US Poultry Producers – Consumer Trends & Operating
Dynamics – 11 June 2021
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Daryl Still (DS)
Specialist:
Former VP, Supply Chain at Boston Market Corp
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. Poultry consumption and consumer trends
2. Plant-based meat's impact on future demand
3. Pricing power and management of higher feed costs
4. Retailer-producer operating dynamics
Contents
Q: Could you give an overview of the poultry production industry and some of the main drivers and trends,
as well as the top competitors?
Q: You noted growth within the QSR portion of the poultry industry. Could you describe how that has
changed due to coronavirus, given the food service fall-off in other areas?
Q: What percentage of poultry producer industry sales would you attribute to QSRs and retail?
4
4
5
Q: Could you discuss the nuances of selling poultry to QSRs and their specifications, whether it’s Chick-fil-A,
5
Burger King or new players rolling out new chicken sandwiches? How does this differ from retail?
Q: Where would it make sense for poultry producers to focus distribution, given QSRs seem to have
opportunity for producers who can supply the more specific birds for the different QSRs? Which poultry
producers are really dominating the QSR segment vs maintaining the retail or hybrid approaches?
Q: Could you discuss the chicken sandwiches trend? When did this proliferation start and how has demand
stuck and resonated with consumers?
5
6
Q: How do players anticipate consumer behaviour around chicken products in quick service or retail? You
mentioned Popeyes stopped selling its chicken sandwich but then relaunched it to huge success. Is it more of
6
a marketing ploy?
Q: Could you differentiate between which poultry industry trends you think are here to stay and which are
more temporary?
6
Q: Could you discuss how rising commodity costs impact poultry producers as well as the end customers and
7
users such as QSRs and consumers?
Q: How much flexibility do QSRs or retail have to push back on producers or packagers such as Tyson when
it comes to higher pricing? How much flexibility do they have to pass costs on to the consumer to make at
least some profit? As well as labour and other commodity costs, feed costs have increased and a lot of
farmers are experiencing margin compression. Some poultry producers, such as Tyson, are making record
profits by keeping farmers at bay from any pricing pushback.
7
Q: How aggressive have some QSRs been in sacrificing profit to take market share and undercut competitors
8
that may not have been as well-equipped to handle higher feed and commodity costs?
Q: How sustainable do you think inflationary pressures are? Do you think we’re in a short-term
unfavourable environment, or could higher feed costs be here to stay?
8
Q: There was an incredible drop-off in food service demand during coronavirus, as without a drive-through
business some restaurants couldn’t service as many customers. How would you assess poultry producers’
agility to quickly re-shift distribution to QSRs or other food service players? Does it take a large organisation
of distribution capabilities and resources to meet a higher demand in food service than expected?
8
Q: Could you discuss how big retail players or QSRs are dealing with labour costs? Many restaurants have
demand but can’t find waiters, and at the same time, McDonald’s has been fitting automated computer
screens to place orders. What role does automation have in helping retail and QSR players meet the labour
challenge?
Q: Why do you think frontline production automation has been slow to develop, given the production line’s
importance? It doesn’t seem entirely complicated to build a robot that cuts chicken. Is management not
putting the resources together to invest? Where does CAPEX go for poultry producers vs where they have
been considering automation?
9
9
Q: Could you discuss smaller, more regional players’ abilities to continue gaining market share within QSR
or retail? How are they dealing with labour challenges? Do you think their size makes it easier for them to
grapple with this, or does it leave them with fewer resources to mitigate labour costs?
10
Q: Which part of the supply chain do you think the supply shortages come from, given pressures around
labour, feed costs and freight? I believe for a period Tyson was running out of chicken and even Chick-fil-A
was running out of sources.
10
Q: What impact do major poultry producers have on pricing and supply, given how much total market share
they have in retail or food service? There have been moments where the US government stepped in with
small fines for price-fixing, but we know the value of the fine seems a slap on the wrist compared to overall
profits and revenue. What do you think are QSR and retail grocers’ attitudes to large producers and their
control over the market?
10
Q: How do grocers and QSRs determine which large poultry producer to do business with, given their
market share size and that they’re all similar in pricing and distribution?
