1

Annemarie Folan, Katina Gattuso, Victoria Gillern, Haley McCraven, & Alex Sivo

MECN 6200 - Group News Article Assignment

“Jim Perdue Talks about Change in Chickens - and the Market”

Introduction

For this assignment our team choose to analyze the recent Wall Street Journal news

article entitled “Jim Perdue Talks about Change in Chickens - and the Market”. In the article,

Mr. Perdue discussed the changing American health trends and their implications on the food

industry. Based on the facts presented in the article as well as knowledge and insight gained from

additional research, our team assembled the detailed analysis outlined below and has

recommended a path forward for Perdue.

We began the analysis with an overview of the U.S. poultry market, including historical

and economic information on the battle between traditional chicken vs. organic chicken -- what

has become a hotly contested topic and the main focus of our analysis. We then examined two

key economic elements impacting the market for traditional and organic chicken: consumer

tastes and price elasticity. Keeping those two economic elements in mind, we examined the three

possible “paths forward” facing Perdue and the consequences of each. Since there are many

variables that factor into the development of the “right” recommendation for Perdue, our team

decided to narrow the focus on only the following four data elements and how those impact our

recommendations:

● Consumer tastes

● Income

● Price

● Expectations of future price

Finally, supported with information from the income statement and 5-year projection

model, our team proposed three recommendations for Perdue that will ensure economic growth

for the company in the years to come.

Economic Environment and Economic Elements

Founded in 1920, Perdue Farms has remained a family-run, privately owned agricultural

products and services company. At the time of this article, Jim Perdue, a third generation

member of the Perdue family and his management team are faced with determining the right path

forward for the company with respect to the growing demand for organic chicken, while

balancing the increase in supply chain and operational costs.

Recently, Perdue and its competitors Cargill, Inc., Pilgrim's Pride Corporation, and Foster

Farms, have been experiencing slow sales growth in their traditional chicken segment, while at

the same time experiencing an increase in sales in their organic chicken (the latter of which

makes up a only a small portion of overall sales for the company.)

As noted in the Wall Street Journal article referenced earlier, a change in consumer

preference, in favor of organic instead of traditional chicken, is beginning to ripple through the

2

poultry market. As a result of this shift in consumer preference, Jim and his team examined their

current product strategy and production methods and determined they would need to address the

change head-on with a business strategy that would realign their product with consumer tastes,

thus of setting the slow sales growth.

Three different paths forward facing Perdue

Jim and his management are faced with three different possible paths forward for the

company:

1. To continue producing and selling the same level of organic and traditional

chicken as in years past (in anticipation that the change in consumer tastes will be

a fad);

2. To stop producing organic chicken altogether and focus all production on

traditional chicken (in anticipation that there will always be a market for

traditional chicken);

3. Or, to increase their capabilities in producing organic chicken while decreasing

their production of traditional chicken (in anticipation that the changes in

consumer preferences are permeant and to remain competitive they will need to

change their production to focus more on organic).

Our team recommends Perdue move forward with option three: increase their organic

chicken production while decreasing their production of traditional chicken. Late in the analysis

out team will lay out subsequent recommendation that support this overall path forward. To

help build the case for our recommendations our team examined and interpreted sales data,

consumer trends, industry trends, changes in supply chain and changes in agriculture policy and

regulation. To help formulate our recommendations our team focused solely on interpreting the

data around four key elements: the consumer’s perception of the quality of the product, the

consumer’s level of income, the price of the organic chicken and the price of related goods.

Consumer’s perception of the quality of the product

According to research done by

the Organic Trade Association

(OTA), the last ten years have seen a

strong increase in the sale of organic

food sales. In 2015, the organic

industry saw a record of $4.2 billion

in sales, up from the $3.9 billion in

2014. (McNeil, 1) By 2020, sales of

natural and organic foods are

expected to represent nearly 14% of

total food sales (Watrous, 1). Organic

foods are shifting to becoming the

norm, rather than the exception. One

of key drivers to this increase in sales

3

can be attributed to the increase education, promotion and

access to these products from mainstream retailers and

popular media. (McNeil, 1) More and more, consumers are

demanding to know everything that impacts their food,

throughout the entire supply chain. Nowhere is this more

prevalent than in parent circles with young children.

