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Wal-Mart Goes All-In on Cage-Free Eggs

By Rich Smith - May 21, 2016 at 11:05AM

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Nine years from now, practically all eggs at the megaretailer should be cage-free eggs.

Judgment Day for the American egg industry arrived in 2010.

That was the year Subway shook up the restaurant industry with a plan to phase out the use of eggs produced from chickens raised in "battery cages" and begin moving to all-cage-free eggs in its breakfast sandwiches.

Cage-free eggs. Cal-Maine produces 'em. Wal-Mart sells 'em. McDonald's and Subway cook 'em.

Other restaurants had previously announced pilot projects to explore the use of cage-free eggs at some locations, but Subway really got the ball rolling. McDonald's (MCD 2.46%) followed Subway's lead with a comprehensive 10-year cage-free plan in 2015. McDonald's move was arguably bigger, but also later. Prior to 2010, nothing had matched the scale of Subway's announcement -- a multi-year initiative to move toward 100% cage-free eggs used in all of Subway's 32,000 restaurants (now more than 40,000) worldwide.

What could possibly be a bigger deal than that? Well, I suppose if the biggest retailer in the world made a similar announcement to go all cage-free, that might be a watershed moment even bigger than Subway's announcement ...

And as a matter of fact, that's just what happened.

Wal-Mart going cage-free

Last month, the world's biggest retail chain, Wal-Mart Stores (WMT 0.86%), announced that it, too, is going cage-free.

Wal-Mart began offering cage-free eggs in 2001 and went cage-free on its private-label eggs sold in-store in 2010 . The results of that move have so far been positive enough to convince Wal-Mart to take the next step. As the company announced in April, the company's entire egg supply chain will go "100% cage-free" by 2025.

The Humane Society of the United States, which has been urging Wal-Mart to make this move for years, immediately hailed the move. Said HSUS, "the trajectory ... is clear." Thanks to Wal-Mart's announcement, "the era of confining hens in cages in America's food system is officially sunsetting."

So what does this mean to you?

What it means to you if you're a consumer

If you're an egg eater, then it's about to get easier than ever to find cage-free eggs on the menu -- and cheaper than ever, too.

Wal-Mart sells 25% of the groceries sold in America. You can't throw a brick in this country without hitting one of its stores. What's more, the 75% of the grocery industry that isn't Wal-Mart must now compete with the lower prices on cage-free eggs that Wal-Mart will be demanding from suppliers who want access to its shelf space. Those other retailers won't be able to charge obscene (and unnecessary) mark-ups on cage-free eggs and still compete with Goliath.

On the plus side, though, as Wal-Mart uses its market power to demand lower prices for cage-free eggs from its suppliers, that could exert downward pressure on cage-free egg prices more generally, wherever they are sold, making cage-free eggs cheaper for everybody.

What it means to you if you're an investor

Speaking of suppliers, here's one to keep an eye on if you're an investor watching this story: Cal-Maine Foods (CALM 1.50%). Easily the largest  supplier of shell eggs in the U.S. (by a factor of three), and the only one that's publicly traded, Cal-Maine clearly has a hen in this fight. Cal-Maine eggs are sold at Wal-Mart, but it's not clear how many.

Cal-Maine doesn't break out revenues among those derived from selling cage-free eggs, and eggs produced from hens raised in battery cages, extra-large cages, or free range (i.e. allowed to range outdoors). But the simple fact of the company's size -- $2 billion in annual revenues -- tells us that Cal-Maine is the company to watch on the supply side, to see the first effects of Wal-Mart's decision to go all-cage-free. As the nation's biggest egg supplier, and the one with the greatest scale of operations, it would be natural to expect Wal-Mart to turn to Cal-Maine as the company best-able to ramp up and supply its cage-free, egg-selling needs -- and the one best able to spread out costs across a large production base.

Last quarter, the rising popularity of higher-priced cage-free eggs probably contributed to the company's ability to grow earnings 26% on only 3% revenue growth. Costs should be rising soon, though. Cal-Maine management notes that "restaurant chains and major retailers are increasingly demanding more cage-free eggs in response to market forces," and said Cal-Maine is launching "major capital projects ... to further expand our cage-free capacity to meet expected customer demand." What we'll really want to see is what happens when the additional operating costs, involved in producing cage-free eggs, meet Wal-Mart's demands for "always low prices." 

What it means to you if you're ... a hen

"Customer demand." That reminds me, when Wal-Mart made its promise to go 100% cage-free last month, it did so with the caveat that its commitment is "based on available supply, affordability, and customer demand by 2025." Cal-Maine, too, says its decision to expand cage-free egg production depends on customer demand.

So what does this mean to America's 155 million egg-laying chickens? Basically, it means this:

Currently, most of you live cradle to grave with no more room allotted to you than the area of an 8.5-by-11 piece  of printer paper. If there's sufficient demand among the egg-eaters for cage-free eggs, though, you could soon be set free from your cages and allowed to live out your life cage-free. If demand falters, though, it's back to the battery cage you go.

In short, Subway, McDonald's, and now Wal-Mart have done their part to set you free. From here on out, it's up to the consumers to decide.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05
McDonald's Corporation Stock Quote
McDonald's Corporation
$252.96 (2.46%) $6.08
Cal-Maine Foods, Inc. Stock Quote
Cal-Maine Foods, Inc.
$50.15 (1.50%) $0.74

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