KPMG Case Study Competition Preliminary Round Perdue Farms Inc.

Submitted by:

Luke Barber Kendra Pedersen Misha Wilkin

Table of Contents Body EXECUTIVE SUMMARY.................................................................................................2 International Operations ......................................................................................................3 Advantages ......................................................................................................................4 Disadvantages ..................................................................................................................5 Retail Operations .................................................................................................................6 Food Service ........................................................................................................................8 Recommendations..............................................................................................................10 Appendix Appendix 1.........................................................................................................................12 Appendix 2.........................................................................................................................13 Appendix 3.........................................................................................................................14 Appendix 4.........................................................................................................................15 Works Cited .......................................................................................................................16 Works Consulted ...............................................................................................................17

EXECUTIVE SUMMARY Purpose of the Report The purpose of the report is to (1) provide a detailed analysis of Perdue Farms as a chicken producer, (2) research the industry and forecast opportunities or threats that affect Perdue Farms, and (3) provide recommendations that respond to twenty first century challenges. Perdue Farms Inc. Analysis Summary The results of the analysis show that Perdue Farms Incorporated is currently a strong force in the chicken production industry. Perdue Farms is a leads the industry in environmental, biological, and genetic research as well as Total Quality Management. Perdue Farms perform well from an internal point of view, but the analysis indicates that Perdue Farms is not adequately responding to external opportunities and threats. Perdue Farms can strengthen its competitive position by expanding international operations into Mexico and China, forming Strategic Partnerships with retail and foodservice providers, and optimizing their information and distributions systems. Recommendations The recommendations to provide the seamless delivery of quality products efficiently and effectively are to (1) form an international management team and expand international operations in China and purchase many small Mexican producers, which will further consolidate the industry. (2) Enter in strategic partnerships with food service providers to expand their market share in the food service industry. (3) Establish strategic partnerships with national supermarket chains. (4) Create a seamless distribution of goods with all customers using information technology and strategically located processing facilities.

Introduction The scope of Perdue Farms Inc. project is to understand the needs and wants of the end consumers and provide the best quality products to that consumer in a fashion that is seamless. Future growth will depend on selecting processing facilities that enable the company to reduce costs in the distribution aspect of business. In addition, choosing strategic relationships with retail and food service industries is essential to gain the benefits of economies of scale. This report begins with analysis of (1) the international opportunities for production facilities to reduce costs, (2) the retail operations and how to capitalize on market opportunities, and (3) the food services industry and changing consumer preferences. The report concludes with recommended course of actions to achieve the companys forward-looking vision to be the leading quality food company with $20 billion in sales in 2020.

International Operations With our new global economy or One World as some call it, we have seen major changes in the way businesses operate. Aside from technological advances in business, arguably, one of the most significant changes in business is a phenomenon known as, as author Alan Tonelson puts it, the race to the bottom. The book, The Race to the Bottom describes the way multinational Corporations are taking advantage of inexpensive labour in developing economies. Using inexpensive labour in new regions not only reduces costs for the par ent company, it gives access to new geographic markets. The parent company can inject capital and technological resources into the emerging economies to promote positive economic growth. Perdue Farms is not reacting to external opportunities, such as developing the Japanese market and avoiding taxes, and import tariffs, to maximize profitability. (Appendix 2) Perdue Farms is in a position to access new economies and lower its cost in various ways. Perdue could continue its North American operations and ship frozen products to Countries such as China, Russia, Ukraine, and Japan, or it could establish operations in a developing economy.