Partners are inundated with research and data pointing to

the use of common faming pesticides and anti-biotics as the

reason behind such conditions as autism, ADHD and

asthma. Social and traditional media had provided a

“microphone’ to broadcast these findings, as well as the

consumer’s opinions on the research and data. As a result,

part of the increase in organic sales can also be attributed to

a fear factor of either exposing your child, family or self to potentially harmful additives in food

or the fear of “looking like a bad parent” for feeding your family non-organic food. Jenna

Blumenfeld, senior food editor and New Hope Natural Media, was reported saying,

“Increasingly more consumers are gaining identity not by what they wear or where they live, but

by what they eat or don’t eat.” This desire to be healthy as well as perception of health is driving

a consumers’ willingness to pay the increase in price for organic food.

Recent

research has indicated

a direct correlation

between consumer

awareness/perception

of organic food and

the sale of organic

food. As illustrated in

the graph below, as

the percentage of a

consumer's’ overall

awareness of organic

foods increases we

see a direct increase

in the sales of organic

foods.

This same correlation is also seen within the poultry market. According to a consumer

taste study performed in 2002 by the Department of Agricultural Economics at Kansas State

University, the lack of awareness around organic foods or a lack of understanding where it was

available for them were the two top reasons why consumers had not opted to purchase organic

chicken. Thus, as education, awareness and availability increase so too does the sale of organic

chicken.

4

A consumer’s level of impact and its impact on organic chicken

After some initial

research on the topic, our

team found that overall,

consumers were generally

not price sensitive as it

related to the purchasing of

regular chicken versus

organic chicken. For these

consumers, the difference

in price seems to be worth

it even if the reasons are

intangible. To take this a

step further our team

explored the relationship

between a consumer’s

income level and their willingness to purchase organic food, specifically chicken, though an

analysis. We began by creating sales forecasts based solely on historical sales data, by region and

then projected into the future based on the historical information, as illustrated below.

These forecasting models demonstrated a continual increase in organic chicken sales in

each region. Additionally, we also examined regional U.S. income data over the last five years

5

alongside the sales data of organic chicken from the U.S. Census of Agriculture. We found the

following:

Visually, this information supports our hypothesis that income and organic chicken sales

are positively correlated; however, we wanted to see how statistically correlated they actually

are. In order to do so, we performed regression analysis for each region where income was the

independent variable (x) and sales was the dependent variable (y). For the Northeast, we found a

correlation of .775, for the Midwest the correlation was .73, for the South it was .808, and for the

West it was .838. For complete regression analysis per region, please refer to Exhibit A. By

doing correlation and regression of sales and income we were able to find the regression

equations for each region:

NE Midwest South West

y=9,133.72x-

492,288,290

y=1,166.59x-

56,136,504

y=48,441x-

2,260,050,473

y=17,618x-

854,086,848

With these equations, we’re able to predict what the sales for each region will be based

on what the income is. They will also help us answer the question “Are organic chicken sales

dependent upon household income?”

6

The price of organic chicken

Non-organic poultry prices have, for the most part, steadily increased over the last 20

years. Today, the price for a whole chicken is around $1.50 per pound. Several factors have

contributed to the rise of poultry prices including the overall increase in the demand for chicken.

This demand has largely been driven by both a decrease in supply and an increase in the price of

chicken’s main substitutes, pork and beef (Wong, 1).

Another critical factor driving up the price of poultry has been the price increase of its

inputs, specifically chicken feed (Donahue & Cunningham). Producers are having to increase

poultry prices significantly just to offset the high costs of feed.

Organic chicken, with a price about 80% ($2.69 per pound) higher than that of non-

organic chicken, has followed the same trend in price increases. The demand increase for organic

chicken has been especially significant over the last 10-15 years as consumers have become

more informed around the health concerns posed by the antibiotics and pesticides used in non-

organic chickens (Lipka). The increased awareness of the harmful antibiotics and pesticides

found in non-organic chickens, combined with the perception of the added benefits of organic

chicken, have led us to believe that consumers are more willing to pay a premium for organic

chicken and are therefore price insensitive.

7

The price of related goods

The main

substitutes for

chicken, beef

(currently priced at

$3.98/lb) and pork

(currently priced at

$4.14/lb), have also

seen significant

price increases over

the last several

years. Unlike the

price increases for

chicken however,

the price hikes for

beef and pork can

be attributed to a

decrease in supply.

Waning domestic production coupled with strict import processes have been the main

contributors to the recent reduced supply (Wong). However, prices of both beef and pork have

already begun to decline, and will continue to decline over the next several years as favorable

pasture conditions, lower feed cost, and increased domestic productions are expected to once

again increase supply and eliminate the current shortage (USDA). Despite the expected decline

in beef/pork prices, we believe consumers will still choose chicken over these options based on

the fact that it is significantly cheaper and consumer tastes are changing in favor of chicken

(Beef Magazine).