11
Q: Could you discuss how the producer and retailer or QSR relationship has evolved? What could producers
provide years ago compared to any new capabilities? Have QSRs become more or less dependent on large
producers?
11
Q: What is your outlook for domestic chicken demand and how 2022 might compare to 2021, given how
demand trended in 2021 vs 2020?
11
Q: Could you discuss the impact of shortages outside of the US and how it affects the pressure on domestic
producers? You mentioned the global market and how China is importing a lot of US commodities.
12
Q: Why do you think trends around animal welfare, animal health, consumer consciousness and organic
meat are more prevalent in retail and aren’t translating through to QSRs? Have you noticed any QSRs
anticipating these trends and trying to market themselves as much less processed than competitors?
12
Q: Could you discuss animal welfare risks, such as disease? How has technology evolved throughout your
time in the poultry production industry to make birds disease-resistant? What negatives may have come with
12
those enhancements?
Q: How much pushback on genetically modified chickens do you think producers receive from QSRs or retail
grocers? Would you say QSRs are encouraging enhancements to increase profitability and meat quantity? 13
Q: Which areas could be the next big thing, given we’ve discussed the high demand for chicken sandwiches?
What form could innovation take, whether in quick serve or retail grocery?
13
US Poultry Producers – Consumer Trends & Operating
Dynamics
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled US Poultry Producers – Consumer Trends &
Operating Dynamics. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Daryl Still, former
VP of Supply Chain at Boston Market Corp.
Daryl, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
DS: I agree.
NH: Thank you, Daryl. Could you give the audience an introduction of your background and various roles
you’ve held in the industry?
DS: I’ve been in supply chain procurement within the restaurant industry for about 25 years. A significant
portion of that has been focused on the poultry industry with much of my career having been in chicken-
focused QSR and casual dining concepts.
[00:01:08]
Q: Could you give an overview of the poultry production industry and some of the main drivers and trends, as
well as the top competitors?
DS: The category is really divided into segments based on size of producer. The three largest would be Tyson,
Pilgrim’s Pride and Sanderson Farms. They are by far the largest players in the marketplace. Then, there is
another group of what I would call mid-tier players, Perdue, Foster Farms, Gold Kist that are in the middle of
the pack in terms of volume. Then, there is significant fracturing of the market into much smaller players
which tend to be very regional, and a lot of those players have tended to be a little bit more progressive in
moving into organic and free range poultry. That’s really where a lot of the growth has occurred over the last
five years from what I have seen. The main drivers certainly are, there’s tremendous volume going through
retail, but QSR has been, over the last 10-12 years, the growth segment for the poultry industry in particular.
More recently, within the last two years, the proliferation of chicken sandwiches as the preferred medium for
growth for burger concepts has really driven a lot of that volume.
[00:02:51]
Q: You noted growth within the QSR portion of the poultry industry. Could you describe how that has changed
due to coronavirus, given the food service fall-off in other areas?
DS: I think, really, what has happened during COVID is it has accelerated that growth within the QSR portion
of the category. All of the burger brands really have focused much more heavily on their lunch business,
particularly for drive-through, and they have shifted that a lot to chicken sandwiches. That has driven
significant investment in R&D marketing to the chicken sandwich segment of the category. There’s been a shift
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away from breakfast because a lot fewer commuters were going into offices, were working from home, so
there’s been a shift away from their breakfast sandwich business and largely to a lunch, and sandwiches are
much more portable and convenient for people to go through a drive-through pick-up without contact. That’s
really been where a lot of that growth has happened.
Early on, during COVID, there was also a significant uptick in retail that has tailed off over the last six month.
As people were beginning to stay home and cook more at home, the retail segment really was driven to whole
birds and chicken breasts, and there was a lot of retail promotional activity behind that that was pushing that
product into the grocery store business away from QSR. You’re really seeing those two diverging trends that
are starting now to come back a little bit more closely to where they had been pre-COVID.
[00:05:04]
Q: What percentage of poultry producer industry sales would you attribute to QSRs and retail?
DS: Retail is probably in the 35-40% range. Quick service restaurants, it’s going to be less than that in terms
of dollars and volume because they tend not to use the entire bird, they’re only using breast and/or nuggets or
strips for the most part, so it’s probably going to be in the 20% range of the total available market.
