In the first of a series, PG examines supply, demand and the new marketplace dynamics in this important protein category.
Supply and demand cycles are as natural to the protein marketplace as the cycles that define livestock production itself. The environment — whether the physical environment on the farm or feedlot, within the context of the global economy, or at point of sale at the meat case — sets the stage for success.
To that end, the environment for meat merchandising and sales continues to evolve. Although the traditional rules of supply and demand are very much in place in the modern marketplace — lower supplies equal higher prices, and vice versa — there are new forces at work that are impacting what, how much and where consumers are buying meat and poultry these days.
“It’s a dynamic marketplace,” agrees Len Steiner, industry analyst with the Steiner Consulting Group, in Manchester, N.H., citing shifting factors from global demand, weather, herd sizes and worldwide currency markets, to name just a few influences.
One example is a new type of frugality that has emerged in the Great Recession’s wake. Even as shoppers clamor for quality, convenience and taste, and have loosened up spending a bit, they remain budget-conscious, a behavior that some market analysts link to the economic malaise of recent years and a somewhat shaky confidence in the future.
“The ‘new normal’ is a good term for it,” says Gary Morrison, market reporter for the meat industry publication Urner Barry’s Yellow Sheet, based in Bayville, N.J., adding that many factors that have shaped the marketplace over the past few years should continue, at least for the short term.
Burt Flickinger, a retail analyst for Strategic Resource Group, in New York, also sees a lingering effect from the pullback. “It’s definitely a new normal. Consumers are buying cheaper cuts of the animal for affordability, especially given that American families have seen a decline of 7 percent of their total disposable income on an inflation-adjusted basis, over the last five years,” he remarks.
Steiner, meanwhile, also points to the “two-tier market” that emerged from the recession. “Some people are doing well, and others are finding a hard time finding any work, or working part-time,” he points out.
Industry research bears out the unique impact of the deep recession. According to the 2013 “Power of Meat” report, from the American Meat Institute (AMI) and Food Marketing Institute (FMI), sponsored by Duncan, S.C.-based Sealed Air-Cryovac, shoppers’ meat and poultry purchase decisions continue to be driven by a desire to save money.
Likewise, the “2013 American Pantry Study,” from the New York-based consulting firm Deloitte, underscores the fact that consumers are still wary when making food purchases. That study found that 92 percent of consumers report that they have become more resourceful, and 86 percent are becoming more “precise” in terms of what they’re buying.
Dollars and Sense
In the midst of lingering frugality, high beef prices over the past year — particularly during the record-setting summer — have affected the environment for beef merchandising.
Right before the Memorial Day holiday, the traditional kickoff to grilling season, wholesale beef prices reached an apex of $2.06, with steaks averaging nearly $5 a pound and ground beef averaging more than $3.50 a pound.
In a classic economic model, the skyrocketing price of beef was attributed to tight supplies. In fact, the inventory of beef cattle at the start of 2013 was the lowest in 60 years.
A variety of factors converged to cause sharp declines in U.S. cattle supplies. High feed and fuel costs in 2008, for example, led livestock producers to cull their herds, right around the time the recession slammed the nation. By the time consumers emerged from the worst of the recession, a severe drought in parts of the country, especially the Southwest, again spurred high feed costs and herd downsizing. At the same time, U.S. exports of beef continued to rise as global demand for U.S. beef grew, while the production of ethanol has siphoned away some of the feed supply.
At the meat case, high beef prices have had various ripple effects, according to industry analysts. “When we got to the record highs this year in the summer, we saw people change their behavior and look to other cuts or other proteins,” reports Morrison. “Boneless skinless chicken and pork are good values compared to some beef cuts.”
Flickinger says that tighter supplies and thinner margins invariably lead to such intra-category competition. “With corn prices the lowest they’ve been in the last five crop years, we saw chicken prices drop significantly and we saw more competitive pork prices,” he says. “So many people will say, ‘OK, in terms of protein, chicken has become more supportable in the last few years, pork is more affordable, and beef, by comparison and certainly with better cuts like more marbled choice cuts, has become more expensive.’”
The Value Equation
Adding together the new frugality and high beef prices — not to mention ongoing concerns about the future of the U.S. and world economies — what does the sum of the equation look like for the protein marketplace?
As the analysts note, switching over to chicken and pork is one alternative for shoppers looking to fill their carts with some form of protein. Serving more meatless meals is another option: In the AMI/FMI Power of Meat survey, respondents report that out of an average of 5.1 meals cooked at home each week, 3.6 now include meat, down from 4.1 meals that included meat last year.