Expectations of the future price of chicken

According to the USDA Economic Research Service, the price of poultry is expected to

rise between 2% and 3% in 2017 (USDA). We believe it is reasonable to expect this trend to

continue to grow at the same rate over the next five years as demand increases. This future price

increase applies to organic chicken as well. Demand for organic chicken seems to be outpacing

the demand for non-organic chicken as American consumers are trending towards organic

options in lieu of health concerns. Furthermore, the increasing cost of organic feed will also keep

the price of organic chicken high for the foreseeable future. This is especially relevant for

Perdue, who must source both domestically and internationally for their organic feed,

significantly increasing their input costs of raising organic chickens.

What we have concluded is that chicken, specifically organic chicken, is fast becoming a

premium good due to the steady demand increases. With a heightened knowledge of health

concerns of non-organic chicken, consumers are finding themselves more willing to pay a

premium for healthier, organic chicken. Demand for organic chicken shows no signs of slowing

down as organic sales are predicted to continue to increase 12% to 15% annually over the next

three years (Doering). Major substitutes such as pork and beef also seem unlikely to pose a threat

to the increasing demand for chicken based on the favorable shift of consumer tastes towards

8

chicken. Since organic chicken prices have been on a steady climb over the past 15-20 years,

with no ill-effect towards demand, we believe that price is not a governing factor in determining

whether a consumer will choose organic over non-organic.

Recommendations

The following recommendations are built on the assumption that Jim and his team has

decided move forward with some form of an increase in the production of organic chicken while

reducing the production of traditional chicken. Based on the team’s research and analysis of the

four key elements of the consumer’s perception of the quality of the product, the consumer’s

level of income, the price of the organic chicken and the price of related goods, our team

developed three recommendations to better define and to support Perdue’s path forward.

Recommendation #1:

Approach the increase in the production of organic chicken with a regional, small-scale roll

out.

o Since the highest correlation between income and chicken sales is in the West we

propose this as the starting location for the increased organic production.

o As detailed above, consumer are demanding more organic products and it was

determined that a slight increase in cost would not be a purchase deterrent, therefore,

greater expansion into the organic chicken market is a safe move for Perdue.

Recommendation #2:

Hire an external advertising firm to develop a pro-organic marketing campaign.

o This campaign would help continue and increase the education and overall awareness of

organic foods among consumers in the market.

o The campaign would feature national advertisements over the course of a 6-month

period, using the following avenues: television, billboards, web-based banner ads, and

print magazine ads.

The content will focus on the benefits of organic chicken and our commitment to

animal welfare. We want to connect with our consumers on an emotional level and

to do this we plan to showcase heartening visions of children and free-range

chickens in our advertisements to give it that farm-to-table, homey feel.

o Running in parallel (and as part of the overall marketing campaign), Perdue will launch

a social media campaign, leveraging the Instagram, Twitter, Facebook, and Snapchat

platforms to promote the brand and messaging.

The social media plan would have the same objectives and feel as the traditional

advertisements but would allow us to reach consumers more quickly and

frequently.

o A key part of the social media campaign will be the “Perdue Organic Pledge”

movement. We’ll ask consumers to take videos of themselves and their families

pledging to eat organic meats and explain what organic means to them. Similarly, we

would ask farmers to take videos of their animals and pledge to raise free-range and

organic animals and what it means to them. They would post the video on various social

media platforms using #PerduePledge. The videos will be used on our main website and

our other social media pages.

9

The goal of the strategy is to create a buzz around the organic movement and the

Perdue brand.

o Additionally, complete campaign will help drive consumers to learn more about the

brand and its other organic products.

To fund this campaign we recommend that Perdue increase organic marketing

expenditures to $1.5 million in 2017, and $1 million each year thereafter in order to

increase organic awareness and thus organic share of sales.

For the impact of this acquisition on Perdue’s financial statements, please see

Financials for Recommendations exhibit.

Recommendation #3:

Acquire a large organic feed producer (assets, employees and copyrights to brand).

o By doing so, Perdue won’t have to invest in new facilities or equipment or talent,

however, they will likely need to take on debt to finance the acquisition. Since organic

chicken production is on an upward trajectory, it’s strategic for Perdue to house multiple

steps of the production process so that they’re less dependent on separate companies and

can be more self-sufficient. This vertical integration will not only allow Perdue to realize

economies of scale by creating synergies, but also will offer an added revenue stream

from an already established business.