[00:05:56]
Q: Could you discuss the nuances of selling poultry to QSRs and their specifications, whether it’s Chick-fil-A,
Burger King or new players rolling out new chicken sandwiches? How does this differ from retail?
DS: Two things that really differ there. Retail tends to be more bone-in chicken, or maybe not necessarily
bone-in. A lot of it is bone-in, whole chicken or whole breast, whole thighs, that kind of thing, bone-in. A lot of
this, certainly boneless, skinless breasts and things like that that are further processed but not as further
processed as what is used in the QSR segment. In the QSR segment, the product is truly processed and a value
added typically would be cut and portioned to a specific size. A lot of times, it would be breaded and fried or
ready for breading and frying, or marinated with a particular flavour. In QSR, the product tends to be far more
value-added and, in retail, it tends to be more on the commoditised section. The other thing is that the birds
that are sold through the retail channels, grocery specifically, tend to be larger than the birds that are raised
and harvested for production of QSR-focused products. The tenders, the breast fillets that are used for
sandwiches, are a very specific size typically from a smaller, younger bird than what would be sourced for a
retail promotional activity within a grocery chain.
[00:08:01]
Q: Where would it make sense for poultry producers to focus distribution, given QSRs seem to have
opportunity for producers who can supply the more specific birds for the different QSRs? Which poultry
producers are really dominating the QSR segment vs maintaining the retail or hybrid approaches?
DS: The big three players are really the ones that are dominating QSR, the Tysons, Pilgrim’s and Sanderson
Farms. They are the ones that have the supply redundancy and enough flexibility in their production and
supply chain to be able to accommodate the large restaurant brands that are looking for new and innovative
products to launch. That really is the dominant factor there, is who has that capability, multiple production
facilities and enough supply flexibility to be able to flex with the demand of the restaurant brands when they
launch those items because there’s a significant ramp-up requirement in terms of inventory and then there’s
always the need to adjust forecasting and production during the middle of those product launches, so that the
big players are the ones that have that capability and recover quickly and be a little bit more flexible.
Private and confidential 5
With that being said, there is a lot of this volume that’s also now starting to go to the lower-tier processors
because they can be very nimble and they can get product to market much more quickly than the big players
can. Working with smaller or regional chains, they have a significant opportunity, I think, to pick off some of
those pieces of business from the big players because they just can react much more quickly and get something
to market and lock out their competition on those things. With that being said, however, the vast majority of
QSR business is still whole bird and it still is a particularly size bird that cooks within a particular time frame
and there’s a bell curve of production with a certain percentage of birds falling all along that bell curve. Only a
certain percentage of their birds, regardless of how big a flock it is, will fall within a particular segment of that
bell curve. The big suppliers have an advantage there because they have a larger population of birds to come
from to hit that QSR size. They will, I think, always dominate that particular whole-bird, small-bird segment of
the business because they are the only ones that can provide a large enough supply to fully meet everyone’s
demands.
[00:11:44]
Q: Could you discuss the chicken sandwiches trend? When did this proliferation start and how has demand
stuck and resonated with consumers?
DS: I think it really started to manifest itself probably 7-10 years ago. Chick-fil-A has always had that as their
bread and butter, so to speak, and they have been continually growing and taking market share from others. I
think that started to get the attention of some of the other bigger players in the market, again, 7-10 years ago.
McDonald’s began launching, Burger King began launching chicken sandwiches 7-8 years ago. Popeyes
launched their first chicken sandwich 7-8 years ago and they were never really as successful as the original
Chick-fil-A sandwich, so many of those were pulled and then further iterations were done of those chicken
sandwiches and relaunched, again, maybe two years ago or over the last two years. There was a hiatus of a few
years, but it really came back full effect about two years ago, two-and-a-half years ago with everybody jumping
into that market and trying to capture share of that chicken sandwich sub-section of the fast food, burger,
sandwich market.
[00:13:38]
Q: How do players anticipate consumer behaviour around chicken products in quick service or retail? You
mentioned Popeyes stopped selling its chicken sandwich but then relaunched it to huge success. Is it more of a
marketing ploy?
