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Case Studies of Value Added Pork Production and Marketing

by 5m Editor
12 November 2003, at 12:00am

This article looks at 3 seperate case studies of pork production and marketing. In order to gain insights into the issues faced by direct pork marketing firms, a case study methodology was developed and three direct marketing pork firms were studied. The case studies were conducted in the first half of 1999. Three cases were chosen: Nahunta Pork Center in North Carolina, The Egg & I Pork Farm in Connecticut and Gordito’s Meats in Utah.

Case Studies of Value Added Pork Production and Marketing - By Brian Buhr, University of Minnesota - This article looks at 3 seperate case studies of pork production and marketing. In order to gain insights into the issues faced by direct pork marketing firms, a case study methodology was developed and three direct marketing pork firms were studied. The case studies were conducted in the first half of 1999. Three cases were chosen: Nahunta Pork Center in North Carolina, The Egg & I Pork Farm in Connecticut and Gordito’s Meats in Utah. National Pork Board

Introduction and Acknowledgments

In 1997, the manual “Front-End Guidance for Value-Added Networks -- Marketing Pork to the Mexican Consumer in the United States” was published by NPPC. It’s goal was to introduce the strategic concept of pork producers evolving to create and capture greater value from the end products of pork production.

It was developed as an actual market evaluation of pork consumption by Hispanic consumers in the U.S. However, it focused exclusively on the concepts and techniques of market identification and evaluation for value added potential. Missing was an investigation of the execution of value-added production into the identified market.

In an effort to gain insights into execution of a value-added chain to the final consumer, the current case study analysis was undertaken. Case studies of existing firms offer the opportunity to generally describe and analyze the complex managerial and production practices necessary to successfully operate in an expanded market. Five firms were initially identified as case study participates, primarily based on the characteristics of their operations. However, two candidates declined to participate due to disclosure concerns. We gratefully acknowledge the participation and openness of the three participating cases: Gordito’s Meats, The Egg & I Pork Farm, and Nahunta Pork Center. Every effort has been made to assure accurate descriptions and evaluations of their operations. Any errors and omissions are the responsibility of the author.

Executive Summary

Swine producers have recently expressed increased interest in gaining greater value from hogs raised by investing or aligning further up the market chain. Perceived advantages include increased control over their product, an opportunity to gain direct access to customers, and to capture a greater value of the final price of pork which has increased relative to farm prices. However, few participants in the market chain have a complete understanding of the challenges in controlling a greater part of the market chain. In order to gain insights into the issues faced by direct pork marketing firms, a case study methodology was developed and three direct marketing pork firms were studied. The case studies were conducted in the first half of 1999. Three cases were chosen: Nahunta Pork Center in North Carolina, The Egg & I Pork Farm in Connecticut and Gordito’s Meats in Utah.

Each case study participant had a unique pork production system. However, there are commonalities which arose which provide further guidance for those seeking to develop niche or value added markets.

Production System Flexibility

In the cases of Gordito’s and Nahunta, there was heavy reliance on the ability to adjust production to respond almost immediately to market conditions. Nahunta was able to control supplies through the use of a large holding facility. They further controlled supply for various products by having variable sized pigs available. Gordito’s makes use of a similar situation in that they have a farm through which pigs are held to control slaughter flows. Given their small scale, the utilization of refrigerated trucks provides some flexibility in their cooling and storage capacity at the plant level as well. On the production side, The Egg & I farm had somewhat less flexibility on the production, but was the only operation which froze and vacuum packed all of their product. This was complementary to the mail order and catalog sales focus of the business and allowed for seasonal control of supplies to meet demands.

In Gordito’s case, not only had they developed flexibility, but they illustrate ways to forge fit within related parts of the chain. This is illustrated by their sourcing pigs from much larger commercial operations and utilizing their distribution techniques to service dispersed Hispanic markets. Although this flexibility was clearly a key element of their competitive positioning, the question remains as to whether this is truly a competitive advantage relative to larger commercial slaughter and processing operations.

Marketing Flexibility

Gordito’s and The Egg & I Pork Farm both had multiple consumer outlets for their products. Gordito’s sold to retail stores in several states, as well as to at least three different ethnic populations (Hispanic, Vietnamese, Pacific Islander). Each market had nuances which allowed them to utilize different types of hogs (lighter or heavier weights). In addition to these sales, Gordito’s also was marketing direct through retail stores.

This allowed improved access to their customers and has allowed them to capture a greater share of the food dollar. They intend to expand their direct marketings as an important way to increase their value. Similarly, The Egg & I Pork Farm markets through its own retail outlet, mail order, catalog orders (Dean & DeLuca), a direct vending bus/deli service as well as area restaurants and grocers.

This diversity of customers protects them from being hostage to one or two large accounts and provides broader exposure to customers. With the recent reduction of offerings by Dean and DeLuca, this illustrates the importance of having multiple reliable outlets for product. Only Nahunta has very focused marketings through their own retail outlets.

Customer Service

Ultimately, all three markets were built on radically superior customer service. In the case of Gordito’s, they had developed strong relationships with Hispanic retailers partly through direct interaction, but also by assuring them they would no longer be shorted pork products. Nahunta and The Egg & I Pork Farm rely heavily on their owners’ personality and personal touch to connect with customers. This is a two way street as they learn more about what their customers want, and the customers feel like they are important to the owners. This may be a significant competitive advantage for small scale regional suppliers who help break the anonymity prevalent in commercial outlets. Clearly there are scale limitations to direct customer service which limits growth as it provides a potential niche.

In addition to customer service, all three continually evaluated and responded to consumer demands. Gordito’s provides unsplit and lighter weight hog carcasses to Hispanic markets, which has allowed them to meet preferences as well as differentiate themselves from larger commercial packers. Gordito’s is further serving their retail customers by offering vacuum packed primals cut to their customers’ specifications. This provides the product desired and results in a cost savings to the retailers.

