Tyson Foods is preparing for a drawn-out pandemic by adjusting its manufacturing capacity to cater to the increased demand from retail amid the pressure on out-of-home sales, which is expected to continue to weigh on volumes even as it starts to recover.
Noel White, the chief executive of the US-based meat group, said retail volumes for its core product and branded lines increased 26% in the third quarter due to the shift away from foodservice, although not all its plants were able to accommodate the switch in manufacturing.
“As we look beyond this year, we are prepared to navigate prolonged pandemic-related uncertainty,” White told analysts yesterday (3 August) after reporting the company’s nine-month results. “We are investing in operational flexibility to ensure that we can continue to meet customer demand while living in a potentially long-term Covid-19 environment.”
He acknowledged Tyson will need to adapt its operations depending on the future course of the virus.
“We recognised that our level of future growth is dependent on away-from-home eating occasions, which will be impacted by communities opening up and potentially re-closing,” he added. “We will thus remain nimble and remain ready to adjust our facilities as demand picks up or shifts.”
Tyson CFO Stewart Glendinning sought to provide an indication of the shift in demand by using chicken as an example. In last year’s fiscal third quarter, the split for chicken products sold into retail versus foodservice was 50/50 but that has now changed to 60/40.
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Over the nine months, Tyson reported a 0.6% increase sales to $31.7bn. Operating income dropped 5% to $2.10bn, while adjusted, it was down 6% at $2.16bn. Net income attributable to the business fell 14% to $1.45bn.
Meanwhile, Dean Banks, who was announced yesterday as the successor to White, said “current buying patterns remain a net negative across our business”, and he does not expect a full recovery in volumes until the out-of-home sector gets back on its feet.
“Meals away-from-home continue to remain soft during the quarter, but are slowly starting to recover,” Banks noted. “Foodservice customers have seen varying degrees of recovery with strength in quick-service restaurants focused on take-out and delivery. Some have returned to pre-Covid-19 levels, which led us to ship some capacity back to historical patterns. Weakness remains in schools and dining channels, which may persist depending upon states reopening agendas.”
On the plus side, the pandemic resulted in an increase in retail volumes and market share across its key product categories, while e-commerce sales doubled.
Banks added volume share gains through the retail channel amounted to 2% in the third quarter, with Tyson’s core categories – representing two-thirds of its measured branded retail sales – notching up an eighth consecutive quarter of growth.
E-commerce has gained new adherents during the course of the virus, which has made some people fearful of visiting stores. And Tyson expects the channel to continue to bring in business.
“The virus has accelerated consumer demand for food through alternative channels, such as e-commerce. We believe e-commerce demand in grocery and foodservice will remain elevated and we intend to capitalise on the shift,” White said.
Down the line, Tyson envisages incurring further incremental costs associated with Covid-19, albeit not as large as the US$340m impact it has taken so far.
Glendinning clarified those costs were mainly the result of the $114m in “thank you” bonuses paid to employees as they battled to get into and stay in work, and also the cost of personal protective equipment.
Those costs are likely to come down in the fourth quarter, “assuming that we get the recovery that we’d like to see”, Banks said.
White added: “We know that some of these expenses will continue, likely at a lower run rate, and we know that we will need to prepare to adjust our operation as the virus persists. Even after accounting produced Covid-19-related costs during the quarter, our business continues to show strength and resilience.”