Give consumers what they want

by Jackie Eager

When you walk into a grocery store, you’re surrounded by choices of several branded beef lines. That’s a relatively new development, promising better beef, and it’s most apparent in just the past 10 years.

Beef cattle specialist Gary Fike, with Certified Angus Beef LLC (CAB), is excited about the opportunities beef branding brings to the ranch. He shared that with cow-calf producers at the Oklahoma State University Master Cattleman Summit in Stillwater, Okla., last month.

“Consumers have gone from a choice of just a commodity program offering retail cuts to a range of branded beef products that offer a more consistent, high-quality alternative,” he said.

The good news for consumers is also a rewarding prospect for producers.

“There is a great opportunity for producers to get into these branded programs,” Fike said. “Most of them offer some type of premium, whether that’s for breed influence, high quality, lean yield, natural, organic or a combination thereof.”

Producers who target the 10 science-based specifications required to hit the CAB brand target can share in the market premiums that add $500 million to the cattle business each year, he said. Even if the economy suffers, cattle producers can take advantage of a stable, premium market.

“Targeting a specific market will improve producer income, and it should also give them pride, knowing when they go to the store their cattle are supplying that brand,” Fike said.

The first step for producers moving toward a branded program is to look at their herd genetics and target those to a program, he said. Next, look at how the cattle are managed and where those practices will fit within a brand. With these adjustments, a producer can market more value-added cattle to receive premiums.

“Producers who can target the genetics and production practices of branded beef can get the premiums in the marketplace,” Fike said.

There is room for growth in the branded beef market, he said, as long as consumers demand consistent, high-quality satisfaction from their beef products.

“Targeting a specific market will improve producer income, and it should also give them pride, knowing when they go to the store their cattle are supplying that brand,” Fike said.

“Producers who can target the genetics and production practices of branded beef can get the premiums in the marketplace,” Fike said.

There is room for growth in the branded beef market, he said, as long as consumers demand consistent, high-quality satisfaction from their beef products.

Meat case math

How retailers establish beef prices

by Miranda Reiman

When cattlemen put an asking price on a bull or a load of calves, they set it as high as they can reasonably hope for a sale. At an auction, the sale manager announces the target price before calling for bids. Grocers take a similar tack, but feedback is not as direct at the meat case.

“Retailers price their meat at the highest level that consumers still perceive as delivering value,” says Al Kober, veteran meat manager and retail director for Certified Angus Beef LLC (CAB).

So they’re the ones making all the money in the beef business? Not exactly, Kober says.

“There are controls, like competition,” he explains. “In a metropolitan area, a five-mile circle around a retail store could have 20 to 30 other retailers selling basically the same products.”

And consumers, just like feeders or packers, will only pay so much.

“Above a certain price point, the product won’t move anymore,” says Julian Leopold, beef industry analyst for Peterson Management. “It meets a level of resistance.” In a tight economy, consumers may be more likely to “trade down” to less expensive cuts when their favorite is priced above that certain price point, he adds.

Grocers can’t be as responsive to the markets as other industries, says Randy Irion, channel marketing director for the National Cattlemen’s Beef Association (NCBA), which contracts to manage retail programs for the beef checkoff.

“They are very slow to make change in either direction,” he says. “When the wholesale price of gasoline changes, it changes at the pump pretty darn quickly. We buy gasoline not because we like it, but because we need it.”

In contrast, demand for beef can switch to other proteins or even non-meat food items.

“The retailers have to be careful to avoid a dramatic swing in prices that reflects exactly what’s going on in the market,” Irion says, noting there are also many logistics against physically adjusting all the numbers that often.

Longer-term market fluctuations—like the steady downward trend for middle meats this past year—are usually reflected in the featured advertising or the weekly sales flier, but forward contracts and printing deadlines still cause a delayed response. Retailers might get customized annual bids from packers for staple beef items, and then shop around for these “features,” which they often use to draw customers into the store.

“The retail trend would be to buy within a four- to six-week window,” Leopold says. “All the ad circulars are printed weeks before. If you came out with something really cheap today, they couldn’t use it for at least a month.”

With those time constraints, some retailers engage in less featuring when prices are extremely volatile, he adds.

In addition to regular retail and features, grocers often use meat items as their “loss leaders.” Lower-priced hams at Easter or turkeys at Thanksgiving will generate more foot traffic.

“If a retailer is going to lose 86 cents per pound (lb.) on hams, he has to make it up someplace because it’s a for-profit company,” Kober says. That’s why a tenderloin might sell for $20/lb. in the store, when the cost is only $7.50/lb. wholesale. “It’s only one tiny little muscle, about 1% of the carcass, while the chuck is about 30%,” he says.

