Operating in the cattle business today is a lot like trying to escape a flood on a horse that has never been ridden. Just because you can see the high ground and just because you wish with all your heart that you were already there snug and dry doesn't mean you don't have plenty of miles and potential wrecks to get through first.
“We're in a business that's in transition, and in transition there is confusion,” said Bill Mies, addressing the recent annual convention of the Texas and Southwest Cattle Raisers Association (TSCRA).
Mies was on the program to offer his thoughts about what feeder calf and cattle marketing might look like 10 years from now. Back in the good old days, just a few years back, glancing in the rearview mirror would have offered as accurate a glimpse of the future as about anything. Not anymore.
Retail Branding Drives the Bus
First, Mies says you have to come to grips with the fact that retailers—in the midst of rapid consolidation themselves—are moving aggressively toward offering customers branded beef. More important, he says you have to understand why they are going that direction.
Yes, retailers want to offer customers more consistency and have proven to themselves with other products that brands offer them that opportunity. Yes, brands allow them to transfer some product liability to their suppliers. And, yes, branded case-ready products mean retailers can hire folks to put packages in the case rather than trying to find the skilled meat cutters they need in a world where the pool of such folks is receding faster than Bozo the Clown's hairline.
Really, though, Mies says the key to retail interest in branded beef is that the beef counter is the single part of a grocery story where competitive advantage can be gained based on the product itself rather then the in-store management of that product.
“Most products they (grocers) sell are common to every store,” says Mies, pointing to the aisles of cereal, soups and flour bags that are all the same, no matter where you shop.
“The two places in the store that differentiate them are the produce section and the meat counter,” says Mies, explaining these are the areas retailers focus on to differentiate themselves and generate customer loyalty, regardless of price. “They have learned in produce that the key factor in differentiation is who is running the department, not necessarily differences in the quality of the produce.” That leaves meat.
“Poultry is like soup, it's common among stores, and pork is growing very close to it,” says Mies. That leaves beef.
Specifically, Mies explains, “The beef counter has been generic. It has been the black hole of the meat case. We didn't know where it came from or who produced it, we just hoped it was good. Today, retailers understand they must have a beef counter that will draw customers. How? With branding, which has already worked on every other item in the store…What that has done is engage the retailer for the first time in the beef business.”
Supply Chains Rather than Alliances
Indeed. Today major retailers are building beef supply chains, in some cases all the way back to the specific genetics that are used to build the product. IBP—now owned by Tyson—is aligned with Wal-Mart using its case-ready Thomas E. Wilson brand. Kroger is working with Excel, which is working with Caprock Industries, Friona Industries and the Rancher's Renaissance alliance to supply product for the Cattlemen's Collection brand. Safeway has a contract with Future Beef Operations (FBO) to supply it exclusively with the Rancher's Reserve brand.
In fact, Mies recently moved from working for FBO—which filed for Chapter 11 reorganization protection in March (more later)—to assuming reins as director of supply chain management for eMerge Interactive.
And, that's just a short list. There are others like U.S. Premium Beef, which supplies product for Farmland branded beef and Harris Ranch Beef aligned with retailers in the West. The bottom line is the industry focus upon “alliances” seems to be quickly giving way to a focus upon total supply chains in which today's “alliances” are components. And, the shift is being driven by retailers, rather than the “alliances” or the producers themselves.
While even the most developed beef supply chain today is crawling along in infancy, the conceptual dye seems clearly cast. “This (branded beef) will happen fairly rapidly, and it will happen rapidly because it isn't just producers talking about it,” says Mies. “Before, it was like trying to push a rope uphill. Today, that rope is being pulled uphill by retailers, and we have to decide which rope (generic or branded) we are going to grab on to as producers.”
Discovering Value Before the Money
Moreover, the added value supply chains are discovering that they didn't anticipate will likely add fuel to the acceleration of supply chains that in turn enable the consistent production of branded beef.