Furthermore, handling the organic chicken feed components garnered from other

companies isn’t new to Perdue. Their R&D division already works with the raw,

organic materials that they get from their feed producers in order to fully develop the

feed for their chickens so they’re familiar with the different components that they’re

looking for in a superior, organic feed.

o Pending success of acquiring an organic feed producer they can consider further

acquisitions in the future. To determine the amount Perdue could realistically spend on

this type of acquisition, we examined a similar acquisition of Smithfield Foods, a top 20

domestic feed supply company by the Shuanghui Group just a few years ago for $7.2

billion.

The Shuanghui group is a Chinese pork producer with similar assets and yearly

revenue as Perdue, so we believe it is reasonable to assume Perdue could spend

around $5 billion to acquire a similar feed supplier.

Doing so will immediately add an estimated $10-15 billion in additional revenue and

increase profit margin by 5% over the next several years.

For the impact of this acquisition on Perdue’s financial statements, please see

Financials for Recommendations exhibit.

10

Exhibits

Exhibit A:

Northeast Regression

West Regression

11

Midwest Regression

South Regression

12

Works Cited

DeNavas-Walt, C., Proctor, B., & Smith, J. “Income, Poverty, and Health Insurance

Coverage in the United States: 2011”. Census.gov. Issued September 2012. p. 60-243.

DeNavas-Walt, C., Proctor, B., & Smith, J. “Income, Poverty, and Health Insurance

Coverage in the United States: 2012”. Census.gov. Issued September 2013. p. 60-245.

DeNavas-Walt, C., Proctor, B., & Smith, J. “Income, Poverty, and Health Insurance

Coverage in the United States: 2013”. Census.gov. Issued September 2014.

DeNavas-Walt, C. & Proctor, B. “Income, Poverty, and Health Insurance Coverage

in the United States: 2014”. Census.gov. Issued September 2015. p. 60-252.

"Expo West Report: Six Factors Shaping the Food Industry." Meat Processing, Food Safety,

Poultry Processing. SOSLAND PUBLISHING CO, 10 June 2016. Web. 15 Dec. 2016

Kollar, M., Proctor, B. & Semega, J. “Income, Poverty, and Health Insurance Coverage

in the United States: 2015”. Census.gov. Issued September 2016. p. 60-256.

Lipka, Mitch. "Is Organic Chicken worth the Price?" Reuters. Thomson Reuters, 17 July 2014.

Web. 15 Dec. 2016.

McNeil, Maggie. “U.S. organic sales post new record of $43.3 billion in 2015”, Organic Trade

Association, 15, Dec. 2016.

"Organic Market Overview." USDA ERS - Organic Market Overview. USD.Gov, 19 Oct. 2016.

Web. 15 Dec. 2016.

Watrous, Monica. "Four Trends Driving Growth in Organic." Food and Beverage News, Trends,

Ingredient Technologies and Commodity Markets Analysis. SOSLAND PUBLISHING

CO,

14 Mar. 2016. Web. 15 Dec. 2016.

Wong, Vanessa. "US Beef Supply Will Fall Again in 2015, Chicken Demand Will Rise."

Bloomberg.com. Bloomberg, 18 Nov. 2014. Web. 15 Dec. 2016.

Donahue, M., and DL Cunningham. "Effects of Grain and Oilseed Prices on the Costs of US

Poultry Production." Effects of Grain and Oilseed Prices on the Costs of US Poultry

13

Production. Oxford Journals, 18 Feb. 2009. Web. 15 Dec. 2016.

USDA. "Food Price Outlook." Food Price Outlook - Data.gov. Publisher Economic Research

Service, Department of Agriculture, 18 Oct. 2016. Web. 15 Dec. 2016.

USDA. “2011 Certified Organic Production Survey”. National Agricultural Statistics Service.

Issued October 2012.

USDA. “2014 Certified Organic Production Survey”. National Agricultural Statistics Service.

Issued 2015.

USDA. “2015 Certified Organic Production Survey”. National Agricultural Statistics Service.

Issued 2016.

Beef Producer | Dec 23, 2014. "Consumers Say They Will Choose Chicken over Beef." Beef

Magazine. Penton AG, 23 Dec. 2014. Web. 15 Dec. 2016.

USATODAY Christopher Doering. "Organic Farmers Face Growing Pains as Demand Outpaces

Supply." USA Today. Gannett Satellite Information Network, 05 Aug. 2015. Web. 15 Dec. 2016.