Anatomy makes merchandizing beef more difficult than other goods.

“Unlike manufactured products, with the beef animal you’ve got to sell the whole thing to make money,” Irion says. “As they start breaking up the primals, there are some cuts that are going to be more in demand than others, but you have to move all of them.”

The more customers, the easier it is, and retailers often use meat and produce as a way to build loyalty by differentiating themselves.

“Then within fresh meat, there’s certainly more opportunity to distinguish yourself with fresh beef than other proteins, particularly like chicken and turkey that are largely case-ready anyway,” Irion says. “Retailers do that by carrying brands, but the cut selection, depth of inventory and knowledge of people behind the counter are all very important.”

Kyle Miller, CAB executive account manager and chef, works directly with retailers in the Great Lakes region. Many companies use the Certified Angus Beef^® (CAB®) brand to set themselves apart as quality-focused, and use a concept called “shadow pricing” to grow sales.

“If they sell CAB and a commodity quality grade, they’ll put them in the same ad with, say, a 50-cent price spread,” he explains. “They let people know, ‘We’ve got a hot deal on Choice ribeye steaks, but for only 50 cents more you can trade up.’

“That retailer is giving customers an opportunity for a better eating experience, plus they make more gross profit and sales dollars,” Miller says.

That added revenue is filtered back to producers.

“Getting consumers to pay more for more quality is the only way producers can get more for cattle that meet the CAB specifications,” Kober says. “At every level, they will pay more because it has intrinsic value.”

In large chains, most meat strategies are set at the corporate level, which takes into consideration the entire product mix from canned goods to toiletries.

“A retail store is very successful if it can make more than one penny per dollar (1%) average profit,” Kober says.

Retail prices aren’t based only on product cost, but must also cover the many other costs of operation and overhead to stay in business.

“Meat departments have to sell everything in the case or it’s going to spoil,” Irion says. “Everything they do is about avoiding that situation.”

Shelf life is typically three days, which includes the day of packaging.

“If it isn’t sold by the end of the second day,” Miller says, “they’ll put a discount and sticker on it, like a ‘manager’s special,’ to make it more appealing and at least get something out of it.”

Irion notes it’s a careful balance between enough inventory and overstocking, because consumers like options at the meat counter.

“If there’s only one package of ground beef, even if it looks fine, but the rest of the case is rummaged over, you might think twice about picking up the very last package,” he says. “Whereas, if it were Rice Krispies®, you’d think nothing of it because they’re all exactly the same.”

In addition to managing this kind of “shrink,” managers are constantly monitoring yield, or how much saleable product they have after trimming fat and cutting portions.

“As soon as you open that Cryovac® [brand vacuum pack] you’re incurring a loss,” Miller says, noting yields can vary anywhere from 88% on a New York strip to 50% on a tenderloin. “You’re trying to make the most money out of the product.”

Often the trim will sell as cube steak, grinds or stew meat. All of the specialized trim labor adds cost.

“When you buy a 20-count box of oranges, you get 20 oranges,” Kober says. “When you buy beef, you’ve got to break it down.”

Top sirloin butts were roughly $3.43/lb. in May.

“That’s the cost from the packer,” Kober says. There is an 11% yield loss, and then labor, benefits and overhead add up to about 15%.

“You have more than $100,000 of equipment in every store for wrapping, grinding and cutting. That has to be paid for,” he says. Throw in maintenance and you have an average 26% markup, or $4.32/lb., before any profit can be figured in.

It’s a lot of work, but beef can bring in more revenue than any other protein.

“Beef has the advantage of being the item with the highest average price,” Irion says. “Even if the margins aren’t as good, you’re going to make more dollars. Retailers need a good beef program to have a good meat program.”

Similarly, producers need good beef retailers to channel consumer demand from the meat case to cattle that hit consumer targets.

“Every segment has to be profitable, but each division must manage their own interests,” Kober says. Still, common interests are critically important. “We all need to get out of the mindset that the other people in the chain are somehow taking advantage and making all the profits. We have to realize that we all have a vested interest in keeping each segment profitable.”

The customer knows best

by Miranda Reiman

Don’t let the media tell you what your customers want. Ask them yourself.

That advice from Edd Hendee, Taste of Texas steakhouse manager, could apply in many areas of the economy. He shared it with feedlot consultants at an Elanco Animal Health-sponsored symposium last month. It was held in conjunction with the Plains Nutrition Conference in San Antonio, Texas, April 9 to 10.

