ADVERTISEMENT

Chicken Feed, Nothing To Laugh At: Manage the Customer Value Proposition to Stave Off Hemorrhaging

November 2008 Pricing

While Lonnie “Bo” Pilgrim, Pilgrim’s Pride Chairman, has sailed his ship into near abyss, A.G. Lafley, CEO of P&G, is guiding his to safer waters.

In 2006, Pilgrim’s Pride was rising high having completed the acquisition of Gold Kist for $1.1 billion, turning Lonnie “Bo” Pilgrim into the world’s largest chicken mogul.  Two years later, a humiliated Pilgrim’s Pride was granted a reprieve from the brink of bankruptcy by a consortium of lenders with a fresh, November 2008, financing arrangement.

Meanwhile, P&G saw its profit rise 8.7% during the most recent and highly tumultuous quarter.  While P&G’s stock is suffering from a similar malaise as the rest of the stock market, its prospects for the future appear much brighter.

Why is there such a difference in outcomes between Pilgrim’s Pride & P&G?  One put the value proposition to customers last in its strategy and the other put it first.

Costs Hammered Pilgrim’s Pride but Prices Didn’t Move in Tandem

The chicken industry has been facing a horrid mixture of rising costs and lowered prices.

In 2006, chicken feed was near $2.40 per bushel.  By October of 2008, the clearing price of chicken feed was around $4 per bushel after having a brief period earlier this summer near $7 per bushel.  To make matters worse, Pilgrim’s Pride hedging strategy went slightly awry when it locked in futures contracts at $8 a bushel earlier this year.

The higher price of feed has a significant impact on the cost of raising chickens.  In 2006, feed costs constituted roughly one-half the cost of raising a chicken.  In 2008, roughly two-thirds of the cost of raising a chicken is directly attributable to the cost of feed.

As a result, feeding costs leaped 41% for Pilgrim’s Pride during its third quarter ending June 28th.

In an effort to combat rising costs, Pilgrim’s Pride has been reducing capacity and laying-off workers.  In August of 2008, Pilgrim’s Pride added 600 job cuts to the 1,700 already in the pipeline.  Unfortunately, it is doubtful that 2300 job cuts from a workforce of more than 50,000 will have a sufficient impact on costs to restore profitability.

Concurrent to rising costs, prices didn’t rise.  In fact, in some markets, they fell.  Wholesale price of boneless, skinless chicken breasts dropped to about $1.22 per pound in October 2008 from the prior year’s $1.45 per pound.

It is hard to run a profitable business when costs increase dramatically yet prices are allowed fall.

Adding Salt to Wounds

Labor has been a challenge at Pilgrim’s Pride.  Though Texas and most southern states are right to work states, they also suffer from an influx of ill-documented workers.  In April of 2008, more than 300 Pilgrim’s Pride workers were arrested by immigration officers as part of an investigation into identity fraud.  Partly in response, Bo Pilgrim took a leading role in Texas Employers for Immigration Reform which calls for legalization of the estimated 12 million illegal immigrants in the US and a guest worker program for future labor flows.  However, a progressive guest worker program is years from realization.  For now, Pilgrim’s Pride must manage with the labor force it has.

Consumer markets have also been a challenge for Pilgrim’s Pride.  In September 2008, Cohen, Milstein, Hausfeld & Toll, PLLC filed a class action suit alleging price fixing in the egg industry where Pilgrim’s Pride is one of many defendants.  Oddly, the price fixing is said to arise from a marginal reduction in laying hens brought about by increasing cage space, wherein the industry wide reduction of laying hens results in a industry wide reduction in egg supply and an economically predictable industry wide price rise.  It appears as though Pilgrim’s Pride is being punished for taking a more progressive approach to approach to animal welfare and ensuring a healthy feedstock.

And now, even stockholders are a challenge for Pilgrim’s Pride.  In November 2008, a class action suit filed by the offices of Howard G. Smith on behalf of stockholders alleges, among other things, that the company materially misrepresented its inability to raise prices to sufficiently offset cost increases.

While these challenges are likely to be addressed over time, for now they add salt to the wounds at Pilgrim’s Pride.

Faith Is Not a Business Strategy

Yet the real challenge for Pilgrim’s Pride is its misguided business strategy.

