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New path for pork giant
Facing limits to
expansion at home, Smithfield Foods looks to Eastern
Europe
by
Paula C. Squires and Lynn Waltz
Virginia Business
November
2004
Nearly
every day hogs are trucked into Gwaltney of Smithfield’s
plant, and spiral hams, bacon slices and sausages are
trucked out. The cycle requires many steps, and some
of the work isn’t for the faint of heart.
The operation begins on the kill floor. The Gwaltney
plant is capable of slaughtering 9,000 hogs a day. When
the pork is ready for processing, a conveyor system
hauls meat to various stations. It’s cold on the
plant floor — below 40 degrees in many areas —
and the machinery drowns out conversation. Employees
wearing smocks, gloves, rubber shoes and hairnets cut
and package the pork. On the “deboning line,”
workers in safety gear wield sharp knives, hacking meat
away from bone. Typically, they debone more than 800
hams an hour.
Getting pork from the farm to the table is difficult
work that raises tough issues. “We process animals.
We discharge fluids,” says C. Larry Pope, the
president and COO of Smithfield Foods. “We’re
steadfastly committed to the environment, but we struggle
with some of the perceptions out there.”
Since being hit in 1997 with a $12.6 million federal
fine for polluting the Pagan River, Smithfield Foods
has strengthened its environmental programs, winning
praise from state and federal officials. But that step
has not changed everyone's perception of the company.
An environmental group led by Robert F. Kennedy Jr.
has sued Smithfield Foods, and Sen. John Kerry questioned
the effects of its large hog farms on small farmers
during his presidential campaign.
“When you get to be big, you get to be the target
for all the special interest groups,” says Pope.
“It’s the cost of getting bigger.”
Smithfield Foods is bigger than anyone else in the business.
From a small, family-owned company known for producing
the hams enjoyed at holiday dinners, Smithfield Foods
has evolved into the world’s largest pork producer
and processor. The company has eight plants in the U.S.
(three in the Southeast and five in the Midwest), operations
in France and Poland and joint ventures in Spain, Mexico,
China and Romania. The U.S. facilities alone produce
2.9 billion pounds of fresh pork a year and 2.5 billion
pounds of processed meats.
Company Chairman and CEO Joseph W. Luter III also has
diversified into beef. Smithfield Foods is the fifth
largest U.S. beef processor. The company’s growth
has created antitrust rumblings at home, and now Luter
is aggressively expanding into Europe. “We’re
very, very excited, and we believe in the next five
years we can create a dominant position in Europe just
as we have in the United States,” he told shareholders
at the company’s annual meeting in September in
Richmond.
***
Smithfield
Foods’ dominance in its industry is evident in
Hampton Roads where it’s one of the area’s
largest private employers. The company’s corporate
headquarters along with its two packing plants in Smithfield
provide jobs for 4,800 employees. Statewide, the Fortune
500 company has offices and facilities in six other
locations for a total work force of 6,200. Overall,
its payroll covers 46,400 workers, including those in
overseas subsidiaries.
As the company has grown so have its profits. Since
2000, Smithfield Foods has doubled its sales revenue
from $5 billion to nearly $10 billion. For its most
recent fiscal year, which ended in May, the company
earned a profit of $227 million, or $2.03 a share, up
from $26.3 million, or 24 cents a share, in 2003. Boosted
in part by the popularity of high-protein diets such
as the Atkins diet, sales reached $9.3 billion in 2004,
30 percent more than the previous year. Shareholders
have done well, too, with a five-year average return
on investment of 17.6 percent.
As Smithfield Foods shifts from essentially an American,
commodity-based company to one with a growing global
presence in processed meats, its growth strategies are
increasingly under scrutiny. Key to building the company
has been a series of acquisitions and vertical integration,
the concept of controlling every step of production,
from raw material to finished product. The company raises
nearly half of the hogs it slaughters on large farms.
Kerry has assailed the development of corporate farms.
While stumping in Iowa, the country’s largest
hog-farming state, Kerry pledged to stop Tyson Foods
Inc. and Smithfield Foods from raising their own hogs.
He says the practice helps processors control supplies
and dictate prices, thereby hurting small farmers. In
2000 and 2002 the Iowa legislature strengthened a law
banning meatpackers from owning livestock.
