Poultry report: At the crossroads

This positioning of chicken on the line between poverty and prosperity has its roots in reality. Consumers tend to eat more meat when incomes rise and, as one of the most affordable proteins around, poultry often marks the first step towards a richer diet. It is no surprise, then, that the latest report from agri-commodities expert Rabobank predicts that global demand for poultry will grow from 99 million tonnes (mt) in 2010 to 160mt in 2030, driven by increasing wealth and high population growth in developing nations.

The affordability of poultry, the perception that it is healthy and the fact that it is not subject to the same religious restrictions as pork and beef mean that Rabobank expects poultry to overtake pork as the globally preferred meat of choice by 2020. “From a global perspective, the outlook for the industry is very bright. Poultry will become the world’s preferred meat in the near future and its global market growth is outpacing all other animal proteins,” it states.

It will not all be plain sailing for the poultry sector, however. The report points out that while global demand is strong, the industry is operating in a turbulent environment. “Global turbulence in the industry has increased significantly in the past decade and is likely to continue to do so. The major drivers from this perspective are the ongoing volatility in grain and oilseed prices, as well as the ongoing animal disease pressure to the industry.”

The European industry faces the added pressure of imports from countries with lower production costs, and has “been faced with a saturated market situation and a high level of imports for some years”, according to the report.

Although poultry imports’ share in the total EU market did actually slip from 8.3% to 7.5% in 2010, due to “an increase in the share of fresh poultry compared to frozen poultry, new marketing standards and the growing competitive power of the EU sector”, the report states that the “impact of imports on the EU market is a lot stronger than it appears, as most imports are white-meat products”, adding that currently, 25% of the total EU white-meat demand is sourced outside the EU, mainly from Brazil, Thailand, Argentina and Chile. Imports are set to grow again over the next decade, probably to around 8-9% of total demand.

A further challenge in Europe is the trend towards sustainability and corporate social responsibility. With retailers like Walmart, Tesco and Sainsbury’s following in the footsteps of quick-service restaurants, such as McdDonald’s and KFC, by raising their standards for suppliers recently, the report predicts that companies will need to act quickly to secure their licences to supply and, in some cases, operate.

Industry at crossroads

With all of this in mind, Rabobank states: “One thing is clear: the global poultry industry is at a crossroads.” Although poultry meat is likely to be successful on a global scale, the success of regional industries will depend on their ability to adapt to challenges and remain flexible in the face of volatility. A key aspect of this will be consolidation — with consolidated companies better able to deal with changes in feed prices or animal disease outbreaks. “In highly volatile market environments, value-chain participants, and especially end-customers, will look to pass on risks to other value-chain participants, so market power will become much more important,” states the report. “The weakest players — companies without a real competitive edge that are unprepared to meet the challenges of volatility — will feel most of the negative impact.”

Other keys to success will be strong, long-term relationships, an understanding of the end-consumer market, supply competitiveness and value chain leadership, and a well-balanced strategy to meet the challenges ahead.

In the face of growing imports, Rabobank recommends that EU processors focus their operations on fresh poultry, which represents more than 60% of the EU market. “Current legislation states that fresh poultry products should be sold within a radius of 600 kilometres of the sales market destination,” it states. “This provides a firm basis for the industry, one that has been strengthened by the recently adjusted marketing standards, in which the definition of fresh and frozen products has been redefined.”

It adds that the industry should act now to ensure they have licence to supply in the future. “The industry needs to be prepared by having strong value-chain management with sustainable use of resources a high priority CSR,” the report says, adding that the industry needs to be proactive in the welfare debate and “tell its side of the story”.

UK poultry market

So how does the UK poultry market compare to this global backdrop? According to the latest data from Kantar Worldpanel, the market remains buoyant despite a difficult economic climate, growing by 7.3% in value terms to £2.3bn over the last year. Volumes only grew by 1.1%, so the majority of this growth has been attributed to higher prices, with Kantar data confirming that poultry prices in the 13 weeks to 3 October 2011 were 8% higher than those in the same period in 2010.

Despite price increases, poultry meat remains competitive when compared with other proteins, resulting in strong sales performance for processors and wholesalers. “Demand for our business has been consistent all they way through from the start of the so-called crisis,” says Charles Woolley, founder and CEO of Rectory Food Group. “Our sales have increased by approximately 30% year ending 31 July 2010 to 31 July 2011. I would estimate that probably 60% of that is poultry.”

Andrew Hanson, head of communications at 2 Sisters, agrees that the market remains robust. “The long-term trends in poultry are positive. Obviously, the wider economy remains challenging and we have seen consumers becoming a bit more savvy in terms of what they purchase,” he adds.

