2 Sisters’ Steve Ellis on poultry industry future

2 Sisters Food Group processes the lion’s share of poultry in the UK. Managing director for poultry Steve Ellis shares his outlook for the company, and the wider industry, with Jake Davies

2 Sisters bought the UK poultry arm of Vion in early 2013. How is that side of the business doing and how is integration progressing?

I no longer see it as Vion. It’s now part of 2 Sisters. We acquired Vion, we went through a period of stabilisation, which took six months, during which time the business was run separately. Then there was integration from September 2013. I’ve now got one team running one organisation.

We’ve already made consolidation readjustments across the whole network, increasing production in Llangefni in Wales, reducing it in Scotland. The next stage is investment.

Can we expect any further consolidation of plants? How is the geographical spread of sites?

For now, it’s one network and we’ll take the right decisions for that network as we go over the next five years. It’s part of the ongoing matching of capacity to demand, rather than an integration. We’ve done that phase.

In late 2013 2 Sisters began a major restructuring of its operation in Scotland. Is it working?

The Scottish plan was clear, Scotland was in an unsustainable position. In fact we’ve seen that it’s never really worked for anybody whose been in Scotland, whether it’s Marshalls, Grampian or Vion. So we needed to take a different approach and we needed to do it quickly. The sale of Letham, switching to a single shift pattern in Coupar Angus, the realignment of agriculture, then looking at how we simplify the site and now working with customers to deliver growth for Scotland. That was the overall plan and we’ve progressed quite far down that path.

Our focus has to be on how we deliver a sustainable position for every part of the Scottish supply chain, whether it be the growers, the processing and delivering what customers want.

So we are working, I’m regularly meeting the contract growers group (Scottish Chicken Growers Association). That’s a fantastic initiative, actually, to bring all of the growers together. It allows us to work with our contract growers, and the Scottish government in a really joined up way to ensure we can deliver a sustainable profitable future for all in Scotland. That’s the plan. We’ve made some big steps down that road, we’ve probably got more to do.

How do you see the general poultry market in the UK?

If you look at UK poultry, there’s been consistent expansion over the last 20-30 years. What we’ve got to do is ensure that we’re planning our capacity increases to match that growth. If we were just to look at population and consumption, it has grown per head every single year. Last year chicken consumption outstripped red meat per gramme consumed per head for the first time.

On top of that, more and more focus is being given for provenance, for British. So we’ve seen growth. Retailers are moving primary fresh product into British, but almost all retailers are also looking at moving more of their chicken products to British sourced in some way or another.

British consumers are traditionally lovers of breast meat, creating a “carcass imbalance”. What’s being done to redress that?

I don’t see it as a carcass imbalance, it’s a revenue imbalance. We can sell every bit of the chicken that we produce. The challenge is being able to maximise the revenue for every part you get off the chicken.

If we sell white meat to a retailer but they don’t take the rest of that bird, then I need to find the highest value I can get for the rest, otherwise I have to charge more to the retailer – I don’t want to do that.

So there is a joint interest in being able to sell more of the chicken that we’ve portioned at a best price, because that reduces the overall cost of chicken to consumers. That’s done through innovation, new packs and selling diferent ranges.

What are your thoughts on the current supermarket environment?

We are seeing big changes in the retail market. The way people are shopping has changed. More online, with more top ups, and less loyalty to any one retailer. So five years ago, you might have one or two supermarkets in your portfolio, now you might have three or four, and the shopping basket size has also reduced. So the market has changed and all the retailers are working out their own strategies to deal with that fundamental market change. The discounters, Aldi and Lidl, are becoming a much bigger part of shoppers’ repertoire and they are increasing their relevance to a wider range of people.

And individual supermarkets?

It depends. Asda and Morrisons have come out very clearly around wanting to reposition themselves towards lower price, Tesco has made investments around price, Sainsbury’s focuses on value and their values. So everybody is taking a slightly different approach and it’s down to their strategy on how they fit the market. It’s not one size fits all, every retailer will do something different.

One of the side effects of competitive retailers is supermarket promotions. How are they affecting the business?

We’re seeing a lot more emphasis from retailers to drive sales through investment in price, and that will have a positive impact on any category that’s involved. At the moment, chicken is involved.

Are those promotions here to stay, as some are suggesting?

I think there will always be a cyclical demand for promoting and not promoting. I would never sit here and say ‘these promotions are to stay and this level of promotional activity is to stay’. Actually, it’s always cyclical, and you get increases in volume and decreases in volume. But overall the underlying market trend is growth in chicken. Now that growth might be stronger in one month versus another month, or stronger in one year versus another year, but overall you’ll see an averaging around growth.

What about feed costs – who has to bear the brunt of an increasingly volatile market?

Feed is a huge part of cost and that’s into farm, into factory and into our customers. It doesn’t make any sense to us for one party to bear all of the risk – we can’t expect farmers to be paid a price which is completely divorced from feed.

We can’t expect the processor to bear the risk, either, and that’s why we need feed ratchet contracts with the retailers. Feed price is about management of risk. More and more we’re working with retailers to manage that risk together.

The big challenge facing poultrymeat is campylobacter. What’s 2 Sisters doing?

We look at campylobacter across the whole supply chain, at farmer incentives trials, training, what farmers can do to reduce incidences of campylobacter. We’re also looking at the prospect of no thinning. In processing it’s washing and chilling; washing equipment such as the crates and chilling the carcasses.

What if thinning was no longer permitted?

Clearly it would reduce the amount of space we have available. I think the first step is let’s really understand the science and the facts, and that’s going to take a year to do properly. You have to take a whole cycle over a year to really understand the true impact.

It’s potentially a huge impact in terms of the space, though, between 15% and 25% less, depending on the profile that we do. But let’s really understand what the impact of thinning or not thinning is first. We’ll be kicking off a trial later on this year.

In profile

Steve Ellis joined the 2 Sisters Food Group as managing director in 2011 to lead the integration of the Northern Foods acquisition. He has also run the business’s added value poultry division, as well as leading on the UK acquisition of poultry and red meat business, Vion, in 2013.

Steve previously worked at brewer Molson Coors, where he was a member of the UK board as strategy and sales director. His work with 2 Sisters is a first foray into poultry, and chilled food in general.