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Unformatted text preview: This dissertation has been microfilmed exactly ap received 69 - 1 0 , 6 5 3 CARLEY, Cameron, 1927AN ANALYSIS OF PROFITABILITY IN THE MEAT PACKING INDUSTRY. University of Illinois, Ph.D., 1968 Business Administration University Microfilms, Inc., Ann Arbor, Michigan AN ANALYSIS OF PROFITABILITY IN THE MEAT PACKING INDUSTRY BY CAMERON CARLEY B.S., University of Illinois, 1951 M.B.A , Northwestern University, 1954 THESIS Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Business in the Graduate College of the University of Illinois, 1968 Urbana, Illinois UNIVERSITY OF ILLINOIS THE GRADUATE COLLEGE SEPTEMBER, 1968 I HEREBY RECOMMEND THAT THE THESIS PREPARED UNDER MY CAMERON C A R L E Y SUPERVISION BY- KXfTTTT.RD AN ANALYSIS O F P R O F I T A B I L I T Y IN T H E M E A T PACKING INDUSTRY BE ACCEPTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF_ DOCTOR O F P H I L O S O P H Y IN BUSINESS In Charge of Thesis fip Jp k/L<U^ Head of Department Recommendation concurred inf (^zZ?'7&i^tSfysutt&eZ^L Committee on Final Examination! t Required for doctor's degree but not for master's DS17 Ill ACKNOWLEDGMENT The successful writing of this study depended upon the i n t e r e s t and advice of s e v e r a l people. P r o f e s s o r Paul M. Van A r s d e l l offered constant guidance and encouragement. Professor Paul M. Dauten expressed particular interest in the study, and gave unsparingly of his time in making suggestions. P r o f e s s o r s Dwight P . F l a n d e r s . J a m e s W. Leonard, and Robert V. Mitchell also offered constructive advice and comments. D r . J o h n W . Allen, Director of Sales and Merchandising, American Meat Institute, provided a generous amount of time, a s s i s t a n c e , and i n t e r e s t to the writer on all aspects of the packing industry. The following people gave valuable assistance by answering a multitude of questions, and the information to some extent has been incorporated into i" Chapter Six. These were Mr, Willard Arant, Corporate Economist, Swift & Company, D r . Burdette C. Breidenstein, Manager. F r e s h Meat Merchandising, Wilson & Co., Inc., M r . Lloyd J . Kurkowski, Vice P r e s i d e n t , John M o r r e l l & Co., M r . Russell W. Ritz, Executive Vice President, Marketing, The Rath Packing Company. M r . Wally Jones, Investment R e s e a r c h Department, The Northern T r u s t Company, furnished valuable information from the view of someone outside the packing industry. Acknowledgment is given to Roberta W. Carley, the w r i t e r ' s parent, for her helpfulness throughout his campus c a r e e r . -':';""rr'^' ~"«^ 1 ST'VK s^zy IV TABLE OF CONTENTS Page ACKNOWLEDGMENT. . LIST OF TABLES 0 0 0 in o o o o o o o u • o O 0 O « VI 9 LIST OF CHARTS Chapter I. INTRODUCTION . 1 The P u r p o s e of the Study Hypothesis . . . . . . Scope and Limitations of the Study . Sources of the Data. . . . . . . . Key Definitions . . . . . . . . . Companies Considered in the Study. 0 II. 0 e • o 27 HISTORY OF THE MEAT PACKING INDUSTRY E a r l y Packing Company L e a d e r s . Growth of the Industry . . . . . Governmental Acts and Regulation S u m m a r y of Chapter . . . . . . III. 1 3 6 9 10 Zl 0 . . . . . . . . 0 0 • 0 o o e o 0 0 0 0 0 0 0 87 SOME ECONOMIC ASPECTS OF THE INDUSTRY. The N a t u r e of the Industry . „ . . C h a r a c t e r i s t i c s of Meat Production P r o b l e m s of Cost Analysis . . . . The Question of Plant Location . . A Consideration of Labor Relations Competition and Ease of Entry. . . E l a s t i c i t y of Demand . . . . . . . Foreign Tnade . . . . . . . . . . S u m m a r y of Chapter . . . . . . . 27 36 58 85 87 89 a o o o a o 0 0 o o 0 • 0 105 117 12 7 152167 174 180 IV. CONSTRAINTS ON PROFITABILITY IN THE INDUSTRY. . 182 Extent of the Problem Conjecture on the Turning Point in Profitability . . . . The Difficulty A View from Three Perspectives . . . Summary of Chapter . 