Walmart’s move to enter the beef supply chain by opening a case-ready beef plant in Georgia after establishing its own Angus supply chain has received much fanfare, but it may be more of an experiment than anything.
“Walmart sees opportunity and is moving up the supply chain at a time of historically high margins for beef processors,” says Will Sawyer, animal protein economist with CoBank. “We believe their current beef strategy is something of a test, not only for Walmart and its suppliers, but also its customers.”
Walmart, the largest food retailer in the U.S., has a stated goal of improving the quality of its food offering, according to a new report from CoBank’s Knowledge Exchange division. The giant is clearly eyeing an increase in in its vertical integration strategy with this move toward creating an end-to-end beef supply chain.
If Walmart’s new beef plant and Angus supply chain succeed, it could lead the retail giant to take another step up the supply chain toward the producer. That could be in the form of harvesting fed cattle or through a joint venture with a current packer, Sawyer suggests.
The new plant will cut and prepare steaks and roasts produced by Walmart’s Angus beef supply chain for 500 stores in Florida, Georgia, and Alabama. Sawyer says the company will need to convince customers that the attributes of its beef, which is hormone-free, traceable, and potentially of higher grade, make it worth buying at a premium price.
“While Walmart’s new beef strategy could make waves for the industry in the future, in its current state we don’t see it shifting the price and leverage dynamics of U.S. beef production,” he says. “By our calculations, this new supply chain will account for less than 5% of Walmart’s U.S. beef business and less than 0.5% of U.S. beef production.”
However, the fact that the largest U.S. food retailer and beef buyer has entered secondary beef processing reveals the state of the industry overall as a complicated and opaque supply chain but with climbing packer margins.
The CoBank report notes that grocery accounts for over half of Walmart’s U.S. revenue, so it makes sense for the company to look at food as a way to increase the share of its current customer’s food budget and possibly attract new customers.
For comparison, Costco offers a large selection of USDA Prime grade beef. Costco’s strategy has been so successful that today it is the largest retailer of USDA Prime beef in the country, demonstrating it has the customers willing and able to pay the premium prices.
Sawyer says U.S. cattle producers, feeders and packers will not likely suffer any significant near-term changes from Walmart’s entry, but its success could lead Walmart to make a bigger move in the future, Sawyer suggests. Other retailers will be watching how Walmart fares. Potential new entrants may also see opportunity to add value and capture margin, a reality that the rest of the supply chain should expect more of in the future.
You can read the report, Walmart’s New Beef Plant is More Sizzle than Steak, For Now, on CoBank’s website.