The beef industry is in the midst of an ongoing collapse in beef demand, says Andy Gottschalk, market analyst for Linnco Futures Group (LFG). But the situation isn't one created by the packer, retailer or producers.
"It's created by consumers. They decide how much money to spend and the value of your product," he says.
The industry's challenge is to attract consumers back to its products, Gottschalk says. The encouraging news is that there are movements in this direction. Among them is an industry program for new product development. Sponsored by the National Cattlemen's Beef Association (NCBA), the program gave birth to 31 new products in 1998.
Those products dovetail with a new industry advertising program called "Easy Beef." The program came on stream last month with television and print ads with support from state beef councils. It will introduce consumers to a broad spectrum of "Easy Beef" products, including ground beef, kabobs, marinated steaks, stir-fry beef strips, fully prepared or fully cooked pot roasts and restaurant take-out meals.
Its goal is to get beef back in the mainstream in the face of the dramatically changing food preparation and eating habits.
"Our skill level in preparing meat is dismal," says Tim Straus of Turnover-Straus, a firm cooperating with the NCBA effort. "Consumers want it fast. Something we can prepare in 20 minutes. That's the average prep time for dinners in America," he says.
Eating Habits Have Changed Why is beef consumption down? Straus says it's simple. Fewer foods are prepared at home where fresh beef typically dominated. In 1997, beef use dropped 27% compared with 1982 while poultry use went up 26% and pasta up 29%.
"In beef, there are two strong entries - ground beef on the cheap side and premium steaks on the other," Straus says. "Chuck and non-premium roasts are way down the road. They can't compete anymore for what consumers look for."
Beef held first place in the retail fresh meat case 20 years ago, offering the most cuts and claiming the largest share of the business, says Straus. Today, beef is second or third in the processed meat area and more of the business is going that way.
Pizza, for instance, didn't exist 20 years ago. Today, the average family has pizza delivered to their home at least once every two weeks. And pork is the major ingredient.
The supermarket deli wasn't around in 1980 either. Today, it's a $23-billion industry with roughly half the sales of hamburger outlets. This steals from fresh meat counters, he notes.
"Last year, Americans ate 1.7 billion pounds of sliced meats, either bought at a deli or one of the 7,000 Subway shops in the country," Straus notes. "Some 500-million rotisserie chickens are sold every year."
"Pasta was something we used to call spaghetti," says Straus. "Today, we call it pasta and it has chicken on it."
There Is Good News The good news is in food service where beef servings are up 8%, says Straus. But that's against a marketplace that has grown about 30% with poultry servings up 75%, he adds.
The industry's strength is the $35-billion burger restaurant business where beef dominants. But even here, competition is getting tougher. "Our hamburger business is being diluted with chicken and chicken nuggets, and turkey and ham are replacing beef in lunch meat," he notes.
Many new ethnic foods aren't beef-based. Salads have little beef. Asian foods tend to rely on pork. Breakfast menus - a growing area among chain restaurants - offer little beef.
The trend toward eating out has opened up another field of food options for consumers. Competing meats and poultry have taken the lead, developing new products that attract changing consumer demands.
"Marketers responsible for marketing beef haven't taken a leadership role," Straus says. "They haven't found a way to move beef to the forefront so we can replace other proteins."
Five Top Priorities Straus lists the above concerns, not to spell doom, but to show where he and his associates are concentrating their efforts. It could well determine the future of the beef industry.
NCBA's new product development program has set up these five priority areas:
--- Value-added ground beef. An example: enhance profits from ground beef by raising its value, such as flavored cheese and ground beef combinations.
--- New beef products like "Rotiss-A-Roast" to capture part of the huge rotisserie chicken market, which the National Broiler Council predicts could grow to 1 billion this year.
"This is the hottest item in food service today," says Carl Blackwell, executive director of product development for NCBA.
Kroger, the nation's largest retailer, launched its On-Pack Beef Cooking Instruction Program last month. The items include rail strips, meat case signs, seven varieties of color-coded, on-pack cooking labels, grouped by cooking method.
Sysco, the world's largest food service distributor, has introduced 30 new products. It's goal: to boost beef sales $1 million per week, according to Blackwell.
One product called Sysco Oven Ready Roast will be distributed to 350 hospitals. These 3- to 5-lb. roasts can be cooked in 11/2 hours. They come in 30-lb. boxes vs. the current 30-lb. top rounds in 80- to 90-lb. boxes that are too big for hospitals and schools to handle.
"Some of these non-commercial groups are dropping beef from their menu because of this problem," Blackwell says.
--- The industry must find ways to make beef easier for consumers to prepare at home.
--- Create "beef strips" and "beef fingers" to meet competition from chicken nuggets and similar products as appetizers and in hospital and school lunch programs. "They're very tender and great appetizers," Blackwell says.
--- New sliced sandwich meat for sandwich shops, deli and school lunch programs.
NCBA's program is off to a good start, Blackwell says. It will blueprint and develop products in these five areas, take the products to the end marketer and get them excited about the products.
Building Beef Excitement The goal is to develop new product concepts and commercialize them, Blackwell says. One way they will do this is through the R & D Ranch seminars. R & D stands for Research and Development.