To do this Perdue needs to overcome one of its internal weaknesses no International Management Team (Appendix 1) has been established at Perdue. Perdue needs a team that understands and appreciates the needs and wants of different cultures and a team that can formulate a marketing plan to target the different regions. However, this is not without risk. The following section analyzes the advantages and disadvantages of pursuing international. Advantages Market research by the Economic Research Service Department of the US Department of Agriculture (ERS-USDA) show Asia, Eastern Europe, Russia 1 and Mexico will exhibit large increases in meat imports over a ten-year period. This is due in part to a shift in preference to chicken over beef and pork, and to population growth. (ERS-USDA, 2002) The developing world is facing an unprecedented change to much more animal protein based human diets. The first decades of the 21st century will thus witness the next human food revolution. (FAO) Other studies by the USDA show that China cannot currently sustain the growing demand for chicken, thus increasing the need to rely on imports. This shift in preference and increase in demand presents a large opportunity for Perdue Farms. Perdue has already set up a partnership with Jiang Nan Feng (JNF) to eliminate risk and understand cultural differences when producing in a foreign country. This is a very prudent first step for Perdue to be successful both internationally and domestically for many reasons. Firstly, the strong US dollar represents opportunities for a newly emerging force in Broiler production. Brazil is expected to threaten US exports because it can undercut the prices of US producers (show how). Having a strong production facility in China will offset the losses that Brazil creates. Additionally, Perdue stays more price-competitive by eliminating overseas shipping costs, new freezing facilities, and import taxes. (Perdue must pursue a cost minimizing strategy because the price of chicken adjusted for inflation is falling.) Secondly, in order to maximize benefits on the

It should be noted that Russias imports will increase at a declining rate and growth is not as significant as previous years.

international operations, Perdue must exhibit control over these operations to maintain its high quality standards and practices. This includes an advanced and centralized distribution centre that will optimize efficiency, eliminate overseas shipping costs, and improve delivery to Japan, Ukraine and Russia. Thirdly, Shanghai is geographically appropriate for exporting to Japan. Japan represents a growing market that appreciates quality and is receptive to of branding. Finally, having an operation abroad will alleviate some of the environmental concerns in Maryland. There will be significantly less demand from these operations to supply international consumers and therefore there will be less waste from chicken production. To further alleviate the US environmental concerns, a second international opportunity looks promising for Perdue Farms. Currently, Mexico is having trouble competing on price with larger US producers such as Perdue. Mexico has a handful of large companies and several hundred small companies that over the next five years will need to consolidate or group together to compete, said Bill Roenick, Vice President of the National Chicken Council, in the US. Perdue can purchase many of these smaller producers and amalgamate them. This will create greater economies of scale and make these operations more prof itable. This investment is attractive because Perdue has access to capital resources, technology, and knowledge that the Mexican producers currently do not have. Disadvantages Investing in international markets is not without social, economic and societal consequences. On the social side, one can assume that there will be some negative feelings toward using Mexican and Chinese production facilities instead of producing locally. External customers may view international expansion as a threat to American jobs. Additionally, internal customers (associates) may have anxiety about losing their job. An economic factor affecting American operations is the pressure that the Russian government is putting on the US. The Russian Government said it would limit all global poultry imports next year to 1.05 million metric tons. This is down from 1.115 million metric tons in 2001 (The Miami Herald, 2002).

Perdue will not be as susceptible to the cutbacks in the Russian market if it pursues international operations and develops new markets such as Japan. Retail Operations Domestic retail sales in 2000 accounted for 60% of Perdue Farms profits, thus a very substantial area of production. On a national scope, retail sales have declined to a growth rate of 5% annually in comparison to other areas of poultry distribution and sales. Because the growth of the domestic retail segment is becoming stagnant, an extensive amount of focus and investment should not be placed in this area. Retail sales still account for a significant portion of profit, therefore, it should be maintained. In order to maintain retail sales amongst an evolving society three points need to be focused on: (1) maintaining high quality products efficiently, (2) establishing strategic partnerships with national supermarket chains, and (3) implementing convenience products to meet the evolving consumer markets. Perdue Farms fosters the company image and standard of high quality in all areas. Quality is a capstone to their marketing approach and has become the image differentiating Perdue Farm from their competitors. The attribute based brand identity is a key point to be held congruent, as a change in this high quality image could create consumer confusion as they have come to expect high quality poultry. The trade off resulting from dealing with large supermarket chains is receiving greater economies of scales, but means selling Perdue Farms products for a slightly lower price. Forming strategic partnerships with national supermarket chains will result in higher volume of sales offsetting the costs incurred to maintain the quality of Perdues products. The establishment of strategic partnerships with national supermarket chains is of utmost importance in order to ensure Perdue Farms survival in such a saturated market. It is essential to gain an alliance with a supermarket chain that spans nationally and is at or near the top of its industry for providing quality products, as rapid consolidation in the industry means only the leaders survive. Industry leaders demand large quantities of products from their supplier

