Sausages and Other Prepared Meat Products

SIC 2013

Companies in this industry

Industry report:

Establishments primarily engaged in canning or otherwise processing poultry, rabbits, and other small game are classified in SIC 2015: Poultry Slaughtering and Processing. Establishments primarily engaged in canning meat for baby food are classified in SIC 2032: Canned Specialties. Establishments primarily engaged in the cutting up and resale of purchased fresh carcasses, for the trade, are classified in SIC 5147: Meats and Meat Products, a wholesale trade industry.

Industry Snapshot

Meat by-products from the sale of beef and pork, including hides, variety meats, tallow, and numerous other products, account for more than 10 percent of the total value of a carcass, which keeps prices to the consumer lower than they would otherwise be. Sales of sausages and other prepared meat products made from carcasses were valued at $20.4 billion, according to Dun & Bradstreet's 2009 Industry Reports. The low-carbohydrate, high-protein diet market of the 2000s helped enhance consumer popularity of luncheon meats, sausages, bacon, and other prepared meats, and consumers were willing to pay for high-quality products. In a poll conducted by the American Meat Institute (AMI), 64 percent of Americans considered hot dogs and hamburgers as American as apple pie and Uncle Sam--who was a meatpacker--surpassing both pizza and chicken in rankings.

Organization and Structure

The meat processing industry is vertically integrated, and in 2010, approximately 1,291 establishments in the United States engaged in the sausage and other prepared meats industry. The industry employed more than 63,336 workers.

Prepared meat products are marketed to supermarkets and wholesale clubs, and often the store brand available is produced by a large company and labeled locally. The pizza topping industry, food services, and in-store delicatessens make up the rest of the market share. Companies in this category also manufacture private-label meats for restaurants.

Meat processors often work closely with vendors from other industries to develop innovative packaging ideas, mindful of the importance of packaging from a marketing and practical point of view. Because meat is highly perishable, packaging must ensure that the food inside will not spoil and that it will retain its flavor for long periods. The packaging must also be convenient and attractive to the consumer. The concept of meeting consumer demands through marketing is reflected in packaging, which presents each product's traits (for example, low-fat or low-sodium).

In addition to the large national brands, many regional brands of ham, sausage, hot dogs, lunch meat, and other prepared meats are available for family-run companies. A proliferation of processed meat products put shelf and cooler space at a premium, forcing producers to create niches in major markets and design more convenient and tastier products. The prepared meat industry's practice of creating products and the resulting demand that had not previously existed among consumers is part of a larger food industry trend called differentiation. With differentiation, similar foods are altered enough to appear different either in preparation, flavor, or packaging and are then marketed as new products.

Prepared meat businesses owe much of their growth to the creation of variations, such as premium, economy, flavored, low-salt, low-fat, or high-protein, or more convenient versions of a basic meat product. The industry devised creations such as microwaveable bacon and sausages, shelf-stable stews and dinners, low-fat deli meats, frozen microwaveable hamburgers, and cheese-filled hot dogs. Reduced-fat products were among the fastest-growing markets of all processed meats in the early 2000s. Changes in the production of such healthier versions to improve their taste and texture appealed to consumers and spawned a devoted following.

Costs and prices in this industry are greatly affected by the hog commodities market. Some companies not only operate their own packinghouses but also raise hogs in order to avoid the price swings that often occur in the commodities market. When hog supplies increase, manufacturers' profit margins generally expand, because only a small part of that savings is passed on to the consumer. When hog supplies decrease, forcing prices up, the manufacturers' profit margin narrows. Another factor affecting price is the strict guidelines aimed at safer meat processing. Techniques required to prevent bacteria and disease increase the cost of production.

Package Labeling.
Nutrition labeling laws designed to enforce the 1990 Nutrition Labeling and Education Act were announced in 1992. The regulations require food processors to provide consumers with additional nutrition information on labels. The rules went into effect in 1995, but most companies voluntarily switched their labels before the deadline.