Smithfield Foods sued and a federal district court found
Iowa’s law unconstitutional. The state appealed
and an appellate court recently upheld the legality
of the Iowa statute. Nine states have passed laws prohibiting
meatpackers from owning livestock, and the U.S. Senate
included a federal ban in its 2002 Farm Bill, but the
provision didn’t make the bill’s final version.
As political resistance builds, Smithfield Foods executives
acknowledge that vertical integration may have run its
course in the United States. The company already processes
27 million hogs annually, representing a 27 percent
share of the U.S. market. Luter said at September’s
annual meeting that, if Smithfield Foods reaches a one-third
market share, he expects federal authorities to halt
any further acquisitions in this country.
“There are limited growth opportunities to expand
the hog raising side of our business due to governmental
and environmental restraints,” says Joseph W.
Luter IV, the son of the CEO, who is Smithfield Foods’
executive vice president. But, he adds, vertical integration
transformed the pork industry “in terms of the
quality of the hog and the quality of meat coming to
market. … It has benefited the industry.”
The younger Luter disagrees with Kerry’s contention
that the company’s hog farms are running independent
farmers out of business. “It’s more rhetoric
than reality,” he says, noting that Smithfield
Foods buys half of its hogs on the open market.
In search of new growth opportunities, the company is
turning its sights overseas, particularly to the emerging
markets of Eastern Europe. In the last five years, Pope
says the company has invested $150 million, putting
in hog farms and manufacturing equipment. In 1999, the
company paid $51 million for a controlling interest
in Animex, Poland’s largest meat and poultry processor.
***
Through
all the challenges and change, Smithfield Foods’
longstanding CEO has rolled with the punches and, some
would say, has delivered a few jabs of his own, beating
out rivals for prime acquisitions. With the company’s
shift to an overseas strategy, some investors wonder
if there will be a shift in the top job as well. In
July, the CEO quietly celebrated his 65th birthday.
While no formal succession plan is in place, company
executives say discussions have begun on who will fill
Luter’s shoes whenever he retires. Speculation
outside the company centers on 39-year-old Joseph Luter
IV, the fourth generation of the Luter family to work
for the company, and Pope, 50, a 24-year Smithfield
Foods veteran.
“We are beginning to put into place the primary
person, myself, who could be…” Pope says,
leaving the sentence unfinished. He adds hastily that
“Mr. Luter has made no decision on retirement.”
Pope describes Luter as the company’s visionary
and strategist, the guy who “flies at 20,000 feet,”
phoning executives frequently and traveling abroad in
search of acquisitions. “Mr. Luter gets all the
credit. … I’m the person responsible for
executing strategy,” Pope says.
Asked about his chances of becoming the company’s
next CEO, young Joe Luter is diplomatic: “That’s
a big if. I certainly have my ideas and things I would
do, but at this point it’s my role to give opinions
and input when I’m asked. I’m very respectful
of Larry and my father.”
Who’s in charge after the senior Luter steps down
will be an important decision for Smithfield Foods’
board as the company continues with international expansion
and concentrates on boosting profits from processed
meats, the company’s most consistently profitable
operation.
Jonathan Feeney, an analyst with Wachovia Securities
in New York who follows the company, recently downgraded
the stock from “outperform” to “market
perform,” in part because of political risks.
“A Kerry victory combined with an at least partially
Democratic Congress would create major uncertainty for
vertically integrated pork and chicken companies like
Tyson and Smithfield,” Feeney says in a written
analysis. Still, he finds the stock — which traded
around $24 in mid-October — “undervalued
from a long-term perspective.”
Analyst Ann Gurkin with Daven-port & Co. in Richmond
expects the company to continue to thrive. “We
like them. Demand for protein is very strong with Atkins,”
she says. “The price of pork is a good value for
consumers. Their return on investments overseas looks
better for future growth and with higher-margined, pre-cooked
processed meat.”
To meet increased demand for cooked ham products, Smithfield
Packing Co. — a subsidiary of Smithfield Foods
— plans to build a new $85 million ham-processing
plant in Kinston, N.C. The 180,000-square-foot plant
is expected to open in 2006 and will employ 206 people.
Smithfield Packing already has a meat processing facility
in Kinston. North Carolina is home to Smithfield Food's
Murphy-Brown hog production subsidiary and its largest
hog processing plant in Bladen County, where a failed
union drive has prompted a labor dispute.