at a moments notice. Ensuring an adequate supply for retailers is manageable by Perdue Farms due to their production capabilities and their increasing expansion and extensive investment in Supply Chain Management and Enterprise Resource Planning. As statistics show 33% of supermarket shoppers are classified as Economizers, 39% Carefree Spenders and 28% Time Challenged (Food Marketing Institute, 2002). Due to the nature and quality of Perdue Farms products, Perdue should target both the segments of Carefree Spenders and Time Challenged consumers. By offering features that target both of these markets, supermarket chains will see the advantage of gaining Perdue Farms as a regular provider of Chicken products. The Carefree Spenders segment results from a changing demographic shift towards health and nutrition. Approximately 50% of all supermarket consumers are concerned with nutrition (Food Marketing Institute, 2002). This concern for nutrition can be linked to quality rather than price perception of consumers. A Carefree Spender can be characterized as willing to pay the extra dollar for a superior product. Thus, Perdue Farms chicken fits perfectly into this segment as they portray the image of a superior product for the consumers. Time Challenged consumers are comprised of the emerging generations. It is of vital importance to target and gain the loyalty of these consumers as they are at the beginning of their consumer lifetime. Within this generation is the emerging desire for convenience, as well as selection. The average household eats at home three days a week and only 19% say they plan for those meals (Food Marketing Institute, 2002). A frozen ready-to-eat product satisfies the need for convenience therefore Perdue Farms needs to allocate production and research into convenience products . Partnerships with higher quality convenience food manufactures need to be established to developed frozen meals that display the Perdue name to reinforce a consumers demand for convenient quality products.

Food Service Currently the food service sector consists of 50% of the total domestic poultry sales with 20% of Perdues revenues generated from this sector. The potential for growth in this sector is on the rise with an annual growth rate of 12% for chicken and turkey sales domestically. This growth stems from growing concern of health conscience eating habits of North Americans. Poultry is leaner meat than beef and pork and chicken accommodates the demand for healthier products. To approach this market Perdue Farms Inc. must enter into long-term strategic partnerships with established food service providers to grow this market, thus generating profit and reducing costs for both Perdue and the food service providers. Perdue has been successful in branding their chicken creating a positive consumer awareness of Perdues chicken and turkey products. A strategy has been developed to facilitate the growth of Perdue in the food service sector. This strategy is based on three competitive advantages: One, the strong Perdue brand and history of quality and consistency of the Perdue products. Two, the potential to utilize the sophisticated information system developed to streamline shipping, invoicing and reporting, while providing a high level of customer service. Three, delivery of an antibiotic free and diverse product line that will include: fresh and frozen chicken parts (wings, breasts, and legs), whole chickens (broilers), ground chicken and turkey, turkey sausages, delicatessen chicken, whole turkeys, chicken and turkey burgers and diced chicken. The Perdue name will be used in combination with chicken and turkey dishes using the brand awareness of the consumer to build the partnerships between Perdue and food service providers. The Perdue brand will be included on restaurant menus reinforcing the consumers demand for quality poultry products. Specific food service products will include the highest quality skinless boneless chicken and turkey breasts for specially selected for restaurants. These products will target high volume franchises harnessing the consumer brand awareness of Perdue chicken products while increasing the distribution of Perdue food service products.