Labels require the manufacturer to list the total fat content; amount of saturated fat; number of calories derived from fat; and cholesterol, sodium, carbohydrates, and protein content in its products. According to the regulations, meat processors may use the term "light in sodium" if the meat product's sodium levels have been reduced 50 percent. In addition, the rules defined terms such as "lite" or "light," "low fat," "fat-free," "reduced calorie," "low in saturated fat," "high fiber," and other terms that manufacturers have been using to tout the healthfulness of products. To use any of those terms on the label, food must meet the requirements of the definition. For example, a low-fat product must have only 3 grams of fat or less in a serving. The government also established standard serving sizes for many foods so food manufacturers could no longer decrease serving sizes in order to meet claims that products were low-calorie or low-sodium.

These regulations were designed to eliminate much of the hype routinely used by food manufacturers. Companies that bring in less than $500,000 in annual sales were exempt from the laws. In addition to the nutrition labels, guidelines for the safe preparation of meat products became common after several prominent cases of E. coli infections occurred.

Environmental Concerns.
Many highly processed or packaged meat products provide convenience to consumers but at a price to the environment. Disposable microwaveable packages free consumers from dirty dishes but create more waste. Products packaged in disposable containers face growing criticism because of increasing public concern about the problem of garbage disposal. Some manufacturers responded to these concerns by increasing the recylability of their packaging. Environmentalists and relief workers also continued to voice their criticism of the meat industry and its use of immense amounts of grain crops, water, energy, grazing areas, and other natural resources in the development of its product.

Background and Development

Many of the companies in this industry began as meat-packing companies and sold nonbranded meat to stores, food services, and meat product manufacturers. They diversified, however, as it became clear that the food processing business was more profitable and less susceptible to swings in commodity prices and that the nature of the fresh pork business was cyclical. A company that processed pork earned 10 times as much on every dollar of sales as a company that derived most of its income from slaughtering.

Many of the establishments that produce prepared meat products also own and run the packinghouses that supply them with meat. Hormel, once a large meatpacking concern, severely limited its packing operations and concentrated most of its resources on processing hot dogs, cold cuts, sausages, and other prepared meats. In some cases, meat manufacturing establishments lease packing services or have exclusive contracts from meatpackers to supply only that manufacturer. For example, Hormel leased one of its slaughtering plants to a pork processing company to operate but provided the hogs and purchased all the plant's prime cuts and processed product output.

As a result of consumer demands for healthier prepared meats, meat processing companies introduced many light or low-fat versions of popular products. Chicken or turkey cold cuts and hot dogs took market share from beef and pork products. According to Marketing Intelligence Service, Ltd., as reported by AMI, in the early 2000s, "more than 50 percent of the product lines in the lunch meat and hot dog categories contain a reduced fat or nutritional claim. The extra low-fat (97 percent fat-free) hot dog and bologna market has grown by more than 21 percent."

It is likely that processors will continue to diversify their product offerings. Additions of low-fat and flavor-enhanced products along with faster, easier, and healthier prepared meats helped the industry grow despite slowdowns in other meat markets in the late 1990s. Sales of bacon declined, probably because of bacon's fat and cholesterol content, but sales of bacon in restaurants remained steady, suggesting that consumers allow themselves some leeway in their quest for a healthier diet. The introduction of lower salt, reduced fat, and fat-free bacon was anticipated to help compensate for this trend.

Nevertheless, the increased emphasis on healthy nutrition revolutionized the prepared meat product industry. Philip Morris's Oscar Mayer Foods Corp. cut nearly 300 slow-selling products, dropped prices on bacon, hot dogs, and bologna, and added light bologna and turkey bacon as part of an ambitious low-fat lunch meat line. ConAgra's Armour Swift-Eckrich Inc. subsidiary enhanced its line of Healthy Choice brand lunch meats and hot dogs to compete against Oscar Mayer's Healthy Favorites and a Weight Watchers lunch meat line, produced by Hillshire Farms, which is owned by Sara Lee Corporation.

