Any progressive cattle producer understands just how fast the industry is changing on the production side of the gate; what you may not know is how fast – and how much – things are changing at the meat department of your local grocery store or supermarket, where well over half of all beef is sold to consumers.
Many of these changes and challenges at the retail level also have implications for beef producers. While the retail meat industry (for our purposes, meaning grocery stores/supermarkets) is much more complex than can be addressed in a magazine article, here are a few key issues you should understand about the businesses that sell your beef to the all-powerful consumer.
No. 1 – One size does NOT fit all
Dr. Jack Allen knows the supermarket business. Allen is a professor of marketing emeritus at Michigan State University and, among other food industry roles, serves as a member of the boards of directors of Hormel Foods Corp. and the International Stockman's Educational Foundation and he has been director of retailer relations for the American Meat Institute.
“What the producer will find is that food retailing has become a constellation of different businesses; each of which sells meat in different ways,” Allen explains. “As we speak, there is more segmentation and splintering of the kinds of retailers that sell meat basically because there are segments of shoppers whose wants and needs are different. It's no longer the monolithic Kroger supermarket store, which looks the same in Houston as it does in my home in East Lansing, Mich.
“These retailers are introducing new forms, new shapes and, correspondingly, different kinds of meat departments.”
For example, Allen recently spent a couple of hours in a Florida Wal-Mart store, studying their meat department. “What characterizes this store from others I have seen is virtually every cut of meat and poultry was cut and packaged outside of the store by a meat processor and most cuts contained a marinade,” he says.
“It is important to realize that the kind of meat they're buying had to meet the strict specifications Wal-Mart established to meet the needs of its shoppers,” adds Allen. “As we all know, Wal-Mart's clientele is very price-oriented. For them, cheaper beef is better beef. By contrast, another kind of supermarket might emphasize a highly promoted beef brand – Certified Angus Beef, for example – which commands a premium of perhaps 15 percent to 20 percent more, which more discerning shoppers are willing to pay.”
Then you have the Costco wholesale club, which Allen says is growing by double digits, with an even different kind of clientele and meat offerings that are larger in size, of higher grade and sold at lower prices than the supermarket.
Still another contrasting company is SuperTarget, which now carries a single brand of beef, Hormel Always Tender, in its meat departments nationwide. It is a case ready, marinated product produced by Precept Foods, a joint venture between Excel and Hormel.
Still another approach by a supermarket company is Wegmans (a Northeast chain) that promotes their beef offerings as “Food You Can Feel Good About Angus Beef.” Their website (www.wegmans.com) describes it as the best-tasting beef from hormone-free, antibiotic-free, rotationally grazed animals from the Rocky Mountains.
What is exceptional about Wegmans, says Allen, is the incredible commitment by top management to its meat department, where quality, safety, variety and service are no mere slogans and where its meat department is a “shopping destination.
Of course, most Texas producers are familiar with H.E.B. (H.E. Butt Grocery Co.), which has earned a stellar reputation in its meat department with a strong private label program of marinated and ready-to-cook convenience products based on local market preferences.
What is driving this phenomenal diversification of stores and meat departments? Allen credits a great deal of this to the power of Wal-Mart.
“Wal-Mart's ability to operate at an incredibly efficient level allows the company to drive low costs and offer prices lower than the typical supermarket. This reality has created an enormous pressure on competing retailers to take a different tact in order to survive,” he explains.
“Although it is true that many retailers have failed in the attempt, there are many retailers that are succeeding as never before as a result of creating successful ways of differentiating themselves from Wal-Mart. And for some of these successful retailers, new and different meat programs are one of the ways this is being accomplished,” he says.
“Some of the outstanding examples of successful differentiation are Wegmans in the Northeast, H.E. Butt Grocery Co. in Texas, and Publix in Florida. These companies are very strong in the regions in which they operate, but in comparison to Wal-Mart, they're very small,” Allen explains.
“In the regions where they operate, they have high shares of market and enough resources to finance progressive change. Often they remain private companies and still retain family ownership,” he adds. “Look to these kinds of companies for innovation and development in meat operations. Their successes to date provide producers a glimpse of what the beef market in general will become in the near future.”
In February, Supermarket News ran a story called “Independents Fighting Big Stores with Meat,” which detailed how Falley's Inc./Food 4 Less, in Topeka, Kan., and Harps Food Stores in Springdale, Ark., have tried to directly compete with Wal-Mart for customers by differentiating – and heavily promoting – their meat departments.
According to the article, Harps has used a character called “The Butcher Lady,” reminiscent of Wendy's “Where's the Beef” campaign, in television ads asking “Where's the Butcher?” The idea is to persuade people that Harps custom cuts of meat are superior to Wal-Mart's (though not mentioned by name) case ready products.
By the way, writer Jon Springer mentions that the store's initial focus was to promote its USDA Choice beef offering over other stores' Select beef – an effort that failed because consumers didn't recognize the difference in quality grades. Apparently, their current strategy is working, because Harps reports that meat has grown as a percentage of total business since the ads began running.