***
The
story of Smithfield Foods begins in Smithfield, a picturesque
town of 6,300 on the banks of the Pagan River. This
is where Joe Luter III’s grandfather, Joe Luter,
and his father, Joe Luter Jr., founded the Smithfield
Packing plant in 1936. Joe Luter III began his career
with the company after his father died suddenly of a
heart attack in 1962. Fresh out of Wake Forest University,
Luter worked his way up to president, sold the company
in 1969 and was promptly fired by the new owners. By
1975, though, with mounting debt and plunging sales,
the company’s board asked Luter to return. He
accepted and is credited with saving the company from
bankruptcy.
In 1998, Smithfield Foods moved its offices from downtown
Norfolk to a new $7 million corporate building on Commerce
Street in Smithfield, one of many steps that have earned
the company high marks from town officials. “They
stay actively interested in assisting the town and improving
the community,” says Smithfield Town Manager Peter
Stephenson. Many of the town’s residents work
at the packing plants where company officials say high
school graduates can earn wages of $15 to $16 an hour.
Smithfield Foods began expanding in 1981 with the purchase
of its local rival, Gwaltney of Smithfield. Since then,
it has gone on a buying spree, making 24 other acquisitions,
extending the company’s reach and diversifying
its products. For instance, its 1999 acquisition of
Carroll’s Foods Inc. of Warsaw, N.C., the nation’s
second-largest hog-production company, transformed Smithfield
Foods into the largest hog producer in the world.
Last year Smithfield Foods bought Farmland Foods in
Kansas City, Mo., for $377 million. That deal prompted
Kerry, a member of the Senate Committee on Small Business
and Entrepreneurship, to request an antitrust investigation
by Attorney General John Ashcroft. Kerry wrote in a
letter to Ashcroft, “It is evident that this acquisition,
which would give Smithfield control over nearly one-third
of the U.S. pork processing industry, has the potential
to harm consumers,
small producers, and rural communities alike.”
Mirroring Tyson’s revolution in the poultry industry,
Smithfield Foods was a leader as pork processors in
the 1990s began consolidating; purchasing livestock
operations and buying hogs through long-term production
contracts. Proponents of vertical integration say it
promotes efficiencies and a higher quality of meat while
mitigating exposure to cyclical swings in hog prices.
The result, however, are farms that generate huge amounts
of waste. In addition to water pollution controls, the
Environmental Protection Agency is raising the possibility
of regulating air emissions from the farms.
Typically, farms store hog manure in open-air lagoons,
then spray it on surrounding fields as fertilizer. Environmental
and conservation groups allege that the farms release
liquefied hog manure into waterways in violation of
the Clean Water Act. And they allege that overspraying
can increase runoff into streams and rivers and contaminate
groundwater supplies.
Since the mid-1990s, North Carolina — the second
largest pig producer in the country — has prohibited
new corporate farms. A federal lawsuit brought by Robert
Kennedy’s group, Waterkeeper Alliance, against
a Smithfield Foods farm in North Carolina in February
2001 is scheduled to come to trial next spring. It alleges
that the farm repeatedly released hog wastes into waterways
in violation of federal laws.
Kennedy’s group and others are keeping watch on
the company’s activities in Poland. Kennedy says
he has lobbied against Smithfield Foods’ corporate
farms. “The argument I’ve been making to
the Polish officials is that these are short-term commercial
values … not a good long-term business strategy,”
he says.
Pope dismisses the efforts of what he describes as a
small group of protesters. “We’re not the
bad guys in the U.S., and we’re not the bad guys
in Europe,” he says. “We’re bringing
tremendous commerce and opportunities to countries that
desperately need those opportunities. …We’re
bringing them Western technology, Western management
and we’re giving them tremendous benefits.”
Expanding in Eastern Europe is easier than in other
parts of Europe, because labor costs are lower. In Poland
and Romania, Pope says workers earn $2.50 an hour for
the same work the company would pay more than $20 an
hour for in other parts of Europe. “We’re
an opportunistic company,” says Pope. As the European
Union expands in Eastern Europe, people there are “begging
for jobs. They’re an agrarian economy. They can
deal with meat processing.”
Meanwhile, at home the company has taken high-profile
steps to improve its environmental record. In 2002,
it hired Virginia’s director of the Department
of Environmental Quality, Dennis Treacy. Since then,
the company has implemented management systems on all
its farms, and Treacy says water violations from the
state have dropped 75 percent in the past two years.