DS: I wish I had a great answer to give to you for that. The answer truly is trial and error. You’ve got to launch
things and see whether it works or not. You do small tests and sometimes the small tests will give you a good
read of what is ultimately going to happen when you’re launching on a national basis, but sometimes it
doesn’t. There are a lot of variables, it has to do with the price point you launch that at. It has to do with what
your competitive set is promoting at the time. It has to do with the time of the year, it has to do with the
quality of the product. It truly is just trial and error. A lot of money has been spent on launching things,
chicken sandwiches specifically, in the last 10 years and until two years ago, a lot of them didn’t work. They
were utter failures but they at least taught the brand something about what not to do or what to do differently
the next time that, hopefully, gave them some actionable data to ultimately deliver something that customers
wanted.
[00:15:30]
Q: Could you differentiate between which poultry industry trends you think are here to stay and which are
more temporary?
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DS: I think the chicken sandwich trend is certainly here to stay. I think the other one that I mentioned briefly,
a switch from breakfast initiatives to lunch initiatives for mini QSR brands, I think that one is also here to stay.
COVID has taught too many people and too many companies that people can work successfully from home
that I expect there to be a continued erosion of people going to office buildings strictly for work. That,
obviously, will cut down on the morning commute and give people more flexibility and freedom to go out for
lunch rather than having to drive in rush-hour traffic in the morning. That one, I think, is still here. Those are
the two trends that I think will continue. I think that the trend of people cooking at home and preparing their
meals from home will continue for a short term, maybe another 3-6 months, but after that, I believe that there
is a lot of pent-up demand for dining out and people are, frankly, tired of cooking their meals at home. I think
there will be erosion of the retail poultry market, retail demand, going into the winter months and shifting
more of that back to restaurant dining rather than prepared-at-home foods.
[00:17:27]
Q: Could you discuss how rising commodity costs impact poultry producers as well as the end customers and
users such as QSRs and consumers?
DS: Rising commodity costs are no question having an impact on the pricing. Wheat, corn, soy meal are all at
elevated levels and I would anticipate will probably stay at very elevated levels through at least Q1 of 2022.
We’ve had two fairly dry years in a row and that is never a good thing for agricultural commodities.
Worldwide, we’re really seeing the same thing. China is importing a lot because they haven’t had great crops
there, so they’re importing a lot of soy meal as well as corn, as well as processed poultry. That is continuing to
drive those prices high. Unless we have an exceptionally wet summer period and, going into the fall, have just
enormous harvests of corn and soybeans, commodity costs are going to continue to be extremely high.
Energy is also driving this. The process of production of poultry is fairly energy-intensive, both from a
transportation standpoint and an energy input, to run plant facilities. Those are going to continue to drive
things higher as well as that market goes higher and higher as it is expected to do. I guess you can call it a
commodity cost, it maybe not truly is, but labour is probably going to be the biggest driving factor. There is an
extreme labour shortage of unskilled labour for many of these production facilities and labour costs are
increasing as much as 15-25% in many cases in order to entice workers back into those plants full-time. That is
going to continue to be a tremendous driver for the final output costs of poultry going forward.
[00:20:04]
Q: How much flexibility do QSRs or retail have to push back on producers or packagers such as Tyson when it
comes to higher pricing? How much flexibility do they have to pass costs on to the consumer to make at least
some profit? As well as labour and other commodity costs, feed costs have increased and a lot of farmers are
experiencing margin compression. Some poultry producers, such as Tyson, are making record profits by
keeping farmers at bay from any pricing pushback.
DS: That’s a good question there, and there are two separate answers to that. Retail has more opportunity to
push back on the supplier when it comes to pricing because they tend to be more on-spot purchase price. They
are not committed to long-term supply agreements or pricing agreements with their suppliers, so they can
shop on the open market and they have the flexibility to do that. They are much more resistant to the
commodity input changes than QSR would be. Most of the large QSR operators, and certainly the largest
percentage of the volume, is going to be in what’s called cost-plus pricing agreements. In those cases, a
supplier’s margin would be fixed, but the cost of the product purchased by the QSR brand would fluctuate
based on the direct input cost of feed and their energy cost, labour, etc. Those are in multi-year agreements,
typically, with suppliers so it takes 1-2, sometimes three years for those pricing agreements to run through and
give the QSR the opportunity to break out of that agreement and source somewhere else. They’re more directly
tied, correlated to those input costs and have less flexibility to move away from the higher prices when they do
occur.