Shoppers are finding other ways to stretch their meat budgets, too. The Power of Meat survey revealed that there has been a 9 percent increase in the number of consumers who say they’re buying more frozen meat as a cost-saving strategy, a 5 percent uptick in the number of shoppers who say that they’re looking more at total package cost than price per pound, and a 3 percent rise in those who say they’re making more casseroles as a way to maximize meat purchases.
Despite high prices and increased competition among other protein sources, consumers haven’t eschewed beef, which has long been a top protein domestically. According to the checkoff-funded “Consumer Beef Index” research conducted by the Glendale, Calif.-based Pelegrin Group in July, although the frequency of beef consumption has slid somewhat, more than 90 percent of consumers say they use beef at least monthly, and consumers overall aren’t dropping out of the beef category.
Trever Amen, director of market intelligence for the National Cattlemen’s Beef Association (NCBA), based in Centennial, Colo., underscores the point that consumers like the taste of beef and are finding ways to continue to enjoy it. “Almost three out of four consumers — 72 percent — say they prefer beef as their top choice of proteins,” he points out, adding that since the worst of the recession, there’s been a rebound in demand for beef. “In retail sales of beef, there has been positive growth in dollar sales year over year over the last four years.”
Not surprisingly, sales of ground beef — always a popular and affordable beef product, even in the best of times — are solid. Despite the net reduction in available beef supply, more than two-thirds of consumers (67 percent) reported eating ground beef at home at least once a week, according to checkoff-funded research.
“Ground beef sales have been really strong, even in the environment of higher prices, and it remains a staple in people’s diets,” agrees Amen.
Morrison asserts that ground beef is as all-American as, well, apple pie. “Ground beef is still the leader, and I don’t think that will change, because of its versatility and the fact that, for many people, there are price considerations to make, such as when consumers are feeding a large family,” he declares.
Beyond the move toward ground beef, the high price of beef at the retail meat case has caused some other changes in behavior, enabling people to have their beef and eat it, too. “Some shoppers are buying in bulk, whether buying larger cuts and storing them and freezing them, or buying a large subprimal and cutting it into steaks,” says Amen. “Also, on the opposite end, other consumers are shopping more frequently, buying smaller packages as one meal at a time.”
Consequently, retailers are finding they can deal with beef “sticker shock” through some innovative merchandising techniques. “There are great opportunities for retailers to merchandise around these behaviors,” agrees Amen, citing the promotion of beef value cuts and the push for lower-priced, perennially popular ground beef products.
Flickinger emphasizes that retailers can deliver the beef that consumers love, without the high prices that may drive them to other red meat or poultry products. “There are opportunities to do more value cuts. We’re seeing some butchers doing more with marinades, showing how they can be used on cheaper value cuts for a better flavor profile. Others are doing more fresh grinds or offering innovative value-added products like a standing shish kebab,” he remarks.
Happy New Year?
As 2014 arrives, frugality and price are likely to remain influential in the protein marketplace and in the value proposition of beef and other red-meat and poultry products. In the short term, tight supplies are likely to continue, given current smaller herd sizes. “Exports have been strong, and we expect that to continue, along with tight cattle supplies,” says Morrison.
Steiner recently spoke to an industry group on top drivers expected to impact the meat market in 2014, noting such trends as economic growth here and around the world, currency markets, feed input costs, market size, world eating patterns, China’s increased appetite for meat, supply trends in the global cattle business, the U.S. beef business, and competing meats and global market situations by country. The price of corn, in particular, will be a factor. “Corn prices are roughly half of what they were 14 months ago, and that’s a game changer,” he declares. As production costs go down, cow-calf operators may well hold back heifers to breed, leading to smaller amounts of animals in the feedlot and, ultimately, a smaller beef supply.
However, in the long-term rebuilding of the cattle supply, there are silver linings. For example, while operators may hold cattle from the market, at the same time, they’re building up the supply for future years. “It’s like priming the pump,” explains Steiner.
NCBA’s Amen likewise reports a more positive outlook in the longer term. “It’s very hard to predict, but we are seeing optimism. Cattle producers are seeing some relief in terms of feed prices, and we’ve seen better pasture conditions,” he says.
Flickinger points to yet another silver lining: expected spikes in certain grain prices that impact other food products. “Some of the branded cereal millers are taking on great price increases, and it might not be long before a big box of cereal will cost as much as a steak,” he says. “And with breakfast being such an important meal, you may see meat as an ingredient in breakfast sandwiches taking off in 2014 and going forward.”
“Consumers are buying cheaper cuts of the animal for affordability.”
—Burt Flickinger, Strategic Resource Group
“Almost three out of four consumers — 72 percent — say they prefer beef as their top choice of proteins.”
—Trever Amen, National Cattlemen’s Beef Association
“Ground beef sales have been really strong, even in the environment of higher prices, and it remains a staple in people’s diets.”
—Trevor Amen, National Cattlemen’s Beef Association