One aspect of this has been a move away from organic and free-range poultry. “If you turn the clock back 18 months ago, free-range and organic were growing off the back of Hugh Fearnley-Whittingstall’s campaigns, but at the moment the only chicken that people are interested in buying is standard chicken,” explains NFU poultry board chairman Charles Bourns. “There are a few people out there buying organic and a few more buying free-range or higher-welfare, but the standard sector is the one that sells. Ninety per cent of the market is now standard chicken and that is a big change.”

Bourns, who was producing Freedom Food birds, but has switched back to standard due to lack of demand, puts this trend down to the economy. “Consumers are not willing to spend the money, simple as that,” he says. He points out, however, that many standard birds are being grown to higher-welfare standards, because supermarkets are raising their supplier requirements. “If you want the reassurance that goes with welfare chicken, you don’t have to buy a higher-welfare bird any more,” he says.

Frozen resurgence

Another result of the recession has been a resurgence in frozen poultry. According to Kantar data, the value of the frozen poultry  market grew by 10.2% over the past year. Unlike with fresh poultry, where volumes are static and market growth has been driven by higher prices, the growth in the value of the frozen sector results from a 10% increase in volumes.

“Interestingly, frozen is making a bit of a comeback on our sales – particularly skinless boneless breast meat,” says Woolley. “I suppose one could put the case forward that frozen meat is more convenient for manufacturing and is going into ready meals, which ties into demand for lower-value foods.”

However, consumers are still looking for good-quality poultry. Woolley says one noticeable trend has been demand for whole muscle in further processed products, such as chicken nuggets. “There is increasingly – and it has taken a long time – less demand for reformed and more for whole muscle,” he says. “That is something where we have noticed a definite step-change. People want a chicken nugget made with pure breast meat, rather than a reformed one that might have skin or fat in.”

Woolley puts this trend down to a change in offerings from fast food chains. “McDonald’s freshened up its image a while ago and tried to move into more healthy eating, and KFC has tried to do a similar thing,” he says. “What tends to happen is that they would lead, and the demand for the consumer in retail would come on the back of that.”

Despite these changes in consumer demand, Hanson says consumers are still buying a range of different poultry to suit different needs. “You are still seeing consumers who are after different purchases for different reasons. I don’t think there is any significant drop off in any one area, but consumers are thinking a bit more about what they buy and the regularity with which they buy it,” he says.

Higher standards

With demand for poultry holding strong in the UK, it has been a “fairly non-eventful year” for the UK poultry sector, says Woolley.

Bourns agrees that producers are having a “relatively quiet time”, although he points out that production costs remain high, despite the fact that feed costs have levelled off since spikes last year. “We are under tremendous price pressure and the people who buy our chicken tend to forget that, while 60% of our costs is feed, there are an awful lot of other costs that are going up,” he says, adding that profitability is further damaged by the requirement to sell birds younger. “As someone said the other day, we are killing more chickens, but selling less weight.”

Bourns believes that the main challenge, looking forward, will be cheap imports from countries with lower productions costs. “There is a challenge to our industry from imports… there is no doubt about it that there are producers in the world who are not necessarily to our standards.”

However, as the Rabobank report points out, increasing concern over welfare means companies may well need to earn the right to supply the EU industry in the future. This might level the playing field and even give UK producers, who are moving to higher welfare as standard, an advantage.

Tackling challenges

The industry is also working hard to address the threats posed by avian flu and bacteria, such as campylobacter. One example is a research project being led by University of Liverpool professor Tom Humphrey, which will investigate how the bacteria infects flocks and what can be done to reduce it. Tesco, Asda, Sainsbury’s, Morrisons, The Co-operative Group, Waitrose, Marks & Spencer and Iceland are funding the three-year project and the scientists will work closely with processors Moy Park, 2 Sisters and Vion to study flocks and identify risk factors. “Work on campylobacter is being done in a very co-ordinated way, with shared learning across businesses and industry groups,” says Hanson.

When it comes to dealing with market volatility, the UK is certainly moving along the lines recommended in the Rabobank report. Consolidation is continuing, and many of the larger companies are spreading the risk posed by feed costs and animal disease by investing in other proteins alongside poultry. Woolley predicts this trend will continue. “There will be more contraction,” he says. “The larger companies will take on the few smaller ones that are out there and then it will reach an equilibrium.”

With stable domestic demand, high welfare standards and a strong, consolidated industry, the future looks bright for the UK poultry sector. However, as the Rabobank report points out, while it is possible to “signpost the crossroads” and “sketch the future terrain” of the poultry industry, nothing is certain and companies will need to be “prepared for the unexpected”.

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