2005 Processor of the Year: Tyson Foods

Despite the pitfalls of the animal protein market, North America’s biggest food processor for years has been adding value to meats, tightly running its plants and staying close to its Arkansas values.

By Dave Fusaro, Editor in Chief

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Chairman and CEO John Tyson (center) is flanked by Richard Bond (left), president and chief operating officer, and Greg Lee, chief administrative officer and international president.

Animal protein is just about the riskiest niche of the food business. Between animal diseases and in-plant contamination, international trade disputes and livestock price fluctuations, it's tough to make a buck in this business.

Yet Tyson Foods Inc. makes millions of them. While it has been climbing the charts for some time, Tyson's 8 percent growth in its fiscal 2004 to $26.4 billion made it the biggest food processor in the U.S. and Canada, according to the Top 100 list we unveiled this past August (Tyson sales were $24.8 billion, according to our criteria). For the first time in the 30 years of our annual ranking, Kraft Foods or a predecessor company is not No. 1 on our list.

Tyson, still based in Springdale, Ark., did it the old-fashioned way, by launching 420 new products and recording double-digit increases in its chicken and pork segments. And, uncharacteristically, all that without an acquisition. While the numbers are impressive, there are numerous intangibles that make Tyson an industry-leading company: A set of core values that everyone seems to carry in their wallets. Manufacturing technology that leads the industry. A $52 million product development center nearing completion. A "chaplaincy program" that involves chaplains - from Baptists ministers to a Muslim imam - to provide care and counseling to workers. And a response to victims of Hurricane Katrina that put government agencies to shame.

For these and a host of other reasons that should become apparent in the next few pages and across three different stories, Food Processing is proud to name Tyson Foods our very first Processor of the Year.

An acquisitive history

While Tyson can trace its history back to 1935 and an earlier John Tyson, who sold truckloads of Arkansas chickens in Kansas City, St. Louis and Chicago, its industry-leading story starts just in 2001. The current John Tyson, grandson of the founder, engineered the most audacious acquisition in a company history dotted with buying and selling. IBP Inc., the country's largest processor of beef and No. 2 in pork, was bought for $4.7 billion, instantly doubling Tyson's size and catapulting it into the top ranks of American food processors.

"We had a vision to combine these companies and create the world's leading protein provider," says John Tyson, chairman and CEO. "Thanks to the hard work of our people, that vision is now a reality.

"Actually, the companies came together very well," he continues. "There were lots of similarities and synergies. Both companies knew how to run their plants well. They're willing to invest in technology, even to experiment. Then there are the individuals. They had some very good people, and we were able to put together the best of the best, really."

As he spoke, at his side was Richard Bond, the former chief operating officer of IBP, who now is president and chief operating officer of Tyson. "We did end up with a lot more products than we realized," Bond interjected. "One of the key things the combined company had to do was take beef and pork up the value chain as Tyson was doing with poultry. In the past four years, we've added $2 billion of value to our product portfolio. But that remains the goal: to increase the value of all our animal proteins that once were commodities."

What Tyson hasn't done is add to its debt. While the IBP purchase left Tyson $4.9 billion in debt, or 58 percent of capital, the company is ahead of its self-imposed schedule of reducing debt, and should come in below 40 percent when the 2005 fiscal year figures are released this month (Tyson's fiscal year ended Sept. 30). Note: To access infographics on Tyson's sales and overall financial picture, click the Download Now button at the end of this article.

One unusual philosophy is that Tyson has added value and increased penetration through primarily one brand: Tyson. Some regional brands have been retained - Weaver, Russer, Wilson, Corn King, Jordan's, Wright and Thorn Apple Valley among them - and others have been eliminated, but the strategy is to put the Tyson name on the newest products and the ones with national distribution, and that goes for all three animal proteins.

Drilling down within those three animal protein segments, Tyson has leading positions in retail and foodservice beef, chicken and pork, as well as prepared foods such as bacon, ham, pizza toppings and deli meats.

A growing international force

It's been a difficult couple of years to move animal protein around the globe. Although Tyson has begun investing in overseas companies and countries, most of its assets are U.S.-based. Still, international sales account for nearly 12 percent of company revenues. Tyson generates $3 billion in international sales. Approximately 30 percent of the company's international chicken sales come from overseas operations.

