Resolving to survive

by Steve Krut
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If there ever was a year of uncertainty, 2013 is one that has captured the attention of the nation’s small meat processing sector. But true to form, a surprising number of these family business owners have been proactive in gearing their operations for a time when production, raw material, regulatory and insurance costs seem poised to threaten major challenges to the way they operate.

Carol and Norm Heinle just celebrated 50 years as owners of The Sausage Shoppe in the city limits of Cleveland, Ohio. Their retail operation has faced some belt tightening and they could retire, but have no immediate plans to do so.

“The winter is usually a quiet time and we worry about being able to make enough money to pay the utilities,” Carol states. “This past fall didn’t have the ‘pop’ in sales our business usually hits due to the tight economy.

“We talk to many other small business owners who come into our shop and they are experiencing the same thing,” she adds.

Heinle says she and her husband were able to adjust better than most with increasing health care costs. She and Norm are on Medicare and their son was able to secure health insurance through his wife’s teaching job. Another full-time employee’s health insurance costs went up by $120 per month to $481. They discontinued offering that benefit and the worker has an individual plan for which he pays $179 a month. They also found another provider for their business insurance who offered a rate savings of $1,392 a year.

She says operating in the city means putting up with “annoyances”, such as compressor fees, compressor user fees, scale fees and more. More of their customers are becoming first-time food-stamp users and they indicate that their business is not what it used to be. Still, they are prepared better than most to weather a slowed economy and plan to hang in there.

Cautious entrepreneur

Jerry Boone operates a federally inspected slaughter and processing business in Bardstown, Ky., with 37 full- and part-time employees. He says his greatest concerns as owner of Boone’s Butcher Shop are the unknowns:

“There are so many issues that could have a major impact on our operation,” he says. “One of the largest deals is with tax law changes. I know taxes will go up on smaller businesses like ours, but I worry about any coming changes in how we can write off the cost of new equipment in the future.”

He is also worried about US Dept. of Agriculture regulation changes on the type and frequency of tests for new strains of E. coli, noting that while the costs of tests are high, there is also time involved in taking more tests and getting them to the laboratory in nearby Louisville.

When a fire destroyed 90 percent of the business in 2004, the firm rebuilt and has seen things going “bonkers”, Boone says. He’s been able to provide medical insurance for workers but may not be able to keep paying for 100 percent of their coverage.

“I don’t know what Obamacare will bring,” he reports, “but private-insurance costs have been pricing many smaller businesses out of the market.”

Boone’s Butcher Shop has been in business since 1946 and the owner recognizes that new laws and regulations translate into higher forms of taxes for smaller firms, but Boone says, “I will do what I have to do to survive.” He observes that while we need food-safety laws, the more that come into place mean a higher per lb. cost to produce product for small companies.

Jeff Bringhurst, operator of Bringhurst Meats Inc., Berlin, NJ, feels changes he made in the format of his company this past summer will help him through a coming year of many uncertainties.

“In August, we gave up federal inspection to focus solely on custom retail and catering,” Bringhurst explains. “This has tremendously simplified our business and we see continued growth. Our emphasis has been on source identifed and verified meats that our customers are demanding. They want it to come from small, local farmers.”

He says local herdsmen have to transport animals nearly 100 miles to get them slaughtered and processed under USDA inspection, but the market for these products has justified the new direction he’s taken.

Bringhurst reduced his workforce from 28 to 20 employees when he gave up federal inspection and identifies worker benefits as something he has to modify.

“We’ve paid 100 percent of the costs of medical insurance, but this year saw a 23 percent increase in the rates,” he adds. “This means we’ve got to pass on some of those costs to the employees. There are large struggles for small processors, and all small businesses, in general. But we see strong growth in retail because of our emphasis on locally raised meats. Throwing off the yoke of more and more testing, paperwork and the unknowns of future regulations under inspection has allowed us to concentrate on what we do best. We could not continue to realize our business vision under a tougher and tougher inspection system.”

Ralph’s Packing Company in Perkins, Okla., made a decision in July to no longer slaughter. It was a tough one, but manager Wes Beane feels it helped streamline the entire operation.

“The decision was based on overwhelming regulatory issues,” he says, “but one that gave us the opportunity to expand in the value-added area. Areas of the plant used for the kill floor, hide room and chilling cooler are being converted into zones for sausage stuffing and a truck-wash station.”

Beane feels the decision eliminated many of the cross-contamination issues the plant had to deal with and allowed an expansion for further processing that did not have to start from the ground up.

Ralph’s was able to retain nearly all of its 40-plus employees and put them to work in value-added areas of production. The firm was also able to institute a product-tracking system that helped meet requirements of third-party auditors for customers like Walmart, which sells the company’s jerky products.

Beane, who is also secretary of the Oklahoma-Texas Meat Processors Association, says Ralph’s has been hard hit by rising beef prices and diminishing numbers of livestock because of the drought. He said hogs remain scarce and many other plants like his face quick swings in protein prices, noting that costs they had to watch weekly now need to be monitored daily.

The largest concern for Beane in 2013 lies in inspection requirements for hazard analysis and critical control point validation.

“Getting an in-plant validation for every product and process can be a major financial blow for smaller operations,” he says. “There has been talk of some relaxation of the original proposal, but this requirement as it stands could have devastating consequences for smaller operators.”

Many small processors have indicated they harbor plenty of uncertainty about the regulatory and tax law environment of the coming year. At industry trade shows in the latter half of 2012, equipment suppliers were experiencing a “wait-and-see” atmosphere from business operators, fearful of the November election’s impact on their companies.

Considering capital

Tom Knase of Zuber-Talsa USA in St. Paul, Minn., whose firm handles new equipment and parts, says smaller processors are repairing what they have when they have to rather than acquiring new equipment.

“There is plenty of used equipment out there in the marketplace now,” he comments. “Those starting up typically opt for the new systems. But there is a definite trend for many smaller firms to hold on to what they have and fix it up, even if it’s 20 or 30 years old.”

James Hankes feels strongly that the new validation demands could put many good small processors out of business and calls it the biggest challenge most will face this year. He says his Thrushwood Farms Quality Meats in Galesburg, Ill., looked at either “riding into the sunset” or going forward.

Just two weeks before Christmas, they moved into a 14,000-sq.-ft. expansion for RTE products, featuring complete separation of processing and pass-through smokehouses.

“Our sons, Doug and Jeff, are in the business with us and we believed this was something we needed to do if we were to stay viable for the future,” he relates. “Tests and validations that once cost hundreds of dollars now cost thousands and there may be no end in sight for the little guy.”

Hankes says the tight cattle market has squeezed margins for everyone, and combined with coming changes in the tax code, it will be a challenging future for most operators.

“I feel our timing was right for expansion and modernization,” he adds. “We had to do it from our own family finances, with no help from the city or state. There isn’t much capital out there to tap into and we felt the only way we could go was forward.”

Steve Krut, an industry veteran, is a contributing editor writing exclusively for Meat & Poultry, specializing in small business issues.

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