“We’re dealing with a problem that’s demand driven, but we’re acting like the problem only has to do with price,” the 37-year-veteran restaurateur said. Many trade publications suggest now is the time to cut costs or focus on price. But when Hendee took 90 days to talk tableside with some of the 6,500 customers who frequent his steakhouse each week, they said otherwise.

“My customers told me they wanted a high quality eating experience, and they’re willing to pay for it,” he said.

In this economy, even the most loyal customers are not coming in as often, but when they do, it’s with heightened expectations.

“I have a theory that no one who makes a decision to lower the quality of the product they’re serving does table visits,” Hendee said.

Since 1984, the $12-million-a-year business has served the Certified Angus Beef^® (CAB^®) brand, which Hendee called “an insurance policy.” Oklahoma State research shows the chances of getting a tough strip steak with a Choice product are one in 13; with CAB, that drops to one in 50.

“Why would you raise the chance of giving a customer a bad steak by more than 300%?” he asks. Looking at the broader foodservice industry, he adds, “We consistently make value choices that are done in a panic because we don’t know what else to do.”

During nearly four decades in that industry, Hendee has learned about the other segments in the beef business. He regularly talks with packers and has visited ranches and feedlots. He said there is a parallel between what is happening in his dining room and what’s going on in cattle country.

“If you raise the quality or ensure the quality, the perceived value goes up,” he said. “It does not have to do with price alone; it’s a price-value relationship.”

While Hendee’s competitors are lowering quality and cutting corners to keep costs down, he said that short-term mentality will cost customers in the end. The same is true if cattlemen focus only on pounds, with no regard for the end product, he said.

Taste of Texas is located in one of the most highly penetrated markets in the nation for the CAB brand, yet Hendee’s sales continue to grow.

“People do not have a limit on how much CAB product they want,” he said. “They do have a limit on how much lack of quality they can put up with.”

So when the media says people want cheap, Hendee says, no, they want a good value—and those are two distinctly different concepts.

Quality in the price equation

by Miranda Reiman

Feeders bid on cattle by penciling out the highest price they can pay and still maintain a shot at profit. Packers need a certain number of cattle harvested through their plants, bought at a particular price, to stay afloat.

That cost/sales formula follows beef as it continues toward consumers.

Distributors have buying equations down to a science. They must be responsive to supply and demand, because they want to make money but their customers must thrive, too.

“On the front side we’re very strategic,” says Ron Becker, president of Stock Yards, a business unit of U.S. Foodservice, Inc.. The Phoenix, Ariz., distributor watches historical trends, anticipating beef sales so it can forward contract with packers.

“We keep our salespeople on top of what the markets are doing,” he says. That lets them keep customers updated. “We’re constantly coaching on things, like in a tough economy it’s a bad time to lower your quality.”

Sticking with top-quality beef means diners are treated to something special and will make a return visit the next time they spend those shrinking discretionary dollars.

“We’re giving customers information so they don’t get too focused on trying to save five cents a pound by lowering quality, which could hurt their customer’s chances of making a return visit.,” Becker says.

Input cost and sales price only make up part of the profit picture. Any producer who has sold on the grid understands the value of yield, or cutability. That concept is vital to distributors.

“Our job is to merchandise as much of that product as we possibly can,” Becker says, but there is fat and other trim. Since a tenderloin is not a perfect cylinder, but tapers at both ends, for example, it takes strategy to get uniformity.

“I’m not taking the whole tenderloin and cutting it end to end in 4-oz. portions. That would produce very inconsistent steaks,” he says. Instead they’ll market the smaller filets together and the center-cut filets together.

“A 1,300-pound (lb.) animal will give you about 13 lb., or 1%, of tenderloins,” says Mark Polzer, Certified Angus Beef LLC (CAB) vice president. “After you trim it down, take the tail, silver skin and strap off, you’re left with roughly 6 lb. of actually steak product.”

Those are significant yield losses, and there are similar issues with strip loins and ribeyes.

“That’s where the price goes from 85 cents on the hoof, to $5 boneless in the bag to $14 portion-cut in a vacuum sealed package to the restaurant,” Polzer explains. For example, buying a 13-lb. strip loin at $5/lb. from the packer, a distributor then cuts it and ends up with 7.8 lb. Dividing that initial cost by 7.8 lb. shows an actual product cost of $8.33/lb.

“Then there is so much overhead and labor involved. As a result, you end up with a pretty substantial cost,” he says.

Restaurants pay for those services and the expertise in managing yield.

“They’re not paying twice as much because they’re going to throw away half the product,” Becker says, noting they are able to market the “leftovers” from those cuts, too.

“That’s critically important to our profitability,” he says. “Any good meat company is doing everything they can to maximize yield.”

Restaurants also consider cost and the marketplace when setting prices.