When Pilgrim’s Pride took a heavily leveraged position and acquired Gold Kist for $1.1 billion, the result was an astonishing 10:1 debt to earnings ratio.  With high debt comes high debt repayment.  According to Bo Pilgrim’s 2007 autobiography, “[the] Lord had foreordained the deal”.  Now lenders are all but foreordaining a return on their investment.

Faith as a personal strategy will find many supporters, but as a business strategy it is hard to defend.  Bo Pilgrim seems unable to distinguish between the two.  According to his 60-second business plan, which he unfortunately teaches at Howard Payne University in Brownwood Texas: “God, first.  Family, second. Company, third.  And Sales, fourth.”

Putting customer needs last in the list of business priorities has once again proven to be disastrous.

Customers Are a Business Strategy

Contrast Pilgrim’s Pride strategy with P&G.

Like Pilgrim’s Pride, P&G is facing rising commodity costs.  P&G is also suffering from a mixture of a rising dollar, currency fluctuations, and reduced growth estimates.

Unlike Pilgrim’s Pride, P&G has managed to push through a series of price increases.

Higher prices of P&G products have resulted in larger than normal price differentials between their products and their competitors.  These larger price differentials have had the economically predictable result of market share erosion.  Yet, market share erosion has not been complete.  Some customers have traded down from P&G’s premium offerings to their mid-tier offerings, such as switching between Tide and Gain laundry detergent or Pampers and Luvs diapers.

To convince shoppers that its products are worth the higher price, P&G is shifting its advertising spend to emphasize value.

Manage the Value Proposition to Manage the Price

Here lies the contrast.  P&G is taking the time to explain to customers why its brands and products are worth the price P&G is seeking.  Pilgrim’s Pride appears to be ignoring customers, putting them last on their list of priorities.

Pricing power doesn’t arise by faith alone.  Managing customers’ perceptions and ensuring that the value proposition delivers on its promise takes work, but yields results.

As Mr. Pilgrim’s no doubt favorite book states, “Show me your faith without works, and I will show you my faith by my works.”  (James, 2:18)  Perhaps he needs to revisit this passage.

References

  • Dianne Solis (2008, 26 August). “Pilgrim’s Pride chief joins voices calling for immigration change”. McClatchy – Tribune Business News, Retrieved November 7, 2008, from ABI/INFORM Dateline database. (Document ID: 1540086481).
  • Karen Robinson-Jacobs (2008, 12 August). “Pilgrim’s Pride cutting 600 more jobs as feed costs soar”. McClatchy – Tribune Business News,  Retrieved November 7, 2008, from ABI/INFORM Dateline database. (Document ID: 1529474101).
  • Scott Kilman (2008, August 8). “Food Giants Race to Pass Rising Costs To Shoppers”. Wall Street Journal  (Eastern Edition),  p. A.1.  Retrieved November 7, 2008, from ABI/INFORM Global database. (Document ID: 1527463481).
  • “Cohen Milstein Files Class Action Against Major Egg Producers for Conspiring to Fix Prices.” (2008, 26 September). Business Wire, Retrieved November 7, 2008, from ABI/INFORM Dateline database. (Document ID: 1564605411).
  • Kirsten Valle, Ames Alexander. (2008, 28 October). “Processors of poultry facing big challenges: Higher costs, lower demand amid faltering economy force officials in Carolinas to eye the situation warily”. McClatchy – Tribune Business News.  Retrieved November 7, 2008, from ABI/INFORM Dateline database. (Document ID: 1583757051).
  • Lauren Etter, Jeffrey McCracken. (2008, October 17). “Debt Woes, Feed Costs Come Home To Roost At Pilgrim”. Wall Street Journal  (Eastern Edition), p. A.1.  Retrieved November 7, 2008, from ABI/INFORM Global database. (Document ID: 1576167571).
  • “Law Offices of Howard G. Smith Announces Class Action Lawsuit Against Pilgrim’s Pride Corporation”. (2008, 1 November). PR Newswire.  Retrieved November 7, 2008, from ABI/INFORM Dateline database. (Document ID: 1587287321).
  • Lauren Etter, Dough Cameron. (2008, October 28). “Pilgrim’s Pride Lenders Grant Temporary Waiver”.  Wall Street Journal. Retrieved November 6, 2008, from WSJ.com.
  • Ellen Byron. (2008, October 30). “P&G Profit Rises 8.7%, Helped by Price Increases”. Wall Street Journal. Retrieved November 6, 2008, from WSJ.com.


About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
More by Tim J. Smith, PhD