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With that being said, I think QSR brands have a lot of cover to take pricing right now because there’s been a
tremendous amount of media coverage on inflation and everybody is expecting inflationary pressure.
Customers are expecting pricing to go up, so I think most QSR brands over the next 6-12 months will take
advantage of that cover and will be allowed to push some of their pricing up. They may see some short-term
traffic declines as a result of that but, ultimately, if everybody does it, they will recapture their market.
[00:23:41]
Q: How aggressive have some QSRs been in sacrificing profit to take market share and undercut competitors
that may not have been as well-equipped to handle higher feed and commodity costs?
DS: I don’t think that most brands are going to be very aggressive in doing that at this point. The reason I say
that is because there is also a labour shortage that is directly impacting most of the QSR brands. Unless they
are in a relatively isolated market where they don’t have that labour pressure to keep their restaurants fully
staffed, they are not looking for additional market share and volume right now because they, in many cases,
don’t have the staffing to accommodate that. They are, I think, for the most part, content at this point to
maintain the status quo, try to recover some lost margin without trying to directly eat into their competitors’
market share. As the labour market eases later this year, which it’s expected to do, I think there will be much
more fighting over market share and we will see some of the big players start to do some deep discounting
trying to pull some of that back. You’re not seeing it right now. There’s not a high level of discounting in that
particular segment. The discounting has been in the pizza segment, so everybody will be trying to fight for
their share of stomach and pull some of their market share back from what was lost to the pizza concepts, I
think, going forward.
[00:25:54]
Q: How sustainable do you think inflationary pressures are? Do you think we’re in a short-term unfavourable
environment, or could higher feed costs be here to stay?
DS: I think higher feed costs are probably here to stay. The long-term trend has been for drier and hotter
weather that is not conducive to strong crop growth across most of the Corn Belt and the Wheat Belt in the US.
I don’t see that changing in the next 10 years, so I think we will continue to see weather challenges that put
strain on the corn and wheat supply. Those are directly correlated to the output costs of poultry, so that one, I
think, certainly is sustained. Energy, I don’t think that is sustained. I think, eventually, the big players in the
market will find ways to invest in infrastructure to build more efficient and lower-cost energy grids that can
run their plants sustainably and will less environmental challenges, but also at a lower cost point.
If they start to heavily invest in solar or wind power to power their plant operations, they’ll expend some
CAPEX, but they will drive their long-term operation costs down. I think that will insulate them from some of
the energy commodity escalation that we’re seeing. That one, I think is a fairly short-term, maybe a 3- to 5-
year window. All of the other pressures, with the exception of labour, I think are going to be short-term and
will be mostly behind us by the end of the year, but commodity costs, the inputs, energy and labour are going
to continue long-term.
[00:28:26]
Q: There was an incredible drop-off in food service demand during coronavirus, as without a drive-through
business some restaurants couldn’t service as many customers. How would you assess poultry producers’
agility to quickly re-shift distribution to QSRs or other food service players? Does it take a large organisation
Private and confidential 8
of distribution capabilities and resources to meet a higher demand in food service than expected?
DS: The big players were better able to respond to the tremendous drop in volumes rapidly than the mid-tier
players were. The reason for that is, if they have birds that they had planned to harvest at a specific time point
of 55 or 60 days because that would have put them at the ideal size for their QSR customers, if they don’t have
the volume for their QSR customers, or projected volumes for QSR customers at that size range at that
particular time, they have the ability to just continue feeding those birds, allowing them to grow larger into the
sizing that would be more applicable for retail, and they can do that. They can flex fairly quickly on that.
The smaller players who didn’t necessarily have an outlet for those large birds into retail because they didn’t
have strong relationships with many of the retail buyers, couldn’t really adjust that quickly. They had to
offload those products either to export or putting them into cold storage or to put them into more
commoditised product, pet foods or ground chicken or things like that that have traditionally been at a lower
price point and much lower margins for them. There was divergence there between the big guys and the
smaller players. When it comes to restarting the supply chain and getting the supply back up, they are all at
pretty much parity. It takes really about 60-90 days to place birds in the field and get them growing to the
point where they can be harvested 60-90 days from now. All they have to do is buy eggs and get those egg sets
completed and they can start their rebuilding process of their flock. You’ve got about a 60-90-day window of
shutdown and ramp-up on both ends of any declining volume and they all have the same capabilities. Some
can just weather the storm a little bit more than others can because they have a place to deploy those larger
birds than the others do.