“First and foremost, we look at competitive constraints,” says Rick Cassara, owner of John Q’s, in Cleveland, Ohio. “I can’t sell a steak for $40 when the guy down the street is selling the same steak for $25. We’re trying to keep in tune with what the market will bear.”

The analysis includes target demographics and foodservice category, Polzer says, citing five main classes of fine-dining, casual-dining, family-casual, quick-casual, and quick-service restaurants.

“That dictates your pricing structure and to some extent what types of items you purchase,” he says.

John Q’s is in the upper tier, and the price, service and quality of ambiance then trends downward within each category.

The clientele at Cassara’s downtown, fine-dining establishment come from the hotels and businesses in the district.

“We start with the cost of the plate and what we need to mark it up to cover wages and other things,” he says, noting the aim is for an overall food cost of 36% to 37%. So if an item is $30 on the menu, the raw materials probably cost around $11. The vast majority of that input price comes from the center-of-the-plate item, or the protein.

“We add approximately $2 for the cost of other items, including bread and butter, the potato or vegetable and salad,” Cassara says.

That overall percentage is a balancing act, he notes, because beef items are typically the higher food cost.

“It would not be proportionate, or I’d end up running $50 entrees for steaks that just wouldn’t sell,” he says. To counter increases there, beverages are generally marked up to a greater degree.

Polzer encourages businesses to take higher food costs on beef, as Cassara does, because they can still make more gross profit. If a $3 chicken item is priced at $9 (or 3 times the cost), there is $6 gross profit. If a beef item is $5 and listed on the menu as $12, there’s less mark up but still more profit.

“That strategy would encourage sales of the higher profit item,” he says, “plus, satisfaction is generally greater with beef.”

Food cost tends to be highest at fine dining restaurants and lowest at “fast food joints” which typically run at 50%. “They’d have a higher volume go through and the overhead as percentage of sales would be significantly lower for a quick-service restaurant,” Polzer says.

Tile versus carpet, fiberglass booths versus upholstered chairs and hundreds of other details highlight the reason for variability.

“All of those factors contribute to the cost of that ambiance,” Polzer says.

No matter where it’s served, beef can be one of the highest value items and hardest to predict.

“We’re buying and selling fresh seafood every day,” Becker says. “That makes staying on the market fairly simple. Beef, however, is much more complex because we age many of our products for more than 30 days. That means we have to be very strategic with today’s purchases in order to be on the market next month and provide our customers with attractive pricing

Restaurants have to be creative when prices are volatile.

“I can’t change my menu prices every time beef prices go up,” Cassara says. Instead John Q’s tries to feature less expensive items like short ribs or flat iron steaks.

“I’m worried about getting into an inflationary period where you have to evaluate it often,” he says. “I remember the late ’70s and early ’80s where inflation caused us to have to print menus every other month because of pricing.”

In the current economic environment, Cassara is holding prices but offering specials.

“We’re looking at things like a $30 fixed-price meal, where you get an appetizer, entrée with the starch or vegetable and then a dessert, and people seem to like that,” he says. “We’re trying to build loyalty.”

He is not backing away from quality, even though it costs more.

“I’ve never had a Certified Angus Beef^® steak come back because it was tough; maybe over-cooked or under cooked, but never because it was a bad product,” Cassara says. “That’s why we’ll use it and we’re willing to pay more for the ultra-consistency.”

Becker says Stock Yards has been able to maintain sales during this period and he credits a similar approach.

“We want to be known as the company that has fantastic product quality and consistent workmanship that our customers can count on,” he says.

That’s not so different from the quality focus among producers who want repeat buyers for their calves, or feedlots hoping to attract relatively higher bids from packers.

Behind the menu price

By Miranda Reiman

Farm and ranch freezers are often full of home-raised beef, yet producer families still enjoy the classic steakhouse experience now and again.

With a quick scan of the menu and some cowboy math, most producers figure the New York strip list price at a hefty premium to the weekly salebarn reports for beef on the hoof.

That means either A, someone in the restaurant business is getting rich or B, it takes plenty of work and capital to get beef to the consumer.

“The reality is everybody is taking a little piece of the pie all along the way,” says Mark Polzer, vice president of Certified Angus Beef LLC (CAB). “Product doesn’t go right from the packer to the plate; there are many important steps in between.”

Rick Cassara owns John Q’s, an upscale steakhouse in downtown Cleveland, Ohio.

“Theoretically you could go directly to the packers, but they would have to provide a whole host of services to me that a distributor does,” Cassara says. “One is that he cuts the steaks for me. I don’t have a butcher here and don’t want to get into that cost.” The distributor also packages the steaks to allow for some shelf life.