Industrial food service is an opportunity Perdue must harness. The large volume of food provided by institutions like hospitals, schools and jails is a lucrative market to pursue. Products supplied to these institutions include all of the Perdue food service line. The demand for deli meats, cooked and un-cooked chicken parts, whole chickens, turkeys for Thanksgiving, and ground chicken come from institutions that produce meals on a large scale. The large orders needed by institutional food service providers will generate substantial revenue for Perdues food service division. The $40 million information system implemented by Perdue enables companies to interact seamlessly. Distribution and supply and demand schedules will be met more efficiently providing a value added service to food service customers. Inventory ordering can be done easily using the sophisticated information system. The information system benefits large and small food service partners. Inventory systems for larger companies will be linked to Perdues food service distribution sys tem cutting down the processing time of request for Perdue food service products. Smaller companies can place orders using the Perdue food service portal. The idea behind this portal is that companies become registered to place orders online to obtain Perdue food service products. Internet ordering will eliminate previous problems with conventional ordering of products from Perdue, streamlining the ordering process. The benefits for Perdue are the information gained and stored. Perdue can track trends, popular food service products, and generate reports to analyze sales trends targeting the demand for specific products and diversifying product lines as needed. A central processing plant will enable Perdue to consolidate domestic food service product manufacturing. The rational of this approach is to ensure quality products are generated at the food service processing plants. Quality is Perdues benchmark and this cannot be compromised by outsourcing the production of food service products. The processing and distribution center must be selected on the criteria of the most efficient geographic location for

deliveries. This location will be located in a centralized area to meet the distribution needs of Perdues food service distribution. Shipping must be conducted from one central distribution center to accommodate the growing demand for Perdue food service products. Logistics of delivery schedules can be controlled by the information system. The shipping of the products will be centralized to ease the logistics issues of distribution, consolidating the order making process for the food service customers and storing information in a central location. With this food service strategy, Perdue Farms Inc. can expect to expand their market share by continually meeting and exceeding the customers needs in food service product supply.

Recommendations

1.

The most important step in order for Perdue to achieve its goals for the year 2020 is to react to changing global economic conditions . International operations in China and Mexico address the 2020 strategy because it is forward looking, anticipates customers needs, promotes multiple brands worldwide and pushes the company into a position where it can yield industry leading profits. An International Management Team increase International sales, and oversee the production to ensure Perdue quality standards, working conditions and goal are a benchmark for success.

2.

Perdue must enter in strategic partnerships with food service providers to expand their market share in the food service industry. Perdue will supply a variety of chicken products to meet the needs of chain style restaurants, and industrial food service providers.

3.

The establishment of strategic partnerships with national supermarket chains is of key importance for Perdue Farms in order to maintain its retail sales in such a saturated market. By establishing strategic partnerships, Perdue Farms will gain greater sales

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volumes and a guaranteed retail consumer market for their poultry products. Perdue Farms also needs to allocate production and research into convenience products for retail in order to satisfy evolving demographic trends.

4.

The Perdue information system must be harnessed to create a seamless distribution network in combination with a centralized distribution center that will ensure the timeliness of deliveries and enable the tracking of orders while building relationships with partners.

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Appendix 1
Internal Factor Evaluation Matrix for Perdue Farms

Key Internal Factors Strengths Quality Product Management Domestic Marketing Research and Development Large client base Employee First Program Efficiency Environmental Waste management Distribution Weaknesses International Management Team Executives have been brought up through the ranks (Lack of formal education) International Marketing Too many Operations - Lack of focus Executives are not major shareholders Centralized Decision making Total

Weight Rating Weighted score 0.15 0.05 0.025 0.05 0.025 0.05 0.05 0.05 0.05 4 3 3 3 2 3 3 3 3 0.6 0.15 0.075 0.15 0.05 0.15 0.15 0.15 0.15

0.1 0.05 0.1 0.1 0.05 0.1 1.000

1 2 2 2 1 2

0.1 0.1 0.2 0.2 0.05 0.2 2.475

The Internal Factor Evaluation matrix quantifies and evaluates the strengths and weaknesses in various aspects of business. Quantifying the results requires intuitive judgement and knowledge of what aspects are important to the business. The weight column indicates the importance of the strength or weakness. The range is 0.0 (slim impact on operations) to 1.0. (Large impact on operation) The rating column evaluates how well Perdue Farms is strong or weak at providing the service. A numeric value of 1 is a major weakness, 2 is a minor weakness, 3 is a minor strength and 4 is a major strength. The total of the weighted score indicates the strength that lies within Perdue Farms. The total weighted averages can range from 1.0 (Very low internal strength) to 4.0 (Very strong internal strength). Perdue Farm's rating is 2.475, which indicates that the compa ny is average in its internal strength. One of the major drawbacks for Perdue Farms at this time is not having an International Management team, hence the rating of 1 (Major weakness). Secondly, a new international marketing plan/ campaign is essential in order for Perdue Farms to strengthen its international advantage.