The total value of sausage and other prepared meat shipments in 2005 was $31.3 billion. According to the National Hot Dog and Sausage Council, retail sales of refrigerated dinner sausage in the top 10 markets topped $425 million from October 2003 to October 2004, with eight markets showing increases in dollar sales from the previous year, not including data on sales of sausage in other food-service outlets. The Council estimated that Americans consume 20 billion hot dogs annually, with 730 million packages of hot dogs sold at retail stores (not including Wal-Mart, which does not release sales data) in 2006, equating $1.5 billion in retail sales. Low-fat and fat-free formulations accounted for approximately 12 percent of total sales. An estimated 27.5 million hot dogs were eaten by baseball fans at major league ballparks in 2005.

The luncheon meat segment of the industry was worth $3.2 billion in 2004, although the market was considered flat. There was a palpable shift in volume to higher-end, deli-quality packaged lunch meats, according to Randy Newbold, senior brand manager for Sara Lee's Hillshire Farms.

The top five brands for the $2.1 billion refrigerated bacon market in 2004 were private label brands, at $392 million; Oscar Mayer (Philip Morris), at $389 million; Black Label (Hormel), at $139 million; Bar-S, at $70 million; and Farmland, at $69 million.

In 2003, the first case of "mad cow disease" (bovine spongiform encephalopathy, or BSE) was documented in the United States. In June 2005, the USDA confirmed a second case, found in November 2004. The FDA concluded that the fatal BSE disease might be transmitted through the use of specified risk material, which included small intestines used for natural sausage casings. The FDA and USDA issued interim regulations barring domestic sausage makers from importing or acquiring domestically intestines that were removed from cattle after January 2004. Industry experts conservatively estimated that the U.S. cattle industry lost just over $4 billion in export values on beef, beef variety meats, hides, and tallow from December 2003 to December 2004.

The industry was also affected by the outbreak of the H1NI virus in the late 2000s. Called "the swine flu" because initial testing showed that many genes in the virus were similar to influenza viruses normally found in American hogs, the situation was eventually declared a pandemic, and some consumers avoided pork products for fear they would contract the disease, even though the Centers for Disease Control and other organizations publicized the fact that, though contagious, the disease could not be spread through pork. The industry was also affected by the fact that some countries initiated trade bans and restrictions on imports of U.S. pork.

Current Conditions

In the 2000s, the red meat industry, which includes meat-packing plants and establishments that produce processed pork and beef products, accounted for less than 60 percent of the entire meat industry, which included poultry and poultry products, compared to 75 percent in the 1990s. Other discouraging news came from consumption figures that showed that total U.S. meat consumption declined in 2008 and 2009 and was predicted to drop again in 2010. This would be the first time in history that meat consumption decreased three years in a row, according to Tom Elam of FarmEcon LLC. The industry also dealt with negative publicity in 2010 when Reuters published findings of a study that showed that eating processed meat such as bacon and hot dogs can increase the risk of heart disease and diabetes. In addition, information in the Dietary Guidelines Advisory Committee's Dietary Guidelines for Americans 2010 "reveal[ed] a strong bias against processed meats," according to the American Meat Institute (AMI). Industry participants reacted to the bad press by promoting the value of incorporating meat and meat products into the diet. As stated in a July 2010 AMI press release, "Meat and poultry products are an important component of a healthy human diet because they provide essential amino acids, minerals such as iron, vitamins and other dietary requirements." In the meantime, the prepared food industry continued to formulate more new products to meet consumer demands for healthier foods.