The Egg & I Pork Farm had a great deal of interaction with customers and in addition was actually soliciting cooked pork recipes from customers to provide further custom products. Similarly, they provide custom hams and chops to restaurant customers on demand. While this results in some merchandising difficulties it helps build a loyal and reliable customer base. The close interaction of all associates of Nahunta with the customers and the entire production base naturally results in strong feedback directly from customers to processing. This is evidenced by Nahunta’s ability to meet demand at any given time by altering slaughter and processing. This assures that customers will always find a reliabl variety of fresh pork products.

Cost Structures

As reported by each of the firms, their costs of slaughter are remarkably consistent. Gordito’s reported a slaughter cost of between $20 and $25/head which was similar to Nahunta’s figure of a direct cost of approximately $20/head in a similar sized operation. The Egg & I was not yet slaughtering, but the slaughtering operation was being built partially on the premise that the $35/head charged for custom slaughter was likely too high.

Nahunta provides the best illustration of processing and retailing costs although they are likely rough as well. Nahunta attributes about $20/head to processing and cooked products and another $20/head to the retail packaging and cutting portion. Hence, the total per head cost is around $60/head from live to the case.

Clearly, these levels are above the levels reported for commercial slaughter firms (Hayenga). However, each firm compensates for this differential by capturing the retail value of the products rather than just the wholesale level. From the cases, each emphasized the difficulty in competing at a level further removed from the customer, since these markets are typically valued via cost structure, while the consumer market represents costs plus the willingness of consumers to pay for additional value which can be differentiated.

Merchandising and Seasonality

All cases provide illustrations of the classic merchandising and seasonality problems which a value added marketing effort will encounter. There are two overall components to the problem (1) is the broad seasonality of hog production and (2) is the seasonality differences of pork cuts within the total market and the fact that one hog will have a relatively constant proportion of pork cuts.

In Gordito’s case, they experienced seasonality from the traditional Christmas and holiday influences, but also from the seasonal aspect of migrant labor. They had mitigated part of this by having flexible slaughter. Several individuals involved in the plant operations are also used to promote sales of products in an effort to smooth the seasonality of sales. This has the dual aspect of reducing seasonal employment problems and directly mitigating the seasonal sales effects.

The Egg & I Pork Farm managed seasonality by vacuum packing and freezing many of its products. In particular, hams are stored through the fall for winter demand. Creative marketing has also been employed to move seasonal products. In the summer, when ham demand is low, The Egg & I Pork Farm will use fresh hams for pig roasts instead of utilizing the whole hog as is commonly done. This allows for gaining greater value by segmenting the markets for loins and ribs during the summer grilling season.

Nahunta Pork dealt with seasonality by altering the types of cuts offered and by featuring pork items. The method of country curing hams allows them a great deal of flexibility in storing and selling a highly seasonal meat item.

In creating a business plan for developing a value added market, it will be imperative to include seasonal sales attributes. Seasonality will be critical in developing pricing strategies, merchandising strategies, production management (including employment surplus and deficit periods) and certainly in managing working capital and cash flow aspects of the enterprise.

Regulatory Factors

All three cases were consistent in their comments regarding inspection and other regulatory issues. In fact, Jim Dougherty’s decision to build his own slaughtering system was to some extent based on concerns springing from the new HACCP regulations. A particular problem all confronted was in difficulty with inspection due to their size. All faced a rapid turnover of inspectors and this created continuity problems. Inspectors seemed to have a large degree of subjective latitude so that changing inspectors changed the focus of inspection.

None of the three saw HACCP implementation to be a serious problem to their continued success. While it did increase costs through labor utilization for greater reporting and record keeping, it wasn’t a determining factor in the continuance of their operations.

Another consistency across all three was their encouragement to use existing consultants and government resources to manage regulatory issues such as labeling and nutritional testing. Learning the systems and issues likely costs more than hiring this expertise.

Case Study Summary
Issue Nahunta Gordito's The Egg & I
Seasonality Price featuring;
cutout differences;
hog slaughter flow
Plant employees as sales force;
on farm holding
Freezing and vacuum pack;
ham "roasts"
Production Flexibility Large holding pens;
real-time retail information;
Hogs sourced from commercial supplier;
farm as holding site;
multiple outlets
Complete integration allows production to meet demand;
Market Flexibility Merchandising only Multiple ethnic markets;
Retail Outlets;
Wholesale to Other Retailers
Direct Retail;
Mail Order;
Catalog Sales;
Lunch Bus Sales
Customer Responsiveness Strong Customer Relations;
Immediate Demand Response;
Quality/Freshness Assurance
Providing Lighter Unsplit Carcasses;
Responding to Custom Vacuum Packed Demands
Strong Customer Relations;
Providing Custom Recipe Fillings;
Custom Cuts for Commercial Clients
Market Niche Extreme Freshness;
Country Cured Hams and Bacon;
Variety;
Retail Specialization;
Customer Service
Ethnic Markets:
Hispanic, Pacific Islander, Asian
New England Farmstead;
Customer Service;
Country Boutique
Pricing Competitive w/ Area Markets;
$1 sales;
Buy One Get One;
Discount Frozen
Competitive w/ Area Markets at Retail;
$327 Value per Hog
Premium Pricing at Retail;
$550 Value Per Hog Necessary
Cost $20/head slaughter;
$20/head processing;
$20/head retail
$20-$25/head slaughter $35/head custom slaughter;
$35/head smoke and cure

To read the 3 case studies and the rest of the article, please click here. (PDF Format, 170 pages, 3.8Mb)

Source: National Pork Board - October 2003