What does this mean for TSN? TSN’s beef business is a spread business. In the past as prices rise, it appears margins suffer. TSN has mentioned they may not meet their normalized beef margin of 2.5 to 4% for Q1. In addition, volumes will be down.
In the last conference call TSN said they are getting away from fixed pricing and passing more of the higher costs onto the customer, who “understands” the current availability environment.
If you are operating a huge spread biz, like TSN is, with downside risk, why would you even bother if you can’t make 2.5%? In any case we will soon find out.
BTW gotta think chicken segment exceeds normalized earnings for 2013, given these rising prices.
So TSN had a gross margin of about 1.6% on their beef biz and has averaged about that amount over the last seven years. Now that is a gross margin, before admin, interest, taxes and such. So something isn’t working quite right here. So what should TSN do?
a) Hit their customers up for more $$’s? It’s not TSN job to insure food services and retail stores make $$;s
b) Hit the beef producers up for lower purchase prices? TSN sells $13 billlllliiooon worth of beef how can they not have the upper hand when buying their beef?
c) Fire those managing that purchase / sale spread?
d) Close unprofitable beef processing plants, adding volume and efficiency to your profitable ones?
e) Sell beef biz to JBS and Get out of the beef biz?
f) A,b,c,d, and e
g) A,b,c,and d, or e
To TSN’s credit they have improved in the last three years and actually did ok in 2010 and 2011, but this can’t be that difficult … with this kind of volume how is it that you can’t dictate purchase and sales prices to the point your making at least 4%?
The chicken segment should do great this year, compliment that with a 3.5% beef GP% (which management does not expect) and a good pork spread, and you just might have a $40 company!
Think about it .... why is TSN not a $15 to $20 billion company?