182 190 193 203 e o o • o o o o O O O 0 Chapter Page V. A FINANCIAL ANALYSIS OF NINE MEAT PACKERS 207 Procedure . . . 207 Financial C h a r a c t e r i s t i c s of the Packing Industry 217 Financing of Nine Meat Packing Companies. 223 Combined Statistics . 300 Cost of Capital to the Nine Companies 3 04 Considerations of Financing in the Packing Industry. . . . 309 Conclusion to Financial Analysis . . . . . . . . . . . . 316 Summary of C h a p t e r . . . . . . . . . . . . . . . . . . 320 VI. VII. FUTURE PROSPECTS FOR THE INDUSTRY Consumption Imports and E x p o r t s . Financing . . . . . . . . . . . . . . . . . . . . . . Management The Profit Consideration. Summary of C h a p t e r . . . . . . . . . . . . . . . . . . 322 331 334 348 364 374 SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . 376 Summary . . . . . . . . . . . . . . . . . . . . . . Validity of the Hypotheses . . . . . . . . . . . . . . . Conclusion 376 382 386 BIBLIOGRAPHY jTX X ^ X ^ J l i I N ±J X^\. VITA 321 . 0 . . . . . . . . . . . . . . . . . . . . . . 0 . . . . D . o e e . o o . 0 0 0 0 0 0 . = 390 . . . J / O 457 VI LIST OF TABLES Table Page 1 P e r Capita United States Meat Consumption . 2 Date and Place of Incorporation of the Selected Nine Companies and their rank in the 500 Largest U . S . Industrial Corporations . . . . . . . . . . . . . . . . 23 3 The Diversification of the Meat Packing Industry 24 4 Approximate P e r c e n t of Sales Derived from Meat Operations for the Year 1965, and Concentration of Meat Product 26 5 Proportion of Meat Animals Slaughtered by the Five — Large Companies and by other Interstate Slaughterers, J. 7 J. O 6 7 8 2 o a e o o o o o o e o « o o o o « * a o e o o G *-* / Rated Capacity of F e d e r a l l y Inspected Cattle and Hog Slaughtering Plants v s . P e a k Weekly Slaughter, for Specified P e r i o d s , 1965. . . . . . . . . . . . . . . . 96 Meat Production and P e r Capita Consumption of Meat, by C l a s s , United States , 1950 to date . . . . . . . . . . 128 Manufacturing Output and Productivity Ratios Key Y e a r s , 1899-1954(1929= 100). . . . . . . . . . . 141 9 Output P e r Manhour in Manufacturing Industries . . . . . 143 10 Average Differences of Wages Between Plants . . . . . . 152 11 P e r c e n t of C o m m e r c i a l Slaughter by Four F i r m s 156 12 Employees in Meat Packing, Processing 1947, 1954, 1958 and 1963. . P e r c e n t of U.S. C o m m e r c i a l Meat Production accounted for by Largest Companies in 1963, 1947-64 . 13 14 15 . . . . 157 158 Types of Retail Promotional Plans used by Meat P a c k e r s and P r o c e s s o r s , 1964. . . . . . . . . . . 165 Sales and Advertising Expenditures , 1965. . . . . . . . 166 7 a o»r*~ , .." -' J I-v ^ * 1 *-"i „' vu Table 16 Page P e r C a p i t a C o n s u m p t i o n of F o o d and R e a l D i s p o s a b l e I n c o m e , 1950-65 1950 = 100 . 172 17 Y e a r l y R e q u i r e m e n t of M e a t for a F a m i l y of Six 174 18 U . S . E x p o r t s of L i v e s t o c k P r o d u c t s , A v e r a g e 1 9 5 6 - 6 0 , A n n u a l 1961-65 177 U . S . I m p o r t s of M e a t and M e a t P r o d u c t s ( c a r c a s s w e i g h t e q u i v a l e n t ) A v e r a g e 1956-60, A n n u a l 1961-65 . . . . . 177 20 A m o u n t of P r o f i t E a r n e d , S e l e c t e d C o m p a n i e s , 1965 . „ 184 21 C o m p a n i e s (500 R a n k ) W i t h L o s s E x p e r i e n c e in 1965 . . 185 22 M e a t I n d u s t r y S a l e s A v e r a g e of T o t a l F o o d and B e v e r a g e S a l e s in S e l e c t e d Y e a r s . 2 00 23 Spot M a r k e t P r i c e s , 222 24 L o n g - t e r m D e b t of Swift & C o m p a n y 1 9 5 6 - 1 9 6 5 . . 228 25 A n n u a l E a r n i n g s on Opening S t o c k h o l d e r s ' E q u i t y , (000 o m i t t e d ) Swift & C o m p a n y 1 9 5 8 - 1 9 6 5 . . . . 229 S u g g e s t e d R a t i o G r o u p i n g f o r A n a l y s i s of Nine Packing Companies . . . . 231 0 19 0 0 0 0 o •> 1965-1966 ( 1 9 5 7 - 1 9 5 9 = 100). c o o 240 27 L o n g - t e r m D e b t of A r m o u r and C o m p a n y 1 9 5 6 - 1 9 6 5 . 