Tyson Foods envisioned big changes in the way it did business when it opened its $45 million Discovery Center in early 2007. Touted as the world’s largest and most advanced R&D center devoted entirely to meat and poultry products, the center’s focus was on “joint value creation.” This meant working with customers as never before to create meal solutions rather than just sell them meat.

More than five years on, the center appears to have achieved just what Tyson envisioned. It has been involved in creating hundreds of new products since it opened. It now creates as many as 1,000 per year, including line extensions. Prior to its opening, about two or three of Tyson’s major customers visited its Springdale, Ark., headquarters each year, on average. Today, two or three visit per week.

“Tyson has had hundreds of customer visits to the Discovery Center since it opened,” says company spokesman Gary Mickelson. “Most of our largest customers come to the Discovery Center multiple times a year to work on innovation, which was our goal for the facility from the beginning.”

Back in May, the Discovery Center was host to a group of around 20 people from a major retailer. This was by special invitation and Tyson tailored the visit especially for the customer, explains Craig Bacon, Tyson’s senior vice president of research and development.

Bacon has been with the center since its conception and has seen significant changes both in the visits and in the time it takes to develop new products. “Competition among retailers and foodservice operators continues to shorten the time from conception to execution,” he says.

Tyson is the lead developer in many cases, Bacon says. The key denominators are value, convenience and new flavors and forms (such as Thai chicken, orange peel pork and beef chili). Tyson has just developed 10 middle-meat and end-meat beef cuts that are seasoned and rubbed, ready for the grill. The company is rolling these out through the SuperValu grocery chain, based in Eden Prairie, Minn.

“The challenge in beef is how value translates for consumers,” Bacon says. “Retailers ask us to develop a point of difference and a selection in their meat cases. We will eventually see a meat case with a very limited number of generic beef offerings with nothing done to them.”

Most new product trends start at foodservice and move into retail, Bacon says. But some, such as nutrition trends, can start at retail and go into foodservice. Right now, a big trend is sodium reduction in food products, he says.

Consumers come first

Focusing on customers’ needs and adding value came up repeatedly in a recent, Meat&Poultry-exclusive interview with Tyson President and CEO Donnie Smith and Chief Operating Officer Jim Lochner. Conversation touched on many aspects of Tyson’s chicken, pork and beef businesses, how Tyson sees consumers responding to the still weak economy and what the company is doing in China.

Tyson’s chicken business saw a sharp improvement in its latest quarter (ended March 31). Margins at 5.0 percent returned to their normalized range, with operating income of $145 million, vs. $37 million or 1.4 percent a year earlier.

Consumers are cautious but hopeful about the economy and Tyson is cautiously optimistic that the worst is over for the foodservice industry, Smith told financial analysts in a May 7 call. Major restaurant chains are leading the recovery and Tyson expects to see a significant amount of chicken features in foodservice this summer, especially in the quick-service restaurant chains, he said.

The growth in Tyson’s foodservice business in the quarter was primarily inflation-driven, Smith explained. Pounds sold weren’t up, although at the QSR level, it saw more chicken vs. hamburger servings. Tyson has a 40 percent share of the chicken industry’s foodservice business. The summer features, which Smith says will be a lot of hand-held items, might add a percentage point or two to this share.

Retail sales are still a little sluggish, Smith says. Beef and pork sales in the January-March quarter were down in volume (by 9 percent and 3 percent, respectively). Chicken volumes were flat and are holding their own. But Tyson saw a surprising trend in the quarter and last year about consumer spending, he says.

“We were surprised that dollars spent on beef, pork and chicken didn’t really change much,” Smith says. “The percentage of consumers’ budget spent on meat stayed consistent among the proteins.”

Smith also notes that from 2007, consumers have consistently spent the same percentage of their disposable income on food. Until employment levels get better and there is less under-employment, and as long as gasoline prices stay strong, consumers’ disposable income will not increase, he says. If disposable income does not grow for another 18 months, demand patterns might shift. “The longer the economy stays sluggish, it stands to reason that you may see a shift by consumers to cheaper proteins.”

