Agribusiness, Livestock Production/Industries,

Wildes, David

English

Research Papers in Economics

Value Added Developments for Poultry
by
David Wildes
Holly Farms Poultry Industries, Inc.
Wilkesboro, NC
Four Trends that Shaped
Today’s Poultry Industry
Growth of the poultry industry was
caused by four interacting trends: a) rapid
increases in per capita consumption of poultry
compared to red meat; b) the shift from ice-
pack to prepackaged branded poultry; c) the
shift from whole birds to cut-up and further
processed products; and d) the decline of the
“Mom & Pop” store and the rise of the large
supermarket chain.
The first of the four trends, and the
most widely recognized, is the shift in con-
sumption from red meat to poultry. Total
poultry sold at retail level on a per capita
basis surpassed pork in 1982 and will pass
beef by the end of this year. Chicken alone
accounts for eight out of ten pounds of poul-
try consumed, and the National Broiler Council
projects it will surpass beef by 1990.
Why has poultry been favored by the
consumer? Although concerns over cholesterol
and other health matters have helped the
trend, the main factor has been price. The
poultry industry has gained the price advan-
tage by becoming vertically integrated and
achieving superior feed conversion. Improved
service and reliable supplies of high quality
products have also been trademarks of this
integrated industry.
Floyd A. Lasley of the National Econom-
ics Division, ERS, USDA showed the poultry
industry’s productivity gains in a simulation
February 88/page 12
model. By holding technology and input-output
ratios constant at the 1960 level and passing
through average annual input price changes,
he could compare this simulated retail price
to the actual retail price. If input prices had
been passed through to retail, consumers in
1981 would be paying $1.30 per pound, a full
56 cents above the actual retail price. Lower
returns per unit to producers and others in
the distribution channels also contributed to
these declining real prices for broilers. Lasley
cites eight ways in which vertical integration
has contributed to the poultry industry’s
success:
1.
2.
3.
4.
5.
6.
7.
8.
Facilitating rapid adoption of improved
technology.
Assisting in financing production.
Realizing potential economies of aggrega-
tion and scale.
Coordinating flow of products.
Reducing and controlling risk.
Improving use of facilities.
Passing efficiencies through to consumers.
Reducing the number of profit maximizing
centers.
This coordinated effort will be the key to the
poultry industry’s evolution into the value
added age.
Journal of Food Distribution ResearchThe second trend influencing the poultry
industry’s growth is the conversion from ice-
pack commodity chicken to prepackaged pre-
priced branded chicken in ready to cook form.
One of the efficiencies created in the inte-
grated companies was a product of uniform
quality and characteristics. Control of the
generic development allowed differentiation
within the commodity oriented industry. With
a differentiated product of consistent quality,
one can develop a brand and extract a premi-
um over commodity prices. Frank Perdue did
exactly that. The vertical integration allowed
a concerted effort between production and
marketing under a common mission statement.
While marketing convinced the consumer t,hat
this brand was better, production backed up
the claim by controlling form and quality right
to the supermarket shelf. Packaging provided
another medium for advertising and guaranteed
the form in which it was presented to the
consumer. Holly Farms developed the chill-
pack process, and Perdue uses controlled atmo-
sphere. The prepackaged product eliminated
costly handling at the retail level, another
savings which could be passed on to the con-
sumer.
The third major trend has been driven
by the consumer’s demand for increasing con-
venience. Broilers are increasingly marketed
in cut-up or further processed form. The
consumer has consistently demanded reduced
preparation time. In 1962, 83 percent of broil-
ers were sold whole; by 1980, only 50 percent
were whole, 40 percent cut-up, and 10 percent
further processed. This year only 20 percent
are sold in whole form, 58 percent cut-up,
and 22 percent further processed. The adapt-
ability of chicken and turkey to consumers’
desires, as well as the price advantages should
favor poultry in its continued growth. Low
returns on whole birds encourage processors
to explore aggressively new uses and forms.
The last trend and probably the most
significant is the change in structure at the
retail level. The fully integrated poultry com-
panies have grown with the large supermarket
chains. All three of the other trends enhance
these two organizations’ growth. Efficiencies
created through technological sophistication
could be developed in partnership between the
supermarket chain and the vertically integrated
poultry company. As retailing transformed
from distributors servicing mom & pop stores
and butcher shops to large regional chains
with distribution centers, an equal transforma-
tion from ice-pack to prepack was occurring.
Greater predictability was achieved by poultry
companies as their business evolved from an
ice-pack/distributor customer with pricing on
a daily market, to a prepack/chain that books
feature pricing weeks in advance. This greater
predictability allowed increased sophistication
in production planning and logistics. Benefits
were also gained by the supermarkets.
Locked-in prices on heavily advertised, branded
poultry created excellent feature items that
attracted the consumer to do her one-stop
shopping at that chain, Prepackaged, pre-
priced poultry in desired forms saved time
and money for the understaffed meat depart-
ments. Other services were generated as the
partnership between poultry companies and
supermarkets developed. Bar code inventory
systems, modular pallets, direct store deliver-
ies, EDI are just some of the possibilities.
It is through these four trends that the
present day poultry industry has emerged--an
industry which has awesome efficiencies in
production and strong brand images from which
to build successful new product programs.
New Products
The development of a new product idea
is a slow, costly process. To minimize the
time and cost involved, a high level of com-
munication and organization must be main-
tained. Throughout the development process
people representing three areas should be
involved marketing, technology, and econom-
ics. These three parties guided under a
common mission statement can generate new
concepts, screen and define them, and develop
a viable prototype. All three parties must