28 Annual E a r n i n g s on Opening S t o c k h o l d e r s ' E q u i t y , (000 o m i t t e d ) A r m o u r and C o m p a n y 1958-1965 . . . 243 A n n u a l E a r n i n g s on O p e n i n g S t o c k h o l d e r s ' E q u i t y , (000 o m i t t e d ) W i l s o n & C o . , I n c . 1 9 5 8 - 1 9 6 5 . . . . 251 30 L o n g - t e r m D e b t of W i l s o n & C o . , I n c . 1956- 1965. . . 252 31 Individual Company P e r Share E a r n i n g s , 2 56 32 C o m b i n e d F i n a n c i a l R e s u l t s of Swift, A r m o u r and W i l s o n , 1956-1965 . 257 A n n u a l E a r n i n g s on Opening S t o c k h o l d e r s ' E q u i t y , (000 o m i t t e d ) J o h n M o r r e l l & C o . 1958-1965 . . . 263 29 #f. * 0 o 26 0 33 1956-1965. O D O Vlll Table _ Page 34 Long-term Debt of John M o r r e l l & Co. 1956-1965. . . . . 264 35 Long-term Debt of Cudahy Company 1956-1965 . . . . . . 271 36 Annual Earnings on Opening Stockholders' Equity, (000 omitted) Cudahy Company 1958-1965. . . . . . . . . 272 37 Long-term Debt of Geo. A. Hormel & Company 1956-1965 . 277 38 Annual Earnings on Opening Stockholders' Equity, (000 omitted) Geo. A. H o r m e l & Company 1958-1965. . . . P e r c e n t of Net Income to Net Sales, and Additions to P r o p e r t i e s , 1956-1965 Oscar Mayer & Co. . . . . . . . . 278 285 Annual Earnings on Opening Stockholders' Equity, (000 omitted) Oscar Mayer & Co. 1958-1965 . . . . . . . 286 39 40 41 Annual Earnings on Opening Stockholders' Equity, (000 omitted) Hygrade Food Products Corporation 1 7 J O " 1 / " J 42 43 44 45 46 47 48 « a o a a o o • o o o o o o o o o o o o o Long-term Debt of Hygrade Food Products Corporation 1956-1965. . . . . . . . . . . . . . . . . . . . . o o .T d / V 291 Annual Earnings on Opening Stockholders' Equity, (000 omitted) The Rath Packing Company 1958-1965 . . . . 297 Average Net Sales of the Nine Meat Packing Companies (thousand dollars) 1956-1965. 301 Average Net Corporate Size of the Nine Meat Packing Companies (thousand dollars) 1956-1965 . . . . . . . . . 302 Average Net Corporate Income of the Nine Meat Packing Companies (thousand dollars) 1956-1965 . . . . . . . . . 303 Sales and Net Earnings of 27 Individual Corporations whose 1965 Net Income Exceeded 122 Million Dollars (ranked according to earnings in 1965) . . . . . . . . . . 305 Cash Dividend Yield, P r i c e - E a r n i n g s Ratio and Average P r i c e of Stock for 24 Industrial Corporations in the Food Industry--1965 307 IX Table 49 50 51 Page P e r c e n t of Cash Dividend Yield and P r i c e - E a r n i n g s Ratio for Nine Meat Packing CompaniesT-1965 308 Thirteen Ratios of Financial Analysis for P a c k e r s of Meats and P r o v i s i o n s for the Year 1965 318 Eight Ratios for All Manufacturing Corporations Except Newspapers, Fourth Quarter, 1965 and for Nine Meat Packing F i r m s , 1965 . . . . . . . . . . . . . . . . . 319 J X LIST OF CHARTS CHART Page A Meat Distribution Channels, United S t a t e s , B Marketing and P r o c e s s i n g Costs for Meat A r e Lower than for Most Other Foods . . C 1954 123 . 124 Production of Beef, Veal, Pork, Lamb and Mutton in the U . S . , 1948-75 129 D Meat Consumption P e r P e r s o n . . . . 173 E U.S. Exports of Livestock Products 178 F U.S 179 G Livestock Slaughter and Industry Earnings 205 H Distribution of the Meat P a c k e r s ' Sales Dollar in 1963 306 Meat Imports 1 CHAPTER I INTRODUCTION The P u r p o s e of the Study A s far back as r e c o r d e d h i s t o r y is known, m e a t has been an integral part of m a n ' s diet. While the m e t h o d s of obtaining this food have been as varied as m e n ' s ingenuity, it h a s always appeared to be available in_some form. E a r l y man had to consume the product while it was freshly p r o - cured, not until recent y e a r s could meat even be kept satisfactorily by salt and still retain its flavor. 1 Today the availability of meat is taken for g r a n t e d in m o r e highly developed nations of the world. The r e t a i l m a r k e t basket value for meat in 1963 was $ 2 7 8 . 