.” This is quite the bold move for a factory farmer where disease, pollution and animal confinement are standard practice.

On 1/21/14 more news broke: Problems Persist After Smithfield Sells Out to Shuanghui; Future Remains Uncertain.  The Neuse Riverkeeper Foundation and Waterkeeper Alliance issued a Notice of Intent to sue the current and former owners and operators of a Smithfield owned feeding operation, located in North Carolina, to stop pollution caused by illegal waste disposal.

Dollars & Sense

Ironically, one day earlier, the NY Times posted this story: Demand Grows for Hogs That Are Raised Humanely Outdoors.

Consumer awareness and c7960787444_a1b4b8476d_ooncern about the use of antibiotics, humane animal treatment and the environment is growing. More chefs and restaurateurs are featuring pasture raised, all natural pork on their menus. The popularity of “farm-to-fork” and “nose-to-tail dishes” is growing.

Opposite to the Smithfield mass production model, pigs raised by family farmers who use sustainable production methods which preserve the land and its resources for future generations, is fast becoming en vogue. The pigs are happy, the farmers are happy, and consumers are happy eating a better product.

pigsinsnow-300x224Pigs raised outdoors using traditional farming and animal husbandry methods cost more because it costs more to raise them this way.  However, the Times article also points out that as much as consumers say they want their meat to come from humanely raised animals, they still resist paying higher prices for pasture-raised pork.

This resistance is what continues to drive companies like Smithfield to keep producing cheap pork, and the consequences that go along with it.

Finding Middle Ground

The situation becomes one of trade-offs. Which is worse: Paying less for cheap pork thereby supporting the issues associated with pervasive factory farming, or paying more for pork thereby supporting the issues associated with humane, natural and sustainable farming? In my opinion, one will never fully replace the other, but both can improve.

As a consumer, I prefeMenusr to spend a little more to eat healthier and better tasting naturally raised pork. I also feel good that a by-product of my preference, is supporting the family farmer.

On the other side of the fence, I see the daily dilemma Buedel Fine Meats customers face between their desire to avoid offering commodity pork and trying to manage their food costs. Many chefs and restaurateurs are simply unable to absorb the higher cost of all natural pasture raised pork and maintain their desired profits.  They too are voting with their dollars.

Perhaps there is a middle ground.

A movement to change the status quo can be ignited by slowly adding pasture raised pork items to meals and menus. Start with one or two items, promote them and educate the consumer on the value. My guess is that a few will stick, and then maybe a few more.

If we all do this, we can begin to deliver a subtle message to the Smithfield’s of the world in a language they understand – money.  Soon they’ll listen because they have to return profits to their shareholders.  When the factory farmers see more dollars being spent for pasture raised pork, they’ll want to capture some of the growing segment – then someday perhaps, most of it, and we’ll all be better off.

From the desk of  John Cecala   @BuedelFineMeats   Fan Page   Slideshare

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