[00:32:04]
Q: Could you discuss how big retail players or QSRs are dealing with labour costs? Many restaurants have
demand but can’t find waiters, and at the same time, McDonald’s has been fitting automated computer screens
to place orders. What role does automation have in helping retail and QSR players meet the labour challenge?
DS: There’s no question that QSRs and retail has begun deploying automation to reduce their labour
footprints with self-checkout lanes in grocery and other retail outlets beginning to become fairly common over
the last 5-7 years. That really was the start of it and, fortunately, we did have that advance because we would
have been crippled as many countries around the world were during the labour shortages that happened that
were related to COVID. We had that runway of ramp-up to already get those into the development pipelines.
What hasn’t really been developed in terms of automation is frontline production, either in the restaurant
industry or in the processing facilities. By far, the most labour-intensive part of production for poultry, or any
other protein for that matter, is the first steps after harvest of that bird or that animal, cutting it into usable
pieces.
That has not really been automated successfully anywhere that I am aware of. There are some of the big
players that have invested in and have started to do some testing, but it is still an extremely labour-intensive
process to begin that evisceration, carving process to get it ready to sell in some usable format to either a
customer as a retail outlet or a customer in a QSR brand. That hasn’t happened. I think this will launch a lot of
that development and we will probably begin to see some type of robotic or at least semi-automated, if not full-
automated, production capabilities in poultry plants over the next 3-5 years. I think we have to have that
because the suppliers cannot go for an extended period of time having to pay the higher labour costs that are
going to result from the post-COVID crunch on labour. It’s unsustainable, you can’t afford to pay an unskilled
frontline labourer USD 15 an hour to harvest and carve chickens and then expect to be profitable selling that at
a price point that a QSR or a retail outlet is going to accept.
[00:35:58]
Q: Why do you think frontline production automation has been slow to develop, given the production line’s
importance? It doesn’t seem entirely complicated to build a robot that cuts chicken. Is management not
Private and confidential 9
putting the resources together to invest? Where does CAPEX go for poultry producers vs where they have been
considering automation?
DS: Historically, where the capital has been invested has been in expanded throughput capabilities, getting
the lines running faster and just being able to put more people on them to do the very manual labour-intensive
work. I think the answer to why there hasn’t been more of a development of that is because there’s been a
ready supply of available unskilled labour. We’ve seen that dry up and I think the current conversation around
immigration is going to continue to dampen that because, unfortunately, whether we like to accept it or not,
that’s where a lot of those workers in many of the poultry facilities were coming from. That’s going to dry up
and they’re going to be looking at a longer-term horizon of, “”At some point, my labour force is going to
evaporate. I need to do something to sustain my business and automation is the way to do that.“ It would be
easy if every chicken that’s harvested is the same size, same shape and the same dimensions. Unfortunately,
that’s not the case, there are inherently variations in there that make that automation process much more
technologically challenging.
[00:38:15]
Q: Could you discuss smaller, more regional players’ abilities to continue gaining market share within QSR or
retail? How are they dealing with labour challenges? Do you think their size makes it easier for them to
grapple with this, or does it leave them with fewer resources to mitigate labour costs?
DS: No, I think because of their size, they are more easily able to adjust to those labour challenges. They don’t
have to hire USD 5,000 workers at a time. They are hiring 50 workers at a time and it’s a much easier play for
them. I think they will continue to develop their foothold in retail because they tend to be more, at least
perceived as value added with free range or organic or all of those hot buzzwords in certain markets, that
people are willing to pay a premium for. The ones who are willing to pay a premium are the 25- to 40-year-
olds who are in fairly good financial condition, have been less dramatically impacted by COVID perhaps than
the age groups that were older and younger than that. They are also the ones who are more concerned about
their health. They’re more concerned about the environment and sustainability, and they put their dollars
behind those belief sets and will continue to drive growth of some of those niche players that have focused on
those particular aspects of the business.