2 3 , from a total m a r k e t basket r e t a i l c o s t for all foods of $ 1 , 0 7 8 . 3 1 , This means that the average urban family of 3 . 3 persons spent m o r e than $ 1 , 000 on food in 1963, and of this about twenty-five percent was spent on meat. F u r t h e r m o r e , m e a t s are a leading item sold in r e t a i l g r o c e r y s t o r e s , and s t o r e m a n a g e r s r e a l i z e that quality of meat offered often is a deciding factor as to patronage of a p a r t i c u l a r food m a r t . ^ F u r t h e r demonstrating the i m p o r t a n c e of meat is the significant r i s e in m e a t consumption per capita, as the following table s h o w s . It should be noticed also that The qualification "and s t i l l r e t a i n its flavor" is important. F o r i n s t a n c e , the A m e r i c a n Indians d r i e d their meat in o r d e r to p r e s e r v e it, but the r e s u l t i n g flavor could not be said to r e s e m b l e f r e s h m e a t . W i l l a r d F . Williams and Thomas T. Stout, E c o n o m i c s of the L i v e stock M e a t Industry, New York, The Macmillan Company, 1964, p. 592. 2 poultry is becoming a stronger competitor for the c o n s u m e r ' s dollar, which directly affects the meat packing industry. TABLE 1 P e r Capita United States Meat Consumption (pounds per p e r s o n per year) Year Beef 1940 1950 1960 1965 55 63 85 99 Veal Pork Lamb Poultry Total 73 69 65 59 7 4 5 4 17 25 34 41 159 169 195 208 7 8 6 5 The A m e r i c a n Meat Institute in its 40th financial survey listed statistics for the meat packing industry as of 1965 showing the magnitude of this segment of the economy. Total s a l e s for 1965 were estimated at $15. 8 billion, a new high for the industry. were estimated at $122 million. Net earnings of the industry The total volume of meat animals p r o - cessed in 1965 amounted to 31. 1 billion pounds (dressed weight). Fluctuation in prices of meat at the~retail level can be wide, thereby having an important economic effect on the cost of living. This is because in the short run the demand for meat is relatively fixed, while the supply varies according to farm production. The result is that minor changes in supply can be responsible for wide fluctuations in r e t a i l p r i c e s , as was demonstrated in 1965 and early 1966. In the capital market the meat packing industry has particular working capital needs. The industry p r o c e s s e s a huge volume of meat each year, and because of the perishable nature of most of the products, 3 inventory turnover i s , of necessity, rapid. T h u s , the business can be handled with an investment in working capital which is not great in relation to sales although representing a larger proportion of total r e q u i r e m e n t s than for the average industrial concern. Relatively sizable amounts of cash are n e c e s s a r y , since the business is transacted, for the m o s t part, on a cash b a s i s . The purpose of this study is to examine and evaluate the particular situation of the m e a t packing industry in the American economy. The approach will be a financial one, but because some problems are deep seated in the history of the industry, and s o m e t i m e s recondite as well, it is believed that an examination of m a r k e t i n g , production, and supply problems must also at times be pursued. While it would be pedantic to suggest that this study will offer concrete solutions to problems of the industry, it is believed that a current investigation of the financial situation of the packing industry will, along with other studies, contribute to a keener understanding of the nature of these problems. -This should b r i n g about eventually a b e t t e r and more competitive financial position for meat packing. Hypothesis Business r i s k in the m e a t packing industry is high, as will be shown later in this study. also high. F o r some firms in the industry, the financial