maintain their coordinated effort throughout
the test markets and introduction, The fully
integrated poultry companies are excellent
vehicles from which to develop new products.
They offer a corporate structure with open
channels of communication and a common
mission throughout production, processing and
Journal of Food Distribution Research February 88/page 13marketing. This coordinated effort will allow
the poultry industry to introduce value added
products faster, cheaper, and more successfully
than can non-integrated agricultural industries.
One such product showing increasing success
is fully cooked chicken. I will use Holly
Farms Oven Roasted Chicken as an example
of the development process.
Holly Farms established its mission as a
national fresh food company concentrating on
value added items sold through major super-
market chains. Oven Roasted Chicken was
chosen as the lead item in this new mission.
Great Britain currently has 26 percent of its
fresh meat case committed to fully cooked
items. Kroger, one of Holly’s largest cus-
tomers, has also been developing a fully
cooked section for its meat case. The con-
sumer demanded further reductions in prepar-
ation time, and wanted a fresh wholesome
alternative to frozen or fast food. The super-
markets had lost approximately 10 percent of
total broiler tonnage sold (between 1981-85)
to the fast food industry. Thus the trade
was looking for opportunities to gain back
this business. All signs pointed toward the
road of success for Oven Roasted Chicken.
Holly brought along two very important part-
ners in this journey Dr. Neil Rattrie, from
Scotland, one of the pioneers in fully cooked
meat technology, and Kroger, itself an in-
novator in the retail business.
Three test markets, Atlanta, Cincinnati,
and Indianapolis, were used to experiment
with different advertising and promotional
strategies. These test markets also allowed
refinement of the production process at pilot
plant level. The amount of testing one should
do is proportional to the risks involved. Test
the product in the marketplace until the cost
of testing is greater than the cost of making
the wrong decision. One exception is if a
particular uniqueness must be kept secret to
prevent competitors from copying. Holly
Farms did not test market the Cajun and
Smokey Barbeque flavors in order to gain an
advantage over Perdue when introducing the
product line. Those flavors are already
associated with chicken so the risk of failure
was not great. In the testing phase Holly
learned the palatability of the product began
to decrease on the 14th day yet the shelf
life was many days longer. Holly decided on
a 13-day code for the product, and encouraged
the trade to make smaller, more frequent
orders. The loss of efficiency in production
was outweighed by the need for premium qual-
ity in this value added product.
Effects on Dktribution Systems
As the poultry industry transforms from
a commodity industry to a further processed
packaged goods industry, there will be con-
siderable effects on its distribution systems.
One such effect felt by Perdue, Inc. was a
drop in payload, and a resulting increase in
transportation cost, from the introduction of
its “Done-it” breaded product line. Based on
a report generated by Randall Day, Physical
Distribution Manager, at Perdue on August 26,
1986, the reduction in payload between FY86
and FY87(YTD) of approximately 1000 pounds
resulted in an increase in transportation cost
of $690,000 per year. This was primarily
caused by increased tonnage in the new
“Done-it” product line. Following is a very
abbreviated explanation of Day’s payload
analysis.
Average payload on customer deliveries
was 34,451 pounds per load FY86 and 33,450
FY87(YTD). Payload consists of number of
pallets per load, and net pallet weight. Aver-
age pallets per trailer was 18.17 FY86 and
18.22 FY87(YTD). Thus, pallets per load did
not contribute to the reduction in payload.
Day’s study revealed three sources of de-
creased net pallet weight. Increased volume
in the new “Done-it” product line, changes in
packaging specifications, and decreased live
bird weights, were the main factors in the
loss of 1000 pounds in net pallet weight. A
summary of the effects of reduced live bird
weights for all plants showed a loss of 38
pounds/load. Changes in packaging specifica-
tions for three items had a 240 pound/load
negative impact. The major factor in reduced
net pallet weight was the introduction of the
lighter “Done-it” breaded products. This ac-
counted for 720 of the 1000 pound loss in net
pallet weight for the beginning of FY87.
February 88/page 14 Journal of Food Distribution ResearchMost poultry companies are shifting their
product mix toward further processed value
added products to improve profit margins.
This pleasing picture of increased profits
should be inspected more closely for hidden
costs and strains on existing distribution sys-
tems. As the poultry companies evolved from
strictly slaughter and evisceration, to cut-up
and prepackaging the product, they had to
develop distribution skills. The whole breast
on ice has now transformed into a multitude
of forms that the consumer desires. As the
poultry companies continue to integrate into
further processing, the stock-keeping units
(SKU) skyrocket. With the increasing number
of SKUS being pushed back up the distribution
channel, storage and selector efficiencies are
reduced. This is compounded by the added
service of prepricing offered to the super-
market chains. Payloads are decreasing with
the increased packaging material associated
with added value items. When companies see
the attractive gross profits, they are lured
toward shifting their product mix. But in-
creased logistics costs from increased SKUS
and decreased weight per cubic foot must be
considered in the total picture.
Journal of Food Distribution Research
The possibilities of adding value to your
products are endless. Adding value by adding
service can be very beneficial. The partner-
ship between integrated poultry companies and
supermarkets will be enhanced with efficiencies
gained through added services. Modular pallets
are already being used and EDI will soon be
available. Bar code information systems will
definitely play a part in adding service. Tech-
nologies such as these are being pushed
through the distribution system and not pre-
sently being pulled. The poultry industry has
enjoyed rapid growth and the only way it will
continue is to add value through new uses,
forms and services.
February 88/page 15February 88/page 16 Journal of Food Distribution Research

VALUE ADDED DEVELOPMENTS FOR POULTRY

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