For instance, Ronnie Green, who heads up cattle operations for FBO, says, “The biggest value added opportunity in the beef business has nothing to do with meat; it has to do with the hides.”
For perspective, pretty well all beef packers market hides to the hide market after they've undergone something called the blue chrome process at the packinghouse. FBO, however, has it's own tannery, so they trade hides as finished good into the leather market. In round numbers, by operating an integrated supply chain, Green says FBO has discovered there can be $250-$275 value difference between cattle based solely on their hides, i.e. difference between a clean hide and one that is damaged by brands or parasites and the like. That's in the upper end market where leathers are used for seats in fancy cars and whatnot. Even on the lower end of leathers used for shoes, as an example, Green says there is $50-$75 difference in hide value between animals. Presumably, this is a value that can be retrieved by a supply chain such as this and ultimately parsed out, in part, to producers as incentive to supply the higher value hides.
Likewise, supply chains continue to document the fact that there is added value in both process verification and source verification, although the market does not yet necessarily pay for verification across the board.
Mies describes a study conducted by Texas A&M University for the Texas Beef Council several years ago. In essence, they wanted to see if consumers would pay more knowing exactly where a beef product came from, all the way back to the ranch. By tracking cattle from the ranch to the feedlot, bar-coding carcasses, then primals and subprimals at the packing house, then bar-coding individual packages of meat at the store, consumers could scan a package of meat and see who produced the animal that their steak came from, where it had been fed, etc.
“I was amazed,” says Mies “More than 35 percent of those customers said if they had the ability to track the product all the way back (source verify) they would pay more the product and be more loyal to the store. The retailers were surprised, too.”
Then, as now, however, while retailers recognize there is value to source verification, as an example, no one has yet put a price on it. “You can't find a retailer today who knows the per pound value of source verification,” says Green. “And, until the retail industry says here is a per pound value for source verification, it will be tough for anyone to make sense of doing it.”
Spun differently, Mies says, “The system (retail) wants to go branded, it wants to reduce liability, but it doesn't yet know the economics of it.”
Producers Must Choose
In sum, Mies says, “What we do know is that retailers will go down the branded road. How? They will become more involved in our supply chain. They want process verification more than source verification today; they want to know what happened to the product at each stage.”
What we're still struggling with is how to accommodate those demands at a profit, while building the required infrastructure. Consider FBO, for example. They started harvesting cattle in August. In March, some creditors forced them into Chapter 11 bankruptcy protection. Keep in mind, FBO owned a huge percentage of the cattle they were feeding. Given the historic economic blood bath on the cattle feeding side of the fence during that time, hindsight had them starting a new business in a deep hole. Spun differently, if fed cattle had been bringing in the mid 70's as many anticipated, if September 11 hadn't happened, there's a good chance FBO creditors would be congratulating the organization on its success instead of demanding reorganization. Remember, FBO did not seek reorganization; their creditors did. Green says FBO still believes in its business plan and ultimately believes it will be successful with that plan.
But, this reality underscores the challenges of transition.
With that said, Mies points out, “There is a retail business in this country that is purely price-driven. We will continue to have cattle we know nothing about purchased and fed on a margin.”
But, the existence of two distinctly different production and marketing systems, really two completely different industries (generic and branded), means that producers will have to make a choice about where they want to participate.
“One of the first things we have to realize and accept is that we're (producers) not all going to go the same direction,” says Mies. “Generally speaking, we all have come down the generic road together. Today we are at a fork and can choose which road we're going to travel.”
Choose the generic route driven by price and the scenery is plenty familiar; the road simply follows the path of commodity forces carved by supply and demand. Follow the branded route and there are plenty of unknowns and undecideds as cited above, although the ultimate economic net appears wider and deeper.
The one thing that does seem certain is that wishful thinking or not choosing are not options. “If we want to fool ourselves as cow/calf producers that there is a quick band aid solution, we're wrong,” said Green.