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The Wal-Mart Of Meat


It's not easy following in the footsteps of a legend. Just ask John H. Tyson, the 51-year-old CEO of Tyson Foods Inc. (TSN) For years he toiled in the long shadow of his father, Don Tyson, a colorful, freewheeling Arkansas good ol' boy who transformed not only his father's company but the entire poultry industry. With rapid-fire acquisitions and such product innovations as McDonald's (MCD) Chicken McNuggets, he made Tyson the king of the coop.

When John took the reins in April, 2000 -- after successfully battling years of drug and alcohol abuse -- he was widely considered a lightweight whose only claim to the top job was his name. After he moved to put his stamp on the company with the $4.6 billion acquisition of beef and pork giant IBP Inc. in 2001, investors fretted about the outsized debt and the volatile beef business Tyson was swallowing as it tripled in size.

Now, after a roller-coaster year, "Johnny," as he likes to be called, is winning respect for navigating his company through turbulent times. With the relatively smooth integration of IBP, John Tyson has won the confidence of many investors. But his grand vision of Tyson as a one-stop shop for beef, pork, and chicken has yet to deliver juicy returns. Three years after a federal judge forced Tyson to complete the IBP marriage, beating back an attempt by Don Tyson to kill the deal, Tyson hasn't significantly boosted margins or market share. Says Gary Stibel of New England Consulting Group: "The strategy appears sound. The question now is, can they execute?"

Critics see a bigger question: What price will the new Tyson exact from meat workers, ranchers, and consumers? Tyson is now a kind of Wal-Mart of meat, seeking to control every step of production from farm to supermarket. It produces nearly one out of every four pounds of beef, chicken, and pork consumed in the U.S. The company began consolidating the poultry business back in the 1960s. Today, Tyson has about 60% more chicken-processing capacity than its next-largest rival, Pilgrim's Pride Corp. (PPC), and it enjoys a level of control that any manufacturer would envy: Contract farmers raise the chickens, but those birds are owned by Tyson. Tyson provides the chicken food and the medicine, specifies how the houses should be built, and controls the price farmers ultimately are paid.

INCREASING CONTROL

While it was buying up competitors, Tyson figured out ways to add more value to the chicken -- by slicing, dicing, marinating, breading, and pre-cooking it. Now the company wants to extend that marketing and logistics savvy to beef and pork. The goal is to sell meat and poultry products under the Tyson brand, delivered on a single truck, with a single invoice. Tyson says it's not aiming for the same kind of vertical integration in beef that it has in chicken. But marketing agreements with ranchers that cover 50% or more of its cattle supplies give it increasing control over that end of the business.

The bottom line, some contend, is a strategy that squeezes workers on one side and farmers on the other -- with most of the gains going to Tyson, not the consumer. The four largest beef-packing outfits now process about 85% of beef, up from 20% in the late '70s, says C. Robert Taylor, an agriculture professor at Auburn University who has testified for cattle ranchers who are suing Tyson. "The mergers and acquisitions [in the meat industry] are more about economic power than economic efficiency," Taylor says. Tyson declined to make its top executives available for interviews, but a spokesman says, "We believe our efforts benefit the consumer."

As big as Tyson gets, though, it still has to contend with the vagaries of the farm business. Analysts give the new team high marks for managing through a storm of bad luck, which has included everything from a Russian ban on U.S. chicken to soaring grain prices to the closing of the Japanese market amid mad-cow fears. "Almost once a quarter, something would shock the system -- and it wasn't a positive shock," says analyst G. Leonard Teitelbaum of Merrill Lynch & Co. (MER) Just how quickly the company's fortunes can change was highlighted on Aug. 30, when Tyson slashed its fourth-quarter earnings outlook thanks to grain-hedging losses and weakening demand for beef and chicken. Its stock fell 8% on the news, to $16.26 a share, as disappointed analysts scrambled to lower earnings forecasts for next year, too. Now some expect profits even to decline in 2005.

Described by some as a shy but volatile man, John Tyson is trying to leave his mark on the company's close-knit culture. Outsiders applaud him for putting strong executives, particularly President Richard L. Bond, in key positions. Bond, a hard-nosed cost-cutter, was formerly president of IBP. "It's really gone from entrepreneurial, cowboy, Wild West management to professional management," says food industry consultant Burt P. Flickinger III of Strategic Resource Group. Tyson also has moved to placate shareholders by adding more independent directors to the family-controlled company's board.

In a move viewed warily by some insiders, John Tyson's own religious bent is now reflected in changes made to the corporate code of conduct. Among the core values Tyson Foods now lists: "We strive to be a faith-friendly company," and "We strive to honor God and be respectful of each other, our customers and other stakeholders." Tyson has also hired 87 chaplains covering 58 plants to help employees cope with family problems, stress, and other issues. A spokesman says John is not trying to impose his faith on the company, and "we make every attempt to be inclusive of all our team members regardless of their religious persuasion."