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Appendix 2
External Factor Evaluation Matrix for Perdue Farms

Key External Factors Weight Rating Weighted score Opportunities Chicken is gaining larger share of total meat consumption (preference) 0.1 3 0.3 International demand for chicken is growing faster as economies wealth grows 0.15 3 0.45 Increasing population 0.05 2 0.1 0.1 2 0.2 Avoidance of taxes, import tariffs and duties into Asia China cannot sustain increasing consumption levels 0.05 3 0.15 Opportunity to control distribution channels 0.025 2 0.05 0.1 2 0.2 Japan will pay top dollar for quality products Access to new markets 0.025 3 0.075 Threats Consumers disposable income spent on chicken decreasing Government regulation impeding importing meats to US Strong US dollar affecting exports Brazil is becoming a strong producer Entry of new competition Russia's unstable economy Russia's quota on import meats Distibution Channels is Asia and Western Europe

0.05 0.05 0.05 0.05 0.025 0.05 0.1 0.025 Total 1.00

2 2 2 2 2 2 2 2

0.1 0.1 0.1 0.1 0.05 0.1 0.2 0.05 2.325

The external factor evaluation matrix quantifies outside environmental opportunities and threats that may affect the competitive advantages and market share. If these conditions are ignored, the company puts itself at risk of losing customers and profits. The weight column indicates the importance of the opportunity or threat. The range is 0.0 (Not important) to 1.0. (Very important) The rating column evaluates if Perdue Farms is effective in its current strategy. A numeric value of 1 is a poor, 2 is a average, 3 is above average and 4 is superior. The total of the weighted score indicates the strength of Perdue Farm's current strategy. The total weighted averages can range from 1.0 (Not responding to external conditions) to 4.0 (Excellent response to external conditions). The average total weighted score is 2.5 and Perdue Farms rating of 2.325 indicates that they are below average in responding to external opportunities and threats.

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Appendix 3

Most research shows that increases in broiler consumption are due to the increased preference to leaner, healthier meats. Poultry production is rising but at a declining rate because of the maturation of the industry. The trend toward larger and more commercialized livestock systems continues throughout the baseline period; efficiency gains allow production to expand while real prices generally decline. Economies of scale and integration (both vertical and horizontal) contribute to the improving efficiency of poultry production, however gains will not be as great as technology advancements slow. Source: Economic Research Service US Department of Agriculture. (2002) Agricultural

Baseline Projections: Summary of Projections, 2002-2011. Retrieved on February 11, 2003, from http://www.ers.usda.gov/Briefing/baseline/uslstock.htm

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Appendix 4

U.S. meat exports rise throughout the baseline period, reflecting improved global economic growth and rising demand for meats.

Source: Economic Research Service US Department of Agriculture. (2002) Agricultural

Baseline Projections: Summary of Projections, 2002-2011. Retrieved on February 11, 2003, from
http://www.ers.usda.gov/Briefing/baseline/uslstock.htm

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Kreiter, Marcella C. (May 5, 2002). Value, health foods top consumer trends. Chicago: United Press International. Retrieved on the World Wide Web February 12, 2003: http://www.washtimes.com/upi-breaking/05052002-012119-4611r.htm Pethel, B. (2002) US chicken Producers Seek Deal With Mexico. Bloomberg News. Retrieved on the World Wide Web on February 11, 2003 http://www.miami.com/mld/miamiherald/business/international/latin_america/4843441.htm

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Reynolds, M (2002) Poultry ban eased by Russia . Los Angeles Times Retrieved on February 11, 2003, from http://carper.senate.gov/newspaper/TheDelawareStateNewsPoultrybaneasedbyRussia.htm

Young, E., Khoo, M. (2002) UCS: Pilgrim's Pride Industry Laggard on Antibiotic Use Major Poultry Producers Go Cold Turkey, Pilgrim's Pride Fails to Follow. Retrieved on February 11, 2003, from http://www.commondreams.org/news2002/0523-10.htm

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