Hidden away in one of 19 test kitchens in Tyson Foods Inc. (TSN)’s headquarters, Greg Luchak wraps a Lady Aster cheese omelet and Wright brand bacon into a Mexican Original tortilla. Voila -- the breakfast burrito.
Luchak, a Tyson principal food scientist, then demonstrates to a visitor a prototype flat-bread ham sandwich topped with lettuce, pickles and crispy onions. The scene may surprise those who know Tyson as the largest U.S. commodity beef and chicken supplier, whose slaughterhouses process an average 132,000 head of cattle and 41.4 million chickens weekly.
“Some people are shocked we do tortillas,” said Eric Le Blanc, vice president of marketing for deli and convenience-store foods at Springdale, Arkansas-based Tyson, which had $33.3 billion in sales in its last financial year.
Tyson is building up its line of prepared foods to dominate the convenience-store market and go head-to-head with Hormel Foods Corp. (HRL) and Hillshire Brands Co. (HSH) They’re fighting for customers who increasingly buy meals from shops that are more known for selling gasoline and toilet paper at all hours.
The company is betting that foods it has seasoned, breaded and partially or fully cooked will help it achieve a target of boosting annual earnings per share by 10 percent on average. Tyson aims to increase sales by 3 percent to 4 percent a year, with value-added foods growing at twice that rate.
The convenience-store strategy is designed around the evolution of shopping habits: Sales at U.S. convenience stores without gas stations grew 5.2 percent annually from 2008 through this year, while falling 0.4 at traditional grocery stores and supermarkets, according to market researcher IBISWorld.
These shops, which make up 35 percent of U.S. retail locations, offer food manufacturers faster growth than even restaurants and owners want to increase quality and the number of meals and snacks offered.
Value-added chicken and prepared foods give Tyson higher, more stable margins and a cushion against some of the volatility in commodity prices, said Kelly Wiesbrock, a San Francisco-based portfolio manager for Harvest Capital Strategies, which owns 70,000 shares. The price of corn, which Tyson buys to feed chicken, has fallen 48 percent since trading at a record in 2012.
“The fact that they are mixing margins higher and expanding in more value-added products is very appealing to me,” Wiesbrock said.
At a 100,000-square-foot (9,290-square-meter) facility that Tyson calls its Discovery Center, chefs and food technologists are creating new dishes that can be sold packaged or reheated at U.S. convenience stores, which number more than 149,000.
Tyson’s prime target right now is the American mother, rushing to pay for a tank of gasoline or a quick cup of coffee, Le Blanc says. While young men might not think twice about buying a hot dog with a bag of chips and a mega-sized cola, women often veto the idea, wondering how long the meat has been spinning on the roller, he says.
“The number-one thing that’s important to her is, will I be proud to serve this to my family?” Le Blanc says during a tasting at the Discovery Center at Tyson’s headquarters. “We have to convince her.”
Many of those moms and other consumers already buy the company’s raw and cooked products in grocery and club stores such as Costco Wholesale Corp. (COST) and Kroger Co. or restaurants such as McDonald’s Corp. and Wendy’s Co.
The challenge for Tyson is not just to spur those consumers to accept convenience-store food but also to increase the number of its entrees and snacks available in stores. Consumers today would be hard-pressed to find more than one Tyson product in a convenience store, says Jon Kathol, Tyson’s vice president of investor relations.
Tyson’s current range of prepared-food products includes Buffalo bites, which are made from chunks of boneless chicken doused in spicy sauce and sold in packs of four or five pieces at a regional convenience-store chain. Other examples include frozen Cajun tortellini and charbroiled burgers.
“Convenience stores want to upgrade their food and image,” Luchak says. “They want to become a food destination.”
More cash-strapped consumers opted to run to the local mart to buy a few items and avoid the temptations that add to bills in larger grocery stores, says Jeff Cohen, an analyst for IBISWorld in Los Angeles. While inside, they have started buying more meals such as sandwiches, he says.
Food service has grown to 15.8 percent of sales at convenience stores this year from 9.4 percent in 2007, according to Cohen. Companies such as meat producers “have a big opportunity to expand,” he said.
Hormel Foods, with $8.2 billion in revenue, considers the convenience store category to be a “growth vehicle,” Deanna T. Brady, vice president of food service sales, said in an e-mailed statement.
Tyson is trading at about 10.1 times estimated earnings for next year, while Austin, Minnesota-based Hormel is trading with a multiple of about 19.4, according to data compiled by Bloomberg.
“Tyson wants to increase their value-added and prepared-foods business to become more like Hormel to get to the higher multiple,” Bryan Agbabian, a San Francisco-based sector head for agricultural equities for Allianz Global Investors, said by phone.
For Tyson, which started with John W. Tyson delivering chickens throughout the Midwest during the Great Depression, its meat-processing business still accounts for the bulk of its revenue. The company controls 22 percent of the U.S. chicken production, 26 percent of beef and 17 percent of pork production.
Still, Tyson has evolved: it’s now the producer of about 13,000 individual food items, the second-largest U.S. manufacturer of flour and corn tortillas, the biggest supplier of pepperoni and pizza toppings to restaurants, and it makes entrees, soups and sides for quick-service and casual-dining restaurants.
There has been a greater emphasis under Donnie Smith, who became chief executive officer four years ago, to increase profits not just volume, Wiesbrock said. Expanding in convenience stores is one example of how Smith is pushing growth through value-added and prepared food, he said.
In contrast to prepared foods, it sees the commodity-meat business growing fastest outside the U.S.
“There is still domestic growth here,” Tyson’s Kathol says. “Maybe the overall pie is not growing as fast as historically or today internationally. The shape of growth has changed.”
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