r i s k is The "New England Method" of financing, because of its funda- mental soundness and conservative b a s i s , wo.uld therefore appear to be the most appropriate for packing companies. This study will attempt to 4 show that such a conclusion is not warranted, however. Certain firms within the industry enjoy a relatively lower degree of business risk, and experience a minimum of financial risk. The efficacy of these latter f i r m s employing the " B a n k e r ' s Method" of financing will be examined with the approach that such a method is appropriate. ^ This study will examine the use of trading on the equity in the meat packing industry. This consideration is important because by effective operation of the trading on the equity principle, a r e t u r n on proprietary funds can be increased to a rate exceeding that on the total investment. Such an increased return depends upon the borrowing of funds which will e a r n more when invested in the firm than the firm is obligated to pay in i n t e r e s t . _The common stockholder thereby gains from the use of e x t e r n a l sources of funds. A loss can result from trading on the equity if the funds a r e not profitably employed in the company. A further explanation of this concept is included later m the chapter. The hypothesis of this study is that trading on the equity might be used to better advantage in the meat packing industry. Those firms which have a high degree of business r i s k in their m e a t packing 3The expansion of an e n t e r p r i s e through the continuous reinvestm e n t of earnings is known as the "New England Method. " The "Banker's Method-" of financing is that of seeking funds from the financial market by such means as bank loans, insurance company loans, and the sale of bonds and preferred or common stock. Which method is most appropriate depends upon each particular situation. The "New England Method" avoids i n t e r e s t charges. The " B a n k e r ' s Method" makes possible gains from the use of leverage, and i n t e r e s t expense is deductible for income tax purp o s e s . However, there is m o r e financial r i s k involved in this method. 5 operations should keep their trading on the equity to a m i n i m u m , but this is not p r e s e n t l y the situation with s e v e r a l of them. By so r e s t r i c t i n g the use of e x t e r n a l s o u r c e s of funds, financial r i s k might be reduced c o n s i d e r ably over what it is now. One immediate benefit which could a c c r u e from a lowering of financial r i s k in these f i r m s is that of being able to appeal to i n v e s t o r s for the use of funds with lower interest, longer t e r m debt i n s t r u m e n t s than a r e now being used. A second benefit would be a g r e a t e r r e s p e c t from the business community than now a p p e a r s to be enjoyed, as judged however, solely by p e r s o n a l interviews this w r i t e r has m a d e . Thirdly, the ability to a t t r a c t capable staff m e m b e r s , including college g r a d u a t e s who p r e s e n t l y are difficult to r e c r u i t , would be enhanced. C o n v e r s e l y , those f i r m s in m e a t packing which enjoy a lower degree of b u s i n e s s r i s k could i n c r e a s e their trading on the equity without a probable danger of the financial r i s k i n c r e a s i n g a l s o . The advantage would be the i n c r e a s e d r e t u r n on the common s t o c k h o l d e r s ' investment which could be expected. In o r d e r to examine the financial s t r u c t u r e of the meat packing industry, a r a t i o analysis is p r e s e n t e d in Chapter F i v e , a s well as a c o m p a r i s o n of financing methods among the different p a c k e r s . Ezra Solomon has stated well the i m p o r t a n c e of proper usage of funds: In the m o d e r n f r a m e w o r k that has emerged, the c e n t r a l question in business finance is the wise usage of funds, both w...
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