International sales clearly are a key component of the company's future. The goal is for 20-25 percent of corporate revenues to come from international sales, perhaps within 10 years, according to Greg Lee, chief administrative officer and international president. Lee shares an "office of the CEO" with Bond and John Tyson. That is, when he's in this country, which is becoming increasingly rare.

The company looks for two things in overseas markets: a platform of animal production that allows for growth in that country or region and growing consumption of animal protein in that country or region.

Tyson has targeted four geographic markets in which it wants to grow: China, Mexico, South America and Canada. The interest in China comes from the explosive growth in that nation as a consumer of both packaged goods and fast food. "As people's incomes grow, they tend to add more protein, especially animal protein," says John Tyson. "All our key customers are there, both in retail [Wal-Mart] and foodservice [KFC].

"Mexico also is growing as a consumer, and north Mexico is beginning to resemble the U.S. [in buying and consuming habits]," he continues. "We've been there 10 years, so we're well positioned." Subsidiary Tyson de Mexico is the largest producer of value-added chicken for both the retail and foodservice sectors in Mexico.

South America they speak of collectively, while acknowledging fine differences between countries and recognizing Brazil as a low-cost producer in the region.

Canadian subsidiary Lakeside Packers is a leader in the Canadian beef industry. A new joint venture in Canada with Export Packers is supplying fully cooked chicken products to the Canadian market.

While Tyson's past and future lie in animal protein, the company is not 100 percent meat. Its Prepared Foods division makes pizza crusts, flour and corn tortilla products, appetizers, hors d'oeuvres, prepared meals, ethnic foods, soups, sauces, side dishes, specialty pasta and meat dishes as well as branded and processed meats.

All these markets are following the pattern Tyson has experienced in the U.S.: Consumption of animal protein is on the rise, and that is closely followed by a growing appreciation of value-added, more convenient products. Another way these markets follow the Tyson pattern is that chicken seems to lead the way, with pork and beef trailing.

"Our assets are nearly all U.S.-based, so our first effort is in maximizing export opportunities," says Lee. "We sell to 87 countries and have offices in 18 of them. But long-term we recognize that we'll need to participate in the countries we serve. So we'll need to make careful choices on where to invest."

Investment, Lee says, could be in the form of building Tyson plants and other infrastructure in some countries or in acquiring or investing in local companies that can mesh with Tyson's goals and philosophy. "Only about 10 percent of the chickens produced in the world trade between countries, and about the same holds for beef. So there is great potential."

But the first step, especially for an American exporter, is market access, and that's been tough. "Europe doesn't even allow in U.S. chickens," he says. No U.S. poultry processing plants are currently approved for export to the E.U. because of differences in our processing procedures.

And the discovery of mad cow disease in the U.S. has closed most foreign markets to U.S. beef since December 2003. "Several times we thought some of those markets were going to reopen," Lee continues. "But we really believe the Japanese are winding down after they've seen the safeguards in place and that access to that market will come this month or next." Japan has been the number one export market for the U.S. beef industry. Lee believes at least younger American cattle, perhaps those under 20 months, will be allowed back in many countries.

In all, Tyson estimates it lost $800 million in overseas sales in fiscal 2005 because of the appearance of bovine spongiform encephalopathy (BSE or mad cow disease) in the U.S. And a significant portion of that is not typical cuts of beef that can also be sold here in the U.S., but many cuts and parts that are not even saleable here. Skinned beef tongue, for instance, sold for $7-8 a pound in Japan before the Japanese BSE-related ban on U.S. beef.

"Over the past two years and after testing over 300,000 high-risk cattle, they found only one other infected cow in Texas," Bond points out. "We believe the firewalls in place are working."

Even when bans are lifted, it could take a while for foreign consumers to get over their fears. "We recognize there will be some resistance, but Japanese and Korean consumers were very fond of American beef, especially the finer restaurants," says Lee. "We won't immediately go back to the pre-BSE sales levels. It will take some marketing and promotion, but it will come back."

The threat of avian influenza should only aid Tyson, as the company's style of more sophisticated and more hygienic growing practices should mean more disease-free birds. "[The disease] is starting in backyard flocks and only then moving to commercial poultry," says John Tyson. "You have to break that cycle. That's difficult because in some of these cultures poultry is used as currency. Animals in the backyard are part of their economic base.

"But when you read the reports from the World Health Organization, their recommendation is that China, Vietnam and Thailand move toward a model that is our agricultural model; that you move toward bio-secured, more sophisticated farms. Their recommendations mesh with our expansion plans."