The poultry industry largely ignored the value of dark meat for years, and Smith admits he doesn’t know why. There is great value in the back of the bird and his favorite chicken items are grilled legs and thighs, he says. Now Tyson and others are producing more boneless dark meat, which is being used as a replacement for red meat in categories such as sausages and pepperoni.

“The key is to have the capability to get at that dark meat,” Lochner says. A lot of Tyson’s recent capital expenditures were spent on dark meat deboning, to get the meat into the overall meat block, he adds.

Is Tyson concerned the poultry industry might over-produce again? Smith says it can only control what it does. It is very important that it stay balanced between supply and demand, he says.

“Tyson has added a lot of robust capabilities to look at demand.” Smith says. It looks at demand six to 12 months out and develops a buy versus grow strategy for all parts of the bird. It is very important not to be long a high-cost part that Tyson might have to get rid of in an excess market, he says.

Tyson has also dramatically limited the amount of chicken it sells forward, compared to a few years ago. A very small percentage of its product is in fixed sales agreements that are three to six months out front, Smith says. At the same time, it is becoming increasingly important to Tyson’s customers that they have a very good supply from an assured supplier, he says.

Tyson also felt it important to focus on processing efficiencies and be a low-cost processor. “Our customers should never have to pay for our inefficiencies,” Smith says. “We focus on adding value to our customers’ businesses. Our goal is to become their go-to supplier.”

Lochner notes that all species have seen their carcass weights dramatically inflate. For example, the number of laying hens in the poultry industry is at an all-time low. But production remains high because the average broiler weight is 5.89 lbs. The heavier bird size puts more breast trim on the market. This trim goes into products like nuggets. That’s where Tyson’s Discovery Center comes into play, as it can turn this material into new value-added products, Smith says.

Growing the business

Growing its value-added business is important for Tyson’s future, Smith says. He especially notes Americans’ diminished cooking skills. People need convenient food solutions that they can take home and heat up, he says. Or they can buy food pairings (such as meat, vegetables and sauces) that they take home and feel they have cooked a meal from scratch. This is how Tyson will lead, through value-added meal solutions. Adding value greatly diminishes the finished cost of goods, which benefits retailers, Tyson and consumers, he says.

Tyson expects to grow its chicken business in China and plans to process 3 million birds per week by 2014, Smith says. This would still be 10 percent of what it processes in the US but it is the size of three decent-sized US complexes. Tyson is raising all of its birds itself in China because it wants to control the entire production process to protect the Tyson brand, he says.

Pork performed solidly for Tyson in its January-March quarter, with operating profits of $115 million for an 8.4 percent margin. But this was down from $146 million and a 10.5 percent margin a year earlier because of a lower pork cutout. This weakness continued into the April-June quarter and some analysts had fresh pork margins negative throughout the quarter.

“The cutout was most hurt by bellies and hams,” Lochner says. High-priced bacon put pressure on belly prices in the first quarter, while domestic ham sales were the biggest disappointment. Pork trimmings prices also took a hit because of the furor over lean finely textured beef (LFTB), very heavy hogs and some pullback in pizza sales, he says.

As for the mounting pressure to phase out gestation crates for sows (Tyson does not own any sow herds or hog production facilities), Lochner says: “We have to defend what we have done in all of animal agriculture.” The industry has allowed the Humane Society of the United States to challenge a system that it needs to defend. The industry needs to stand up and say that what it has done in beef, pork and chicken production is right for animal welfare and for consumers, he says.

This also applies to other parts of the business, Lochner says. The entire industry should have defended LFTB as soon as celebrity chef Jamie Oliver disparaged the product in early 2011. The industry must look at defending its products and processes collectively, and it needs to talk about the positive aspects of food production, he says.

