Tyson Foods: Beefing Up the Bottom Line

A Cut Above the Rest
Tyson Foods, Inc. (Tyson), an American multinational corporation, is the world’s second largest processor and marketer of chicken, beef, and pork. Tyson controls approximately 20 per cent of meat production in the United States, with 36 per cent of revenues derived from beef products. Consumer products comprise Tyson’s largest distribution channel, accounting for 45 per cent of total sales. Since 1935, Tyson has steadily risen up the Fortune 500, and has grown to be Fortune Magazine’s most admired food brand. With a market capitalization of over $25 billion, the company’s operations are supported by 140,000 employees, 42 distribution and cold storage facilities, and two research and development centers, operating across four regions: North America, China & Korea, Asia Pacific (APAC), and Europe.

The Com-pea-titive Landscape
Until recently, investing in the rapidly growing plant-based simulated meat industry has not been a priority for legacy meat producers. Unlike traditional vegetarian meat substitutes, such as tofu or textured vegetable protein, these simulated meat products focus on replicating the taste, texture, and cooking experience of traditional beef, going so far as to “bleed” when cooked. Beyond Meat leads this new sector, posting $92 million in revenue in its most recent quarter—a 250-per-cent increase year-over-year. The company made headlines in 2019 after shares skyrocketed 840-per-cent in the three months following its IPO, and currently maintains a market capitalization of over $5 billion. Impossible Foods, estimated to be the second-largest industry player by revenue, was valued at approximately $5 billion in its Series E funding round. Despite exponential sales growth, both companies are still plagued by supply shortages in the face of unexpected consumer demand. Some analysts expect the meat substitutes market to reach $140 billion by the end of the decade, which would constitute 10 per cent of the $1.4 trillion global meat market. As a result, large legacy players like Nestlé, as well as many new startups, are entering this market with their own meat substitute products. Simulated meat alternatives represent a significant market opportunity that Tyson must pursue to persist as an industry leader in the long-term.

A Mis-steak-en Approach
Plant-based meat alternatives are currently priced at a premium relative to traditional animal products. Beyond Burger patties sell at Whole Foods for $12 per pound, while ground beef sells for approximately $5 per pound. This is primarily due to underdeveloped supply chains for primary ingredients driving up costs—namely, yellow-pea protein. Beyond Meat simply does not have the scale to compete on price with mainstream meat producers, nor does it have the logistical capabilities to adequately fulfill North American demand. Beyond Meat has struggled to manage its supply chain, and currently sources raw materials from multiple vendors in North America and Europe. Recognizing its scale advantage along existing supply chains and the costly nature of purely plant-based alternatives, Tyson launched its Raised & Rooted line—a product catering to “flexitarians” with products consisting of animal and plant proteins mixed together. Tyson’s current alternative offering targets health-conscious consumers with an alternative to meatless products that is approximately 17-per-cent cheaper on average.

However, companies such as Beyond Meat have made supply chain improvements their main priority, with the expressed purpose of driving costs down to attain pricing parity with traditional meat products and Tyson’s Raised & Rooted products. For example, Beyond Meat signed a new multi-year sourcing agreement with French pea producer Roquette, granting access to a new $400 million plant that will substantially increase supply when operational in the fourth quarter of 2020. More robust supply chains for raw materials combined with economies of scale, improved infrastructure, and cost cutting plans, will threaten Tyson Foods’ ability to gain an early foothold in the market.

Once Beyond Meat implements its cost-cutting plans, Raised & Rooted will lose its pricing advantage, eliminating any distinct upper hand over both fully simulated meats and real meats. Demand for meat substitutes is primarily driven by both desire for healthier alternatives which are better for the environment and ethical beliefs of preventing animal cruelty. By incorporating ground beef into its blended patties, Tyson’s Raised & Rooted product line has neither the realism of regular meat nor the health benefits of fully-plant-based meat. As vegans and flexitarians seek to minimize their meat consumption through purely plant-based proteins, while omnivores can consume real meat at a significantly lower price point than Raised & Rooted, mixed-meat products do not offer a particularly distinct value proposition.

Going Beyond Raised & Rooted
Given that Raised & Rooted does not offer the most competitive value proposition to any consumer group, Tyson’s current product must be replaced with an alternative that competes directly in the 100-per-cent plant-based meat market. Tyson can use existing partnerships with yellow pea producers developed for Raised & Rooted, in combination with its immense R&D capabilities to develop a meat alternative that directly challenges Beyond Meat. However, it may be difficult for Tyson to compete against existing brands in North American markets given incumbents’ pre-established relationships with franchises and existing brand recognition. Beyond Meat is already carried by several major retailers, including Walmart, Whole Foods, Safeway, and Target, with Walmart alone offering its products in over 2,207 locations.

