A month ago, Tyson Foods (NYSE:TSN) sent a letter to its farmers outlining pork supply chain expectations that the company hopes to implement in 2014. Tyson's new guidelines, such as the recommendation to install video monitoring systems by the end of this year, threaten to put financial strain on farmers. Farmers have already started to push back, arguing that Tyson is demanding too much from them and that the guidelines will result in higher production costs.
The company already anticipates hog supplies to decrease by 2%-4% in fiscal 2014, due to a deadly and highly contagious virus that is spreading among U.S. hog farms. Increasing its pork farming standards and implementing these supply chain expectations doesn't bode well for farmers and their wallets, but it seems that Tyson is hoping that the changes will resonate with consumers and subsequently boost demand.
The increase in Tyson's standards might very well result in a decline in production, and a jump in retail prices. These expectations are straining relationships with suppliers while belittling consumers concerns, so what does all that mean for the stock?
Suggesting that farmers change their practices without providing specific guidelines and adequate financial support to implement these changes is alienating (and if there is one supplier I don't want to alienate, it's my farmer).
Tyson had an opportunity to change the relationship they have with their hog farmers. It could have offered their suppliers a straightforward roadmap with timetables for specific improvements, the training and resources to make the changes, and ongoing audits in order to ensure that the farmers felt supported in raising hogs in a humane way.
They could have, but they didn't.
Bulls make money, bears make money, pigs get slaughtered
While Tyson's proposal to farmers is a step in the right direction, it's a day late and a dollar short. The guidelines are meant, in part, to address growing shareholder concerns that the company may lose market share if it fails to adapt to consumer demands for improved standards. Still, it may not be enough to wipe the public's memory of the horrific conditions caught on video and publicized by NBC.
Tyson's half-hearted attempt at increasing hog living standards only encourages making the changes they've suggested. This move doesn't require the company's supply chain to make moves toward more humane conditions. Tyson has now confirmed that it hears investors' concerns, but the company isn't willing to validate or adequately address the issues in any concrete terms besides increasing audits.
Who brings home the bacon?
Are Tyson's new expectations enough to convince the conscious investors to buy into the protein giant? Not likely.
One of the most pressing shareholder concerns is the use of gestation crates, which are cells that confine inhabitants to a space in which they cannot turn around, and in which they spend the majority of their lives being repeatedly impregnated. Companies like Costco and Chipotle (NYSE:CMG) have already removed gestation crates from their supply chains in order to address growing consumer concerns. On top of that, McDonald's also recently announced that it would pursue sustainable beef (whatever that means) production by 2016. There's a reason why these companies are making these changes: Consumers care where their food comes from.
Chipotle has recognized the consumer push for more humane conditions, so much so that it has started to take a stance against big agriculture. The Mexican food chain has been focused on creating a change around how consumers look at food, so much so that it's putting ads out that have nothing to do with burritos.
Ignoring the conscious consumer is just asking for your demand to dwindle. Tyson's pork segment was the most profitable last quarter, with a 8.5% operating margin last quarter, but what happens when the your bacon-loving customers start asking questions about living conditions and euthanasia practices? Pork made up 30% of the company's total operating income last quarter. Choosing to abstain from truly addressing these prominent shareholder concerns alienates a growing group of key stakeholders: the conscious consumer.
With 72% of consumers willing to buy green products, it's an unwise move on Tyson's part to turn a blind eye to this growing market.
You're in the hog house now
Tyson is walking a very thin line here. In order to decrease risk, the company has to find a way to balance the financial interests of its suppliers while addressing the concerns of their consumers. The company has a huge opportunity here, if they can adequately address customer's concerns while supporting its suppliers in a collaborative way. It'll take a lot of work on Tysons end, but if they do it right, it could really pay off in the long run. The problem is that I'm not so sure investors will stick around to watch this balancing act take place.