With Food 4 Less, Springer reports that aggressive sales and promotions focused on the meat department has helped the independent chain bring customers into their stores, even from outside traditional market areas. A company executive is quoted as saying “meat is the chain's key weapon to drive sales….”
So what does that mean to you, the cattle producer? Allen says retailers are increasingly buying beef according to specific characteristics that fit their particular operations. He believes the days of unbranded, commodity beef products stocked in supermarket meat cases is coming to an end much faster than many beef producers realize.
And if you're not aware of the different specifications retail meat buyers are demanding, how will you know if your genetics and management will fit their specifications? Allen emphasizes that reading this article about retailers is not good enough.
“To really understand and be able to respond to that side of the business, producers need to become involved in the supply chain and establish relationships with a processor and retailer through some form of coordinated system,” he believes. “Connecting to the beef supply chain is the means for obtaining and sharing vital information upon which to make needed changes.
“I believe beef producers fully realize it is imperative that beef becomes still safer and less prone to safety and quality problems,” Allen says. “But they must realize that to produce the beef that a given customer needs for its particular company will require much greater coordination than in the past. Moreover, it is without doubt the only means by which traceability can be achieved, as well as certifying the protocols in producing beef to meet the specifications required by retailers and consumers.
“If there are other serious safety episodes, supply chain alliances that reveal where the beef comes from all the way through that beef value chain – even down to the ranch – will be the beef products that will have earned the confidence of both retailers and consumers. And that assurance and trust will be the basis of a profitable business for partners in the beef value chain,” says Allen.
No. 2 – It's more complex than you think
Tom DeMott, sales/marketing consultant and head of Encore Associates in San Ramon, Calif., was formerly vice president of meat and seafood for Safeway. He says producers need to be aware that a meat department is like a mini-manufacturing plant, and across the country, retailers literally have tens of thousands of these meat departments manufacturing beef every day.
“In these traditional meat departments, you have butchers and a wrapper who are manufacturing products to sell to customers,” DeMott explains. “And they have a very small window from which they process beef, wrap it and get it on display in time to sell the cuts to their customers. This window is from one to three days, depending on the cut.
“Oftentimes, what I hear from cattle growers is, ‘I got $1 pound for the animal and then I go into your stores and see ground beef for $3.99….' They look at that as though the retailer is making all this money,” DeMott says. “They need to know that meat departments have many expenses including yield losses from the primal cut, some product that is reduced and some that is thrown away. There are very few meat departments that are making lots and lots of money off their beef operations.”
DeMott gives a simplified example of the financials in a supermarket meat department:
“Let's look at every $100 dollars of beef sales; where do those 100 dollars go? First, you've got your cost of goods,” he says. “Out of that $100 of beef retail dollars, you're paying between $60 and $65 for the beef itself. So now you've got a difference of about 35 percent to 40 percent. If you allocate your costs according to work, the amount of work involved with beef is probably 50 percent of all the labor costs in a meat department.
“So you're probably looking at somewhere around 25 percent of those beef dollars going to labor, leaving the rest of the $100 – anywhere from 10 percent to 15 percent – that's going toward wrapping supplies, workman compensation, utility, rent, and at the end of the day, hopefully, they'll make a few dollars.”
Although DeMott says most well-run meat departments are profit centers, there are many more costs that the retailer has to absorb to get the product on display than a casual observer can realize. For example, one thing that sets the meat department apart from other departments in the grocery store is who picks up the advertising and promotions bill.
“Beef producers should realize that meat departments are basically selling and promoting the beef themselves, with little or no incentive from the producers,” he explains. “When you open up a food retailer's ad, you're typically going to see beef on the front page and a lot of beef in the middle of the newspaper. And when you go to the stores you see all these signs promoting beef. So who pays for these promotions and the mark downs to sell the beef?
“Well, if you were to go into the grocery department and you see Kraft Macaroni and Cheese or Nabisco Oreo cookies, or Tide detergent…all those manufacturers had to pay a significant amount of dollars to place the product in the stores and for those promotions. They're paying the retailers lots of money to promote their products,” De Mott says.
“But in the retail meat world, the retailers are not charging beef producers or the beef packers any money at all to promote their product. In most cases, the beef industry is literally getting a free ride regarding advertising and promotion of their product,” he says.
Retailers frequently promote beef and meat in general because it is one of the few categories in the store, along with produce, which has the ability to attract consumers into the store and impact their purchase decisions.
But the biggest thing he thinks producers need to realize is that they have more to do with the quality of a consumer's eating experience while the animal is alive than the retailer does once the meat is under their control.
“They should be doing everything that's humanly possible at their end to be producing a consistent, safe, higher-quality animal so that their industry, the beef industry, will not only survive, but grow and thrive in this environment,” De Mott emphasizes.
“And I think we're all seeing more of that these days as both producers and some of the packers are working (on the animal side)…and with the various specialty programs that are out there. All the major retailers, the Krogers, the Safeways, the Albertsons, and many regional retailers are all focused on providing increasingly higher-quality beef to their consumers.”