The first trial run took place in October at Visionary Design, Atgen, PA. At that time, NCBA new product development team member Eugene Gagliardi hosted representatives from the Washington State Beef Commission, Para Livestock, Washington Beef (packer), Associated Grocers (wholesaler) and Queen Ann Thriftway (retailer). A similar session for Michigan state representatives is planned March 9-10 at Michigan State University.
The R&D program showcases 40-50 new product concepts to packers, processors and wholesalers.
"They are the customers," NCBA's Blackwell says. "Our mission is to be a catalyst and encourage them to do what they can in new product development. Our goal is to have a lot more big hits with beef products in the next 18 to 20 years that will drive consumer demand for beef."
At current trends, beef production as percent of red meat and poultry supplies are likely to decline 50% for the three-decade period ending in 2005, says market analyst Andy Gottschalk. By that date, beef will account for 26% of red meat and poultry production, down from 52% in the mid-70s - beaten down by exploding volumes of chicken, pork and turkey.
"From 1975 to 1980, the last of the golden years for beef, beef captured $45 or half of the $92 increase in new spending for red meat and poultry," Gottschalk says. "Since 1980, beef has captured only 10 percent, with 90 percent of new spending going to finance the growth in competing meats."
Another perspective: per capita spending on beef by Americans declined by $4.11 in 1997. "That $1.1 billion in lost revenue reduced the value of every animal slaughtered by $29.70," he says.
As beef market share gets smaller, it becomes more difficult to force our quantity of supply and prices through the system.
"We are being crushed by the competing meats," Gottschalk adds. "We must work harder. The competition isn't sitting still. We have to focus on the real issue - consumer demand."
Market Analyst Andy Gottschalk of Linnco Futures Group blames most of today's depressed cattle market on what he calls "an ongoing collapse in beef demand and a near-record beef production and record total meat supplies. It is not just meat demand, driving prices down, but big supplies.
"We simply don't have the pricing power with the consumer we had in the past," he warned members of the Kansas Livestock Association at their recent convention. "We've turned the consumer on to the competition from a value standpoint. They bought competitive meats and left our product, expressing a value preference for the competing meats."
Other Factors At Play The problem is more than just shrinking demand, however. Gottschalk lists other factors that could restrain any huge recovery in fed cattle prices after this current liquidation phase is over:
--- Though the calf crop is the smallest since 1951, calf prices are weak. While this might imply market manipulation, Gottschalk says that's "classic misinformation."
"Sure USDA says the calf crop is the smallest since 1951," he says. "But in the early 1950s, we slaughtered 12 to 13 million calves. Now calf slaughter is down to 1.5 million per year on the same-sized calf crop. We effectively increased feeder supplies available by 11 to 11.5 million head with the same-sized calf crop. This is how we have a near-record number of cattle on feed with a smaller calf crop."
--- Average carcass weights on cattle are the highest on record. Carcass weight gain since 1982 is equivalent to adding 15.5 million head to the cattle inventory. How important are carcass weights?
"For every 7-lb. increase in carcass weight, we add about 1 percent to beef production," Gottschalk says. "In 1998, carcass weights will average 20 lbs. or more above year ago levels. This has increased beef production by 3 percent - the equivalent of adding 20,000 cattle weekly to the kill."
--- Competing meat and poultry supplies have increased dramatically since 1980. Just since 1990, when fed cattle prices in western Kansas averaged $79/cwt., beef production is up 3.2 billion pounds; pork production up 3.5 billion pounds, with half of that increase in 1998 alone; broilers up 9.2 billion and turkey up 770 million pounds. Total red meat and poultry supplies increased 16.7 billion pounds with competing meat and poultry supplies increasing 13.5 billion.
--- Beef imports (live plus processed equivalent) is up only 280 million pounds since 1990 on a processed product basis. This isn't a factor in price declines, Gottschalk believes. Neither is the concern about the effect of captive supplies on cattle prices.
Better Situation Ahead These factors may not comfort those hit with negative profit margins. But there is good news, says Gottschalk.
"We're setting the stage for a decline in beef production, "As such, cattle prices are expected to advance the next three to four years, barring some act of nature like severe drought," he says.
Technically, the bear market in cattle isn't over, Gottschalk warns. He doubts that average fed cattle prices will hit $70/cwt. this year, despite rosy predictions from some sources.
Gottschalk pegs average fed cattle prices at $65.50 next year, up $3.50/cwt.; feeder steers up $3.75 to the $74 to $75 range; and calves up $4.50 to $91.50/cwt.
"But we are moving in the right direction, although it will take a little longer than many of us will like," Gottschalk says. "The good news is that beef production is set to decline. That will have a positive price impact. We made the bottom in fed prices in 1996, retested it last year, and this bottom will be a major support price for cattle."
Need Help On Demand Side But the industry won't drive beef prices to all-time highs in this scenario, he warns. "As a result of declining beef demand and market share, beef prices are increasingly influenced by production and price of competing meats," he says.
"The greatest challenge is to reverse the trend in declining beef demand," he warns. "And, we don't have the luxury of time. We must act now. Demand is the only issue we should be talking about."