The LFTB episode was a big wake-up call as it showed that consumers have no idea about many of the industry’s processes, Lochner says. The industry has a major job to do in talking to customers. It also has to talk more to the social media, he says.

Benefits of beef

Tyson surprised many people by breaking even in its beef business in a challenging January-March quarter. Industry analysts had reported steady losses for fed-beef processors throughout the quarter. The difference between Tyson’s margins and industry-calculated margins reveals that Tyson and other beef processors are doing a great deal behind the scenes to be more efficient and add value wherever possible. This means getting more for a carcass than USDA’s mandatory price reporting system captures.

For example, Tyson’s beef team looks at more than 80 metrics, from plant and labor efficiency to yields, value-added mixes and pricing, Lochner says. Its job is to add as much revenue as possible to beef. The bulk of the industry-generated margins are based on commodity beef or second value-added raw products, he says.

Tyson looks at how to “value up” its mix, Lochner says. Its whole thrust is to try to understand where it can add value to the customer, such as taking out more bone, more trim, more case-ready trim and more retail-ready trim on all sub-primals. Tyson obviously charges for this, so it looks at its return on labor. With higher freight costs, there will a more rapid transformation to more value-added raw products, he says.

Lochner notes three other factors in Tyson’s higher-than-industry margins. Its plant locations (close to large sources of cattle) give it a freight advantage and a shrink advantage on its carcass yields. Second, Tyson is always looking at efficiencies and how it manages its product mix. Third, it tries to get as much beef as possible sold on formula and take the least amount of forward selling risk, he says.

Regarding the shrinking US cattle herd, cattle supplies were originally projected to decline 1-2 percent in fiscal 2012, Lochner says. But cattle slaughter was down 700,000 head in the fiscal year’s first seven months. This would imply that Tyson should have more cattle available in the second half of the year. Cattle supplies appear to be adequate into the fall, and it expects to see more cattle pushed into Tyson’s fiscal 2013 (which starts October 1), he says.

“The key number going forward is the size of the 2012 calf crop because it will be 2014’s fed steer and heifer supply,” Lochner says. 2013 could see a decent year for beef margins. He’s more concerned about 2014 because of the 2012 calf crop, a one-million-head reduction in the beef cow herd and how much heifer retention will occur.

The beef industry has excess processing and feedlot capacity, Lochner says. But Tyson’s southern plants (in Kansas and Texas) will have sufficient numbers, as will its Joslin, Ill., plant, which Lochner describes as Tyson’s most efficient beef plant. Tyson, though, will be watching closely the number of cattle in feedlots under 1,000 head of capacity, which help supply its other Corn Belt/Midwest plants.

“With smaller numbers, we will have to increase our efficiencies and add revenue and value for our customers,” Lochner says. “Adding value starts with the customer and integrates back through the supply chain.”

The beef industry’s biggest issue is that it keeps adding weight to carcasses, Lochner says. This is producing merchandising problems. The industry must step back and look at the trade-off between efficiency gains and merchandising issues and costs. It has to see if it is producing what consumers want, and it has to look at portion size, he says.

Some of beef’s recent carcass-weight gains stem from the widespread use of two beta-agonists. Asked about their use, Lochner repeats that the industry has to look at what its customers want. In addition, there might be a number of countries that will not accept beef produced with beta-agonists. As for the perceived benefits to cattle feeders in using beta-agonists, Lochner wonders whether cattle feeders have simply passed the efficiency gains back into the price of feeder cattle.

“The beef industry has to make the decision whether to produce for economics or for its customers, and this doesn’t just include the use of beta-agonists,” Lochner says.

Tyson appears unlikely to persuade cattle feeders to stop using beta-agonists or produce smaller carcasses. But it’s clear that it will continue to push the message that Lochner outlines, and that it will remain focused on its customers’ needs and on consumers. Smith summarizes Tyson’s corporate mission: Tyson never lets its customers out of its sights, and it can’t ever let products out-run consumers’ desires.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com).