Another bonus is advice and market support.

“We’re more consultants than order takers,” says Ron Becker, president of Stock Yards Meat Co. of Phoenix, Ariz., a business unit of U.S. Foodservice Inc.. “We’re out there face-to-face with the customers talking about what they’re buying every single week.”

Cassara’s Midwestern-based distributor “knows the marketplace,” giving him information on price trends and new products.

The same is true in the Southwest, Becker confirms: “Really our focus is on helping our customers make more money.”

That starts with purchasing, then processing and finally service.

“We’re not just buying from anybody who comes out of the woodwork,” Becker says. Stock Yards constantly negotiates and works closely with certain packers.

“When the product hits our door, the quality control process starts,” he says. The company monitors temperatures, inspects delivery trucks and assigns tracking numbers. “We have full traceability on every case.”

The beef is aged, typically 14 to 30 days for added flavor and tenderness.

“At any given time we have about a month’s worth of inventory aging, so that ties up a significant amount of money,” Becker says.

Customers can specially request certain brands, sizes or even product sourced from a particular packer. Stock Yards is one of the leading volume distributors licensed to sell the Certified Angus Beef ^®(CAB^®) brand in the Southwest.

“That’s why on the receiving side we have to have every single case accounted for,” Becker says.

The details keep up as subprimals enter the production area, where beef is trimmed, cut, marinated or diced for accounts.

“We make each order as they come in—to do that you have to have a high level of productivity,” Becker says, crediting their people and equipment.

Customers can place orders up until 5:30 p.m. for delivery the next morning.

“They can get all the way through their lunch and have a feel for what they’re going to need the next day, but there are some expenses in that,” he says. “We’re running multiple shifts and smaller trucks to deliver that aggressive service platform.”

Becker always has one underlying concern that trumps all others: “While all that’s going on you have to be impeccable in food safety and people safety. It doesn’t matter how busy you get, those are non-negotiable.”

That vigilance takes extra training, labor, time and money.

Part of the difference in what a packer charges and what a restaurant pays is found in the cost of handling the product, from warehouse workers and cutters to packagers and truck drivers.

“We can’t forget about the overhead for that manufacturer’s plant, or the cost of buying new trucks and putting gas in them,” Polzer says. “We can’t forget about the cost of vacuum-packing film, knives and mesh gloves.”

Liability insurance, salaries for the sales force and all the related staff also must come out of the end profit, along with the ever-growing problem of “bad debt” or customers unable to pay their bills.

“The National Restaurant Association estimates 17,000 restaurants may go out of business this year, so accounts receivable is another cost,” Polzer says. “With all of those factors, a foodservice distributor would be happy to come out with 3% to 5% net profit at the end of the year.”

Restaurants generally work on similar margins.

“The cost of doing business in a restaurant is not just the plate of food and what I’m getting for it,” Cassara says. “That would be like if I had a stand outside and I grilled the steak myself and handed it to you.”

Polzer says three main factors impact expenses at foodservice venues: overhead, labor and food costs.

“What are the costs to operate your home?” he asks. “They’re going to be pretty similar, but magnified by the scope and size of the restaurant.”

Those prices can increase with a commitment to providing a special “atmosphere” for a desirable eating experience.

“Outfitting the fine-dining establishment in both the front and the back of the house would be considerably more,” Polzer says. For example, fast-food locations have a couple of flat grills, fryers and microwaves, versus the white-tablecloth category with its gas ovens, stoves, broilers and stock pots.

“It’s just a much more elaborate set of equipment,” he says. That translates to a need for more highly skilled workers, too.

“You’ve got to hire a chef, a sous chef (assistant), a dishwasher and a bus boy,” Polzer says. “Then your management team and wait staff to take care of the front of the house.”

Casual observers may not realize it, but those people are part of the fixed expense, Cassara says.

“You have to have your staff, and if nobody comes in, you still have to pay them,” he says. “If people do come in, hopefully you have enough staff to provide good service – because if you don’t, people aren’t coming back.”

Experienced kitchen help can also be an asset in managing food costs.

“You need to have skilled people who know how to take care of the product,” Cassara says. “If you burn a steak, it costs me a lot of money.”

Typically, what a diner sees on the menu is marked up two to three times what the raw products cost coming in, just to approximate that 5% projected profit.

“This is one of the few businesses where we not only sell the finished product, but we manufacture it as well,” Cassara says. “We get it as raw goods at the back door, we make it in the kitchen and then we bring it out and sell it on a retail basis. It takes a lot of capital to do all those things.”

It also takes a lot of old-fashioned hard work—not the get-rich-quick business often imagined at a first glance at menu prices.