And while they admit a heightened sense of urgency over the possibility of avian influenza developing here in the U.S., "We [at Tyson] have been managing animal health issues for 60-70 years. With the heightened sense of biosecurity that's been a byproduct of September 11, we believe the controls are in place so this would not get out of hand," says John Tyson.

Not 100 percent meat

While Tyson's past and future lie in animal protein, the company is not 100 percent meat. The company's Prepared Foods division makes pizza crusts, flour and corn tortilla products, appetizers, hors d'oeuvres, prepared meals, ethnic foods, soups, sauces, side dishes, specialty pasta and meat dishes as well as branded and processed meats. More than half of the division's sales are to foodservice, 44 percent are consumer products and 2 percent are international.

The company became one of the leading suppliers of fully-cooked meat toppings to the U.S. pizza industry with its 2001 acquisition of IBP. This growing business includes such toppings as pepperoni, Canadian bacon and sausage, and it recently introduced such nontraditional items as steak products (Philly and Angus steak, meatballs). They are sold to both foodservice and retail customers. Tyson is a major manufacturer of pre-made pizza dough and crusts and sells to all the major pizza chains.

Tyson acquired Mexican Original Inc., essentially a one-plant company in nearby Fayetteville, Ark., in 1983. According to the book Tyson, From Farm to Market, "The initial synergy with poultry was in mass purchases of corn for torillas and chicken feed, but Tyson product-development teams soon created the Crispito, a trademarket product of rolled tortilla with fruit or chicken-based fillings."

Tyson also has bought into and sold out of a number of food categories in the past. Its biggest foray probably was into seafood, beginning with the 1992 acquisitions of Arctic Alaska Fisheries Corp., Seattle, and Louis Kemp Seafood Co., Duluth, Minn. Added in 1995 were Star of Kodiak, Multifoods Seafood Inc. and JAC Creative Foods. At its height, the seafood group accounted for sales of more than $200 million annually.

"We got into seafood on the premise the [National Marine Fisheries Service] would change the quota rules, from an Olympics style fishing system [boats collectively can bring in a limited number of tons] to assigned quotas [with each boat having a limit]," says John Tyson. "It didn't work out that way, so we got out. Even commercial fishing is fishing; you never know if you're gong to catch something. We're better when animals are raised under a system."

Managing the future

While no major acquisitions appear on the horizon, according to John Tyson, the company's reduced debt does allow it to make some strategic buys. Even with sales of $26 billion and such a heavy concentration on animal proteins, there are gaps in the product line, the execs say.

"We could use more barbecue items, in both pork and beef," says Bond. "We could grow in cooked ribs."

A lot of effort will be expended simply on managing what they already have. As a smaller, family-owned company, Tyson once was known for its nimbleness. How does it keep that edge when it's the largest food company in North America?

"When you're as big as we are, 300 facilities and 114,000 employees, you have to guard against bureaucracy," warns Bond. "You have to trust people and encourage them to make decisions without always having to work their way up the chain of command."

"We have a simple mantra around here: Respond and do whatever the customer wants done and we'll figure it out later," says John Tyson. "You can see our commitment to R&D and innovation," he said, pointing out the window at the new $52 million Discovery Center under construction (see following story).

With a commitment to promote from within, Tyson has a formalized leadership program to identify capable people in the company. The program trains them, moves them around and into different work situations and then upward when the time is right. Data on employees' abilities goes into a company-wide database. "Dick, Greg and I spend three to four days per quarter looking at people, thinking about who should be moved up, making adjustments in the organization," John Tyson says.

Every employee should know what the company stands for. All of them get a "core values" card, and employees are expected to carry these with them at all times. "We are a company of people engaged in the production of food, seeking to pursue truth and integrity and committed to creating value for our shareholders, our customers and our people in the process," it starts. It then lists nine bullet points under the headings of "Who we are," "What we do" and "How we do it." An effort to bring common purpose to a large and growing company, the card now is printed in seven languages.

One thing you can count on is the continued influence of the Tyson family at Tyson Foods. While this has been a public company since 1963, the Tyson family owns about 36 percent of the economic interest and controls about 90 percent of the voting shares.

"This is a good time to be Tyson," says John Tyson, reflecting on the health of the animal protein markets, both domestically and internationally. "There are plenty of opportunities out there, and we have positioned ourselves well."



To access infographics on Tyson's sales and overall financial picture, click the Download Now button below.

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