[00:40:21]
Q: Which part of the supply chain do you think the supply shortages come from, given pressures around
labour, feed costs and freight? I believe for a period Tyson was running out of chicken and even Chick-fil-A
was running out of sources.
DS: It’s been all of them at different times. It’s been the ramp-up of raw ingredients, raw materials to produce
the finished goods product. It’s been labour to fully staff plants. It’s been freight to move raw materials from
point A to point B and then finished goods from point B to point C. It really has been all of them. It’s been
exacerbated by anything that would be imported because there were slowdowns or shutdowns at most of the
ports. Some of the spices, etc, have been impacted on the inbound side because of that. It really has been all of
those things at times that have created the shortages that, frankly, are going to take maybe another six months
to really get behind this.
[00:41:59]
Q: What impact do major poultry producers have on pricing and supply, given how much total market share
they have in retail or food service? There have been moments where the US government stepped in with small
fines for price-fixing, but we know the value of the fine seems a slap on the wrist compared to overall profits
Private and confidential 10
and revenue. What do you think are QSR and retail grocers’ attitudes to large producers and their control over
the market?
DS: This is coming just strictly from my own personal perspective, they are a necessary evil. You can’t survive
without them. You may not necessarily want to be working with them, but if you have a large supply need,
then you almost have to use one of the big suppliers to get the supply redundancy and consistency across a
large geography. Again, that’s my perspective, but I think it’s probably one that’s fairly common within the
industry.
[00:43:26]
Q: How do grocers and QSRs determine which large poultry producer to do business with, given their market
share size and that they’re all similar in pricing and distribution?
DS: I think supply consistency is going to be the number one priority at this point, who can supply me? Who
can give me what I need when I need it? Price is going to become less and less critical, at least in the short
term. Long term, I think that will, again, ascend to the top but, for right now, it’s all about who can make what
I need, get what I need to the places that I need it at the time that I need it. That’s going to be true for both
QSR as well as retail. I’ve seen retail shelves that have gaps in them because they can’t get supply from their
manufacturers. It’s affecting everybody, and for the next 6-12 months, will continue to affect people and, in the
supply chain world, we need assured supply, and that’s going to become the determining factor for who we
build our partnerships with going forward, who took care of us during COVID, who is taking care of us now,
and who do we feel comfortable will be able to take care of us in the future.
[00:45:24]
Q: Could you discuss how the producer and retailer or QSR relationship has evolved? What could producers
provide years ago compared to any new capabilities? Have QSRs become more or less dependent on large
producers?
DS: I think we are more dependent at his point than we were in the past. In the past, it was a much simpler
process to find several suppliers that you could cobble together to produce a consistent product across a large
geography as our volumes have grown and our needs have grown for consistency and brand continuity across
multiple geographies has become more and more incumbent that we have large partners who can provide
redundancy across multiple regions and give us the same product everywhere.
[00:46:41]
Q: What is your outlook for domestic chicken demand and how 2022 might compare to 2021, given how
demand trended in 2021 vs 2020?
DS: I think, for the remainder of this year, we will rebound to probably close to 2019 demand levels. I don’t
think we will go much beyond that. The population hasn’t grown significantly. There’s not a ton of disposable
income, so people are not inventing new eating opportunities. We will probably see a significant shift away
from retail into restaurant, away from home dining. Whether that’s in-restaurant, on-premise or carry-out or
delivery is still to be determined, but people are tired of looking at their four walls and cooking at home, so I
think people are going to want to get out and experience the things that they were told for so long that they
were not allowed to or capable of experiencing. There’s a lot of pent-up demand in restaurant. Growth or
rebound volumes is only going to be limited by the amount of labour that operators can throw at their
operations.
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[00:48:25]
Q: Could you discuss the impact of shortages outside of the US and how it affects the pressure on domestic
producers? You mentioned the global market and how China is importing a lot of US commodities.