“The whole world watches us,” Treacy says.
“We’re not in a position to make mistakes.
We’ve come a long way very quickly.”
Frank Daniel, regional director of the Tidewater office
of the Department of Environmental Quality, says the
company is doing a much better job. Several years ago,
the state fined Smithfield Foods for runoff from its
hog farms into swamps and streams, but the farms are
in compliance now. “They were spraying their biosolids
at rates the fields couldn’t handle. They’ve
totally turned things around,” says Daniel.
Last month Gwaltney of Smithfield (a Smithfield Foods
subsidiary) was one of 16 companies that received a
2004 Environmental Excellence Award from Businesses
for the Bay. The awards, sponsored by the Environmental
Protection Agency’s Chesapeake Bay Program, recognized
Gwaltney for a project that reduces nutrients in the
wastewater at its Smithfield operation.
To publicize its environmental programs, Smithfield
Foods produces an annual environmental stewardship report
accessible from its Web site. It includes information
on recent initiatives, including a $20 million hog waste-to-biodiesel
energy project in Utah and a voluntary agreement the
company signed in 2000 with the North Carolina attorney
general. Smithfield Foods has agreed to pay $50 million
over 25 years to support environmental measures that
will enhance the state’s water quality. In addition,
it has committed $15 million in research to North Carolina
State University to find environmentally safe ways to
treat the wastes from hog farms.
These days, Pope says the company’s survival depends
on its commitment to high principles. “We stand
for three things that the company will never compromise:
food safety, environmental safety and worker safety.
Those three things can’t be compromised. Those
could put us out of business.”
***
The
treatment of workers is one of the issues behind charges
of unfair labor practices at the company’s 5,000-employee
Bladen County plant in North Carolina. The charges were
made after two failed union drives in 1994 and 1997
by the United Food and Commercial Workers International
Union. After hearing weeks of testimony in 2000, an
administrative law judge with the National Labor Relations
Board found that Smithfield Foods violated federal labor
laws in dealing with the 1997 union election, which
ended in a fight. A 436-page ruling included a cease
and desist order, saying Smithfield can’t threaten
employees with closing the plant or being fired if they
vote to be represented by a union. The order has been
stayed, pending an appeal. If upheld, Smithfield Foods
would be required to hold new elections, rehire workers
who were fired with back pay and publicly post the remedies
sought by the NLRB.
Greg Robertson, an attorney with Hunton & Williams
in Richmond who represents Smithfield Foods on labor
issues, says the company disagrees with the judge’s
conclusions. And, he says, it made no sense for management
to incite violence since the union had lost the vote.
“We won. Why would we do that? But this happened
seven years ago, and we’re focusing on where we
are today and the work force we have today.”
A new complaint was filed in July by the National Labor
Relations Board after reviewing grievances raised by
the same union involved in the earlier case. The complaint
alleges that company security and a cleaning contractor
assaulted workers in November 2003 and threatened some
Latino workers with arrest by immigration authorities.
A hearing before an administrative law judge was scheduled
for Nov. 1. Robertson says the company had nothing to
do with the contractor’s dispute and did not assault
or threaten any workers.
The Bladen County dispute has caught the attention of
Human Rights Watch, a New York-based group, which plans
a report this month on labor actions at the plant. It
will be an update to an earlier report in 2000.
About half of the Smithfield Foods’ total 40,000-plus
work force is unionized. Smithfield Foods does a good
job of bargaining with workers at plants where they
are unionized, say union officials. “If a union
is rightfully voted in, we’ll work with the union,”
says Joseph Luter IV.
***
Going
forward, as customers become more health conscious,
Smithfield Foods will probably expand into more products
such as its Lean Generation line of meats. Pope sees
the company as someday resembling Kraft Foods with many
brands under its umbrella. “Essentially, we will
be a marketing company,” he says.
That would bode well for Luter IV, who came up through
the sales and marketing ranks. If he gets passed over
for CEO this go-round, he still has time to one day
lead the company. “I don’t take anything
for granted,” he says. “It’s a much
different company today.” Years ago, he notes,
Smithfield Foods’ products had a shelf life of
five days and were sold to customers within a 200- to
300-mile radius. “Now the shelf life is 50 days
and we’re shipping fresh pork to Japan.”
For Smithfield Foods, the prize hog may be far from
home.
Return to Virginia Business - November 2004
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