No. 3 – New business relationships are forming
Back to Wal-Mart for a moment, consider this: their stores collect sales data in the meat department by the half hour. Furthermore, that data is shared with their suppliers so that Wal-Mart can get by without a large inventory of product and yet have a 72-hour turnaround on orders, according to another Supermarket
News story titled, “Wal-Mart Describes Beefing Up Meat Sales.”
Wal-Mart has developed such close relationships with their suppliers that a company executive is quoted describing it this way: “They know as much about our business as we do.” That's just one example of several unique new business relationships blossoming in the retail meat industry.
Allen explains, “SuperTarget features in its meat department the Hormel Always Tender brand marketed by Precept Foods, which is a joint venture between Hormel and Excel. So here you have Excel, a major U.S. beef and pork producer forming a joint venture with Hormel. Why?
“The reasoning is that Excel brings to the table strengths in production technology, meat safety and research capacity, and Hormel possesses a trusted brand and a valued reputation with retailers,” he explains. “These companies have realized it makes sense to collaborate and join forces and offer case ready, value-added beef and pork to a retailer that recognizes the importance of partnering in the full sense of that term. SuperTarget has joined the partnership in order to provide its shoppers with a distinctive meat program.
“We didn't see anything like these forms of collaboration along the supply chain five years ago,” Allen says. “And I am sure we're going to be seeing a lot more of them in the future. The same kind of relationship is taking place between Excel and the Kroger Company, where they're working together to develop a beef program and brand that meets the unique needs of Kroger.
“With the retailer and the packer collaborating to provide beef to specification, there is no choice but to coordinate with ranchers and feedlots to provide the genetics, production and feeding practices that are essential to achieving the stated objectives,” says Allen.
No. 4 – What their customers want to know about beef
At the International Livestock Congress this spring in Houston, well-known meats guru Gary Smith of Colorado State University, told conference participants that consumers are increasingly concerned about the issues surrounding the use of hormones, antibiotics, feeding of meat byproducts, humane care and handling and consideration of the environment.
Plus, they also want to know about the “story” behind the brand, all the way back to who/where/how the beef was produced.
If you doubt that, check out various retailer web sites and the information they're providing about their beef products. For example, the beef section on Wegmans' site has information about their suppliers, such as “…a family of ranchers has made a commitment to growing beef right – entirely without growth hormones or antibiotics from birth.” Wegmans relates how the animals “mature at a natural weight, feeding on mother's milk and grass.
“When they reach a weight of 500 pounds, the cattle then get to feast on pure Midwestern grains.” Not only that, the company takes the time to explain how these animals were raised in a rotational grazing system and why that's good for the environment.
Whole Foods, a Texas-based company, goes so far as to display photos above the meat case of the ranchers who supply their stores. At New Leaf Community Markets, an independent, California-based retailer, beef sales have increased by 15 percent in the last year, according to Supermarket
New Leaf has an all-natural beef selection and suppliers must have trace-back ability. They even have consumer education classes where shoppers can learn as much as they want to about their organic and natural foods, including health benefits of grass-fed beef.
However, it's not just the natural/organic customers who are responding to retailers that have begun to provide more information about their beef. For example, Supermarket
News also ran a story on Giant Foods, which took NCBA's informational packet on the health benefits of beef versus chicken and ran with it. Giant used the health message, promoting the “Skinny Six” beef cuts with aggressive pricing and raised their beef sales.
Whether, as a producer, you like or disagree with this type of marketing is irrelevant. The reason being, as Allen quotes Smith, if something is important to the consumer it's important to the retailer. If it's important to the retailer, it's important to the producer. In short, consumers' wants and needs translate directly to how producers have to behave.
No. 5 – Extreme makeovers, the supermarket edition
“The challenge then for supermarketers is to bring about significant change in meat operations as rapidly as possible in order to survive in a white-hot competitive food industry environment” says Allen. “Other key supermarket departments have experienced positive revolutionary changes: fresh produce, deli, bakery, for example.
“The meat department is poised for comparable change,” says Allen. “We can expect to see the meat case stocked with beef that is fully trimmed, combined with some vegetables ready for the oven or microwave, and beef offerings that are flavored, seasoned and many that are fully prepared. And these products will be branded and supported by strong advertising and promotion programs. Much of these value-added developments will be performed by the beef processors and sent to stores in improved packages and have more visual appeal.”
His opinion is supported by the numbers, too. In “The Main Course,” Supermarket
News reports double-digit growth of refrigerated, fully cooked entrees merchandised in the meat department between 2002 and 2003. The trend away from unbranded, poorly packaged, commodity beef to convenient meal solutions obviously brings both new challenges and opportunities to the retail meat industry.
“The challenges confronting the meat department are immense; but so are the opportunities. Because the meat department is the largest single department in the store, improvements will have a significant impact,” Allen adds. “Meat has experienced its share of problems; but despite that, consumers have shown they love meat. And it is certain they will be receptive to ways meat can be improved to meet their lifestyles.
“And I think when the industry responds as it can and as it is doing, with far superior products and more brands that gives people better experience and trust. With all of the challenges, we will see the meat operations become more profitable.
“So, the ability for meat departments to attract people to the store is going to be immense,” Allen speculates. “Meat departments are going to be more center stage than they have been. I'm pretty confident about that.”