Still, some fear the code could alienate employees. It could also make Tyson, with its scandal-tarred past, an easy target for charges of hypocrisy. Indeed, Tyson announced on Aug. 16 that the staff of the Securities & Exchange Commission intended to recommend that the agency bring a civil enforcement action against Tyson and is considering a monetary penalty. The SEC has been investigating $1.7 million worth of perks granted to Don Tyson, who is still a director, from fiscal 1997 through 2003. He voluntarily paid $1.5 million back to the company after a review by independent board members. "These are indications that the company still has work to do, and perhaps the monitoring bodies such as the SEC will call the company to greater accountability," says Vidette Bullock Mixon, director for corporate relations and social concerns at the General Board of Pension & Health Benefits of the United Methodist Church. As a shareholder, the board has called on the company to eliminate the dual-class stock structure that gives the Tyson family 80% voting control.

That family stranglehold has been blamed for past lapses. In 1997, the company pleaded guilty to one felony count of illegally giving U.S. Agriculture Secretary Mike Espy gifts and favors, including trips and football tickets. In the wake of the scandal, Tyson was forced to initiate a wide-reaching ethics program. John D. Copeland, the former officer who ran the program, says his role as an independent watchdog created conflicts with John Tyson. "He told me I was too strong-willed and independent," says Copeland, now a business professor at John Brown University. "I thought that was appropriate for an ethics officer."

Investors this year have mostly looked past ethical concerns and focused on strong results as Tyson rode the low-carb-diet wave. The company says it will have slashed its debt-to-capital ratio to 43% in the fiscal year ending in September, down from 58% after the IBP merger. Even with the recent hit, Tyson's stock is up 25% so far this year, vs. 0.4% for the Standard & Poor's 500-stock index. But now that meat prices are easing, growth figures to be much tougher. Analyst Jonathan P. Feeney of Wachovia Securities (WB) says earnings in this fiscal year, excluding plant-closing costs and other onetime items, will be up 65%, to $470 million, with sales rising 4.5%, to $25.7 billion. But he expects 2005 profits to fall 3%.

IN THE SPOTLIGHT

That's why Tyson is trying so hard to move beyond traditional cuts of meat to higher-margin foods that do some of the work for the cook, as it has done with chicken. Wachovia's Feeney believes that over the next decade, by moving up the value chain, Tyson could boost operating margins to 7% from an expected 4% this year. That would be impressive considering that margins will erode for most food companies over the next 5 or 10 years, he says. But some see little sign yet that Tyson has extended its innovations in chicken to beef and pork. One big restaurant buyer says he has just begun to hear Tyson reps talk about beef and pork products, and they still lack knowledge about plant and research capabilities.

Tyson's efforts to brand beef and pork also face stiff resistance from grocers, who prefer to push their own private-label or unbranded goods. Tyson's new "value-added" products, such as deli meats and microwaveable roasts, are "me-too" items, complains one grocery wholesale-procurement executive. A Tyson spokesman says the company is focused on increasing its share of sales coming from those products from 35% to 50% in the next three to five years. It is "making progress," he says.

Meanwhile, Tyson's growing clout has put it in the spotlight as never before. Tyson has been involved in a variety of controversies, from illegal immigration to price manipulation. Last year Tyson beat federal charges that it had conspired with smugglers to bring illegal workers to its plants. But it still faces an unusual civil case by ex-employees charging that the company hired illegal workers to drive down wages. The company denies the charges. And with the IBP deal, Tyson inherited a suit that charged it with illegally manipulating cattle prices through marketing agreements that lock in portions of its supply -- a widespread industry practice. A jury sided with the ranchers and determined that Tyson owed $1.28 billion in damages. But the judge threw out the verdict and recently ordered the plaintiffs to pay Tyson more than $70,000 in expenses.

While many industry experts expect Tyson to prevail, the cattle ranchers aren't giving up easily. Oral arguments on their appeal are scheduled for January. Tyson says the marketing pacts give it and other packers a steady supply of quality cattle while cutting risks for ranchers. The plaintiffs say the alliances pushed by Tyson and other packers will kill the independent rancher without improving quality of supplies. "It's a significant power shift," says Michael C. Stumo, a lawyer for the plaintiffs. If Tyson wins, he says, meat companies will have near-total control of the beef business, while ranchers are left with "the risk and the manure."

The company's latest advertising campaign sports the tagline "powered by Tyson." But it's the kind of power that Tyson doesn't like to talk about that ensures growing scrutiny as it pushes more protein in more places around the world.

By Wendy Zellner in Dallas


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