Hot dogs and sausages remained two of the most popular food items in this category in 2010. According to the National Hot Dog and Sausage Council, more than 730 million packages of hot dogs worth $1.6 billion were sold in retail stores (not including Wal-Mart) in 2009. Hot dog consumption continued to be seasonal, with 38 percent of total annual sales occurring in the months of June, July, and August. In the sausage category, the Council reported that dinner sausage sales increased 3.4 percent in 2009 to $1.85 billion, whereas breakfast sausage sales increased to $9 million. Research showed that the largest consumption of refrigerated packaged meat products occurred in larger households with children, particularly those in the Midwest and South, and that "better for you " items continued to gain popularity. Other sales drivers included the trend toward new flavors, such as honey and brown sugar, barbeque, Cajun, spicy, and teriyaki.

Industry Leaders

A majority of widely recognized processed meat brands are owned by large conglomerates, many of which started out as small, regional, independent meatpacking and meat processing companies. Although there are also many localized companies, their sales account for a only a small percentage of total industry revenues.

With the purchase of Kraft General Foods in 1988 for $12.9 billion, Philip Morris acquired Oscar Mayer and Louis Rich meat products. In the 2000s, the Oscar Mayer division had annual revenues of more than $2 billion and was clearly the leader in bacon, hot dogs, and luncheon meats. The larger Kraft North America business segment, which included Oscar Mayer, had revenues of $40.4 billion in 2009. One of Oscar Mayer's products, Lunchables, a prepackaged lunch in a box, was marketed to parents as an easy lunchbox alternative. Containing lunch meat, crackers, and cheese, it was to be the ideal "take along" lunch for school children. Various consumer advocate groups claimed that Lunchables were too high in fat to be considered a nutritious lunch. Also in response to consumer demand for lower-fat products, Oscar Mayer phased out its line of Healthy Favorites low-fat luncheon meats, replacing them with a fat-free version.

Sara Lee Corporation (known as Consolidated Foods until 1985) was one of the largest meat processing establishments in the United States. Sara Lee held the number-one position in sales in three of the major categories of packaged and processed meats. The company's Hillshire Farm smoked sausage commanded a 38 percent share of the $1 billion retail market in the 2000s. Its Jimmy Dean breakfasts and Ball Park hot dogs each owned a 22 percent share of their respective billion-dollar markets. Sara Lee also boasts a number of very strong regional brands, such as Bryan and Kahn, among others. Sara Lee Corporation had total sales of $12.9 billion and 41,000 employees in 2009.

The conglomerate agribusiness ConAgra had annual sales of $12.1 billion in 2009 and employed 25,600 people. ConAgra acquired Armour from Greyhound in 1983 and Swift-Eckrich from the Beatrice Co. in 1990. Armour and Swift-Eckrich became a single subsidiary of ConAgra, which manufactures Sizzlean, Swift Premium Brown 'n Serve Sausage, and Eckrich sausages, as well as other Armour and Swift products. Before the acquisition, Swift had been the third-largest manufacturer of processed meat after Oscar Mayer and Sara Lee. ConAgra also owned the meatpacking companies Swift Independent Packing and Monfort and continued to acquire smaller companies, such as Gilardi Foods.

George A. Hormel & Company was founded in Austin, Minnesota, in 1891 as a slaughterhouse and retail meat products shop. Its earnings for the first year were $220,000. About 100 years later, the company name was changed to Hormel Foods Corporation, reflecting its change in focus from a packing and meat company to a food processing company offering meat products, frozen foods, and microwaveable products, as well as branded fresh pork and beef. One of the most widely recognized products from the line is SPAM, a pork-based luncheon meat in a can. Hormel was one of the few older meat companies that remained independent after a wave of takeovers in the 1980s. By 2009, the firm had sales of $6.5 billion and 18,600 employees.

Hormel became known as the industry's innovator in the late 1980s. It was one of the largest meatpackers in the country, but its president, Richard Knowlton, closed many of its slaughtering facilities in the 1980s and began focusing on producing processed and branded meat products. The portion of its revenues generated by prepared meat and other food products rose to between 65 and 75 percent. In 1986, Hormel acquired Jennie-O Foods, the nation's largest privately owned turkey processor. New