Value-added products – you’ve all heard the term, but are you moving in that direction? Like it or not, if you want to stay in business, you have to find a way to capture a bigger chunk of the pork chain. For some this means joining a group planning to buy or build a packing plant, for others it means striking out on your own, certainly it means working more closely with a packer.
No matter which direction you’re headed, Dennis DiPietre, economic consultant, says there is one key issue to address.
Is there a value proposition? Are you putting together a package to compete with existing products and technologies, or are you proposing adding value within the pork chain where it doesn’t now exist?
That’s the message DiPietre brought to the National Pork Producers Council’s seminar on the viability of small packing plants. NPPC commissioned the Stellar Group to determine the cost of building a 2,500-head packing plant. While these engineering considerations are necessary, DiPietre emphasizes the importance of knowing your market before moving forward.
Start by determining if there are niches not being met or opportunities for new products. DiPietre says there is the possibility of producing branded items with different strategies or attributes that aren’t easily captured by other areas of the pork chain. For example, you could capture the family-farm-produced value chain. Some producers can’t copy the strategy because they aren’t a “family farm”.
Probably the best example of capturing a value proposition is Southwest Airlines. The company adopted a strategy that runs counter to standard airline industry protocols. Unlike the other major airlines Southwest doesn’t use a hub; it uses only one type of aircraft; it has a low-fare pricing strategy; and doesn’t offer assigned seats. Southwest has been extremely successful with this strategy and so far, no other airline has been able to match it.
DiPietre says there are tremendous opportunities like this in the pork industry. A good example is Premium Brands. This company offers its customers direct-store delivery. Instead of having to use several distributors, Premium Brands provides an added-value luxury to convenience stores – representatives come in and fill an entire display case with a single display unit containing deli meats and hot dogs.
So, how do you determine your value proposition? DiPietre breaks it down into three areas: consumer, retailer and farm level.
Let’s start with the consumer. The first thing you need to identify is consumer demand. You can accomplish this by conducting surveys, customer profiles, interviews and focus groups. DiPietre also recommends providing consumer assurance – things like certification and branding. You have to find out how important these things are to a consumer. That’s just the beginning; monitoring consumer satisfaction is an ongoing and expensive process. Once you identify consumer preferences, it narrows your window of opportunities.
On the retail level, a big issue is that a lot of meat pricing is done by trial and error. The manager may establish a targeted gross margin then set the prices to achieve that goal. Product movement also is a stickler. Success here draws on the meat manager’s personal knowledge and experience, says DiPietre. Some may track sales, while others see a hole and fill it.
Another pricing issue centers on perishability. If a distributor has excess pork chops, he’ll probably give the retailer a deal so the products don’t spoil. Many times the meat manager will stock the inventory on an “as ordered” basis rather than what goes out the door. He says that the bar-coding system works well for products weighing the same, but not for meats where packages vary. That’s another argument in favor of the growing demand for size-controlled, pre-packaged, branded meat products.
When you look at the value proposition at the farm level, keep in mind that premiums are used for base pricing. You are paid for the value in the premium cuts, but not the leftovers. You need to find ways to capture more value for the entire hog.
Another farm-level obstacle is in receiving direct consumer feedback concerning preferences and purchases. Plus, price gets distorted the farther away you get from the consumer. As an example, DiPietre points to 1998 and 1999 when hogs sold for 8 cents a pound while pork’s meat-case value remained strong. Packers were bidding down the live hog price because they didn’t have the capacity to slaughter more hogs. Meanwhile, consumers were willing to continue buying and paying the same prices for pork. No retailer is going to cut his price under that scenario.
You also need to realize that packers spend a lot of money in verification equipment. For instance, a packer may install an Autofom machine to determine the carcass composition of the hogs he is buying. You have to ask yourself, if I’m buying a plant, how do I verify the quality of hogs I’m getting?
Typically, packers will offer long-term contracts to help assure a consistent supply of top-quality hogs. Contracts will allow you to lock in prices, but will reduce your marketing flexibility.
If you are serious about capturing a larger part of the pork chain by purchasing or building a packing plant, you need to consider these five key feasibility factors. This is the outline USDA uses before it will provide a loan for any project, says DiPietre.
1. Economic Feasibility
Area labor availability.
Utility needs and costs.
Transportation issues – product in and product out.
2. Market Feasibility
The actual market and marketing area, including your target market and consumer demographics.
Committed sales: Do you have signed contracts? What are your retail and wholesale targets? Are you targeting specialty areas such as pharmaceuticals, blood and offal?
Sales organization and management.
3. Technical Feasibility
Site suitability issues: These include your distance from residences, public recreation areas and waterways. Also, what is the soil analysis and suitability of the site for handling waste materials?
Community acceptance: Will the community support a packing plant?
Constraints on achieving targets: Are raw materials available? What are your start up and operating costs?
4. Financial Feasibility
Reliability of cash-flow estimates.
Accounting and information systems.
Financial workability: will this plant make money?
5. Management Feasibility
Management issues. How many managers do you need? Are they experienced? Do they have a teamwork mentality?
Employee recruiting, training and retention.
Capturing more value in the pork chain won’t be easy, but you can do it with the right strategy.
“It’s clear that the value proposition has to be there first,” contends DiPietre. “This helps you determine the information system you need, size of plant and type of products. Marketing drives the investment system back down the chain.”