DS: It has an impact. It doesn’t have as great of an impact as most people assume because what is desirable in
many of the net poultry importing countries is dark meat, it’s thigh meat specifically. That is not, or has not,
traditionally been a highly valued product here in the US, so much of what is being demanded for import by
other countries are products that domestic producers have to discount in order to sell through. That gives
them an outlet to export that product at close to breakeven points and not have to discount that throughout
the domestic marketplace. It’s really a net value for QSR companies when exports are fairly strong because
poultry producers look at the value of what they can sell that whole bird for because they have to look at it as a
complex. If they can get a little bit more for the thigh meat by exporting it, that’s something less that they don’t
have to try and recover on their wing pricing or boneless skinless breast domestically. It really is a net positive
when worldwide demand, specifically for dark meat, is strong.
[00:50:33]
Q: Why do you think trends around animal welfare, animal health, consumer consciousness and organic meat
are more prevalent in retail and aren’t translating through to QSRs? Have you noticed any QSRs anticipating
these trends and trying to market themselves as much less processed than competitors?
DS: Those trends almost always start in retail and then expand into the restaurant side of the category. I think
there are brands that are now starting to think about it or talk about it at least, and starting to make their
plans about when is the right move into organic and totally free range, no hormones, additives, all of those
kinds of things. It’s a marketing challenge that they have to convince their customers it’s worth paying for, but
once they become accustomed to paying for it in retail, it’s an easier sell at the restaurant level. I think we’ll
start to see that over the next 4-6 years, but I don’t think there are many that have really invested into that
path at this point.
[00:52:09]
Q: Could you discuss animal welfare risks, such as disease? How has technology evolved throughout your time
in the poultry production industry to make birds disease-resistant? What negatives may have come with those
enhancements?
DS: The genetic modifications that have made the birds disease-resistant have also created their own
problems, for sure. There’s always genetic modification that’s going on in this world. Producers are wanting to
grow birds with larger breasts because that’s the most valuable part of the chicken. The exception would be if
they could find a way to add two additional chicken wings onto every bird, then they would probably be in
heaven. There are always those challenges and each improvement comes with some negative as well. The
larger-breasted birds are much more susceptible to certain syndromes or diseases. Woody breast, where the
breast is tough and chewy and less desirable, is sometimes a by-product of the larger breasts growing on those
birds. Less mobility because the thighs are being minimised, and that creates more fat on the chicken. They’re
trade-offs, and then there’s the question of humane treatment, and there will continue to be pressure on
producers to treat their birds humanely however that is defined.
That definition of humane treatment, I think is going to continue to be very nebulous and it’s going to
continue to be pushed further and further. As the activist groups make progress in one area, they will not be
satisfied with that particular area. They will push it an inch beyond that, and when they get to that point,
they’ll push it an inch beyond that. The goalpost is always moving and always the producers will be chasing
Private and confidential 12
that line of what is humane treatment and what’s sustainable.
[00:54:44]
Q: How much pushback on genetically modified chickens do you think producers receive from QSRs or retail
grocers? Would you say QSRs are encouraging enhancements to increase profitability and meat quantity?
DS: The QSRs are, no question, the ones that are driving that conversation. They’re pushing for those
enhancements that will allow their needs to be met at the optimal price point from the suppliers. They’re
driving that conversation for the enhanced birds.
[00:55:47]
Q: Which areas could be the next big thing, given we’ve discussed the high demand for chicken sandwiches?
What form could innovation take, whether in quick serve or retail grocery?
DS: I think, for QSR, the innovation is a boneless wing that can meet customers’ demand for chicken wings.
There are some out there that are pretty good, but customers still expect and demand bone-in wings for
certain occasions. The innovation, I think the opportunity is there around that boneless wing category. I’ve
thought, for a number of years, there’s not a lot more you can do to a chicken sandwich, but I’ve been proven
wrong, so I would expect to see some continued development around that and innovation around making a
chicken sandwich that is even more desirable and giving the opportunity to capture more of that traditional
beef burger market. There’s going to be that push.
[00:57:23]
NH: Thank you for your time, Daryl, I will now end the Interview there. Clients, if you would like to speak to
Daryl in a private call or meeting, please let your relationship manager know. Thank you, clients, for joining
Third Bridge Forum’s Interview today. Daryl, thanks again. Goodbye.
DS: Thank you.
Transcription ends at 00:57:36 of the recorded material
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