story by Kim Souza
ksouza@thecitywire.com
Tyson Foods’ focus on its prepared food business is coming at the expense of it international presence. The Springdale-based meat giant announced July 28 plans to sell its Brazil and Mexico operations to competitor JBS for $575 million. The company is also delaying expansion in China after a November an Illinois-based company was alleged to have sold out-of-date poultry in China.
CEO Donnie Smith said during the recent earnings call the Brazil operations sale is expected to close by the start of 2015, with the larger Mexico deal closing by March 2015, pending regulatory approval.
Smith said the operations in Brazil were underperforming and there was no easy way for Tyson to take a major market share. The Mexico business (largely commodity-based) also paled in comparison to the potential Smith saw in the $8.5 billion acquisition of Hillshire Brand.
CHINA PROBLEM
Tyson also has put its expansion in China in a holding pattern given the lackluster consumer demand resulting from food safety scares. Tyson routinely gives updates on its China operations and in the longer run expects its investments there will pay off.
“We think our integrated model is further validated because we control and guarantee the food safety quality in this China production. We are watching for any signal that consumer demand is coming back and can ramp up production at any time,” Smith said during a recent meeting with analysts.
Smith recently told Bloomberg News that the company does not plan to ramp up production in China until they see clear signals of demand growth.
WEAK INTERNATIONAL CHICKEN SALES
While chicken has been a profitable venture in the U.S. amid lower grain costs and escalating beef prices pushing demand upward, that has not been the case in its international business.
In Tyson’s recent annual report the company notes its operating margins for U.S. chicken was 7.9% in fiscal 2014. It’s international chicken business posted a negative 8.8% operating margin as its plants were running at just 67% of an 8 million head capacity.
Tyson’s international sales were $1.381 billion in fiscal 2014, a gain of 4.3%, despite the challenges. While international sales grew minimally in 2014, the operating losses continued to widen since 2012. In 2014, the international segment lost $121 million, widening from $37 million lost in 2013. In 2012 the company’s international segment had an operating loss of $70 million, according to Tyson Foods’ annual report.
Tyson said its sales volume increased but its average sales price decreased due to poor export market conditions in Brazil, supply imbalances associated with weak demand in China and a less favorable pricing environment in Mexico.
Operating income decreased due to poor operational execution in Brazil, challenging market conditions in Brazil and China, according to the annual report. Additionally, operating income was reduced by $42 million related to an impairment of Brazil assets and other costs related to the pending sale of Tyson’s Brazil operation.
STILL BETTING ON INDIA
Tyson invested in India in 2008, but rarely mentions the business there in earnings calls given the smaller scale of this operations. Godrej Tyson serves the food service industry in southern India. It also produces retail fresh chicken under the Real Good Chicken brand, and further processed chicken under the Yummiez brand.
“We sell fresh chicken in west and south India and frozen chicken and Yummiez products in more than 70 cities across the country. The combined production of the two plants in Mumbai and Bangalore expanded this year from 300,000 chickens per week to 500,000 chickens per week,” said Tyson spokesman Gary Mickelson.
Tyson was eager to invest in India given its billion-plus population and growing economy. One drawback has been that many people are vegetarian. Per-capita chicken consumption is less than five pounds per year.
Mickelson said consumption is growing at a rate of 10% a year, which is among the highest in the world. The country’s poultry industry is fragmented, with more than 90% of chicken sold in live markets. Due to rapid urbanization in India, there is an increasing demand for safe processed chicken as consumption shifts from a grain-based diet to poultry, meat, fish, fresh fruits and vegetables, he said.