Tyson prides itself on its global operations, with each region having domestic production, logistics, and administration. Tyson should launch a new simulated meat product in its APAC division, which encompasses Malaysia, Thailand and Australia. By locking up the primary yellow pea suppliers from Australia, the world’s sixth-largest pea producer, Tyson would be able to launch across APAC, where it already holds existing relationships, infrastructure, and expertise. This would effectively lock North American incumbents out of the region, due to their lower cash positions. Consequently, companies like Beyond Meat would be forced to source and produce internationally, driving up logistical costs and ultimately, price.

Despite small local players such as Malaysia’s Phuture Foods and Thailand’s Charoen Pokphand Foods, demand is mostly unserved, with no incumbents of scale. Current competitors in APAC generally source their raw materials elsewhere and are forced to ship from North America or Europe to APAC for distribution. By focusing on local production and distribution, Tyson will be able to enter the market with an inherent cost advantage, as it eliminates the intermediate and shipping expenses associated with production based in North America. For example, Beyond Meat has retail operations in APAC, but does not currently source from there, inflating prices. By using the existing supply chains for pea protein that are used for Raised & Rooted, Tyson will be able to outcompete Beyond Meat on price. Tyson’s foray into APAC would make market entry significantly harder for Beyond Meat and other competitors in the future—once Tyson locks up the local supply of yellow pea proteins, competitors with lower capital resources will have difficulty following.

With demand forecasted to increase 9.4 per cent annually through 2025, this region exhibits strong growth prospects for plant-based meat products. APAC countries have large vegetarian populations, primarily due to religious reasons. This is also complemented by increasing urbanization and westernization, with one in three urban Thais consuming more non-animal proteins in 2017 compared to 2016. In total, the APAC meat alternatives market size is projected to be $1.9 billion by 2023. Further, this strategy also enables Tyson to potentially expand into the North American market in the future. By partnering with South Asian restaurant chains like Jollibee that are preparing to enter the American and Canadian market, Tyson would be better positioned to gain brand recognition and market share in international markets.

Meat-ing APAC Consumers
Tyson should initiate APAC market entry in countries with higher GDP per capita, namely Australia, Singapore, and New Zealand. Consumers in these countries will be able to afford the initially higher prices associated with this new product. As scale is achieved through expanded numbers of retail partners and distribution channels, prices will decrease. Tyson should then expand to Malaysia and Thailand—nations with prominent existing Tyson operations and lower GDP per capita. This can be done with a separately branded line of products, to prevent devaluing the original brand launched in Singapore, Australia, and New Zealand. To accommodate different cultural tastes, Tyson can conduct consumer research and introduce diversified product lines—for example, ground pork dumpling filling in countries with a more Eastern palate, and hamburger patties in more Westernized markets.

To take further advantage of unmet demand in countries with high rates of vegetarianism and veganism, Tyson should then launch products in countries like Indonesia and Vietnam. GDP per capita and average household income of these states, however, are lower than that of Australia and New Zealand. Despite this, Tyson’s ability to conduct large scale marketing, as well as connotations of quality associated with Western brands, will allow these meat substitute products to be positioned at a premium to traditional protein items. Further, Tyson should strategically focus on urban areas with higher discretionary income. Sales efforts should concentrate on fast food establishments, as adoption of the Tyson simulated meat product could occur at scale, as opposed to individual restaurants and retail establishments. As several APAC-based fast food chains, such as Ichibanya and Jollibee, are aiming to move into North America, with Jollibee set to open 150 stores in the U.S. and 100 in Canada by 2023, this strategy will allow Tyson to achieve international brand recognition and gain a foothold in other markets.

This tiered approach will allow Tyson to maximize market share while capitalizing on existing distribution relationships and brand recognition, as well as provide a launching pad for further expansion. Given the rapidly growing APAC market for alternative meat products, if Tyson can achieve similar market share in APAC to Beyond Meat in North America—approximately 25 per cent—it should post around $240 million in incremental revenue, representing a 4-per-cent increase over existing APAC revenues.

Bringing Home the Bacon
The plant-based meat substitute industry is growing at a rapid pace, with increasing consumer preferences towards sustainability, health, and ethics. Consequently, to adapt to a changing landscape, Tyson must compete directly with incumbents to ensure sustainability and growth in the future. By launching a fully meatless product in the APAC region, Tyson will be able to gain dominant market share in a previously fragmented market while inhibiting the ability of cash-strapped competitors to launch in the future. Not only can this increase Tyson’s annual revenue by $240 million, but it will also enable Tyson to effectively compete in North America as APAC food chains expand globally.