The broiler sector is feeling the fallout from the supermarket price war, with margins coming under increasing pressure, as Philip Clarke reports.
Price pressure is here to stay and the poultry sector must adapt if it is to secure a viable future in an increasingly aggressive retail marketplace.
Addressing the recent South West Chicken Association conference near Bristol, Cargill Meats Europe director of fresh chicken, Chris Hall, explained how changing consumer preferences had shaped the retail arena.
Consumers were driven by a range of factors, including convenience, health attributes, sustainability and provenance. But overall “value for money is still king,” said Mr Hall. “Price is what has driven people to choose one retail channel over another – and some post-recession behaviours are here to stay.”
This had driven a number of changes in the grocery market, with the “big four” suffering at the hands of the discounters. While Aldi and Lidl had enjoyed double digit growth for the past four years, Tesco, Sainsbury’s, Morrison’s and Asda had seen their market share drop to 73% – the lowest in a decade.
“Even though the discounters are still less than 10% of the market, it is creating a massive change in the retail environment – and that change is going to be felt by all of us.”
The discounters had grown their market share by “shocking on price”, said Mr Hall, something they had been able to do because their margin expectations were much lower than the other supermarkets.
“The big four have consequently had to invest in their margins to compete. Those margins aren’t going to come back and that will have implications for all of us. It’s about how we become more efficient as an industry, so we can reinvest and the supermarkets can keep their shareholders happy.”
But more than price – which has always been part of the story – the discounters had raised standards and moved into fresh foods, offering the same quality as other supermarkets in what is the biggest sector of UK retail.
The big four had reacted by introducing more sophisticated loyalty cards and “price match” propositions. The consequence had been food price deflation of 2%.
Chickenmeat had not been immune from any of this. For example, between January 2014 and April 2015 Tesco dropped its breast fillet price from £10/kg to £5.96/kg, while Morrison’s was down from £8.22/kg to £5.99/kg, Mr Hall explained.
“We have seen some volume increase, and that’s the trade-off. But it’s not nearly setting off the effect of deflation.”
Recent sales data from Kantar Worldpanel to the end of March showed chicken down about 4% in value year-on-year, despite a 2% increase in volume. Turkeys had fared even worse, with volume down about 5% and the value of retail sales over 10% lower.
Focus on breast
Within the fresh chicken category, the issue was that all of the focus was on breast meat, which had become one of the key weapons in the battle for customer footfall.
Sales were up 6.3% on a year ago in volume terms, albeit with a slight decrease in sales value. But whole bird sales had really suffered – down 6% in value and 7% in volume – while dark meat sales were worth 4% less.
“This balance of where we sell our product is critical,” said Mr Hall. “As breast fillet becomes the battleground, this is where retailers are investing their margin. The consequence for us is the impact on dark meat.”
With access to certain key export markets restricted, the impact had been very damaging on prices for dark meat, and this had been exacerbated by the strengthening pound. “Ally that with the fact that we’ve got much worse carcass balance because of this huge increase in breast fillets, and we have a problem the industry will have to deal with. A market that only values breast fillets is not really a sustainable position.”
The consumer desire for convenience was another challenge, especially as the average time spent preparing a meal was just 31 minutes. “That makes it very difficult when you are preparing meat from scratch.”
Meeting these challenges, while still delivering on price, would mean establishing partnerships with customers.
“Sustainable long-term supply chains are the only option for us. This is a long-term business. Investments take a long time to pay back. What’s absolutely essential here is, in order to make this new world of low retail margins work, we all need to make sure there is fair and equitable margin share,” said Mr Hall.
“Without that, we’ll go back to the days when margin bounces along the supply chain according to who happens to hold the balance of power. Strong partnerships will make sure we share it equitably, so we can invest properly.”
It also meant meeting consumer needs, including on price. “We have to provide value for money solutions. This isn’t a marketplace that will just remain static. We have to recognise that value for money is here to stay.”
This meant taking costs out where they were not essential to delivering consumer value, and investing to improve efficiency, from breeding through to packing. And it meant having a good carcass balance, in order to make UK chicken really competitive.
To do this, the sector needed to innovate the product, educate consumers and promote dark meat to ensure that local chicken remained value for money.
One encouraging sign had been the significant growth in demand for boneless, skinless thighs in the UK in the last year. It was certainly a versatile product. But it was also costly to produce, as it took a lot of labour to get the bone out, while the end result was less meat.
Mr Hall also emphasised the need to maintain consumer trust in the UK poultry industry. “They want to buy British because they believe it gives more assurance about how the birds have been reared and processed. We have to maintain that trust by being open and honest, talking and engaging with people.”
Other challenges facing the poultry sector
Campylobacter. “The industry has to be seen to be taking the issue seriously, so that consumers trust us to respond.”
Avian influenza. “The impact has been to close markets to us. Global markets are important to the UK industry as they are where our by-products go.”
Political unrest. “Russia closing its borders is creating an oversupply of some of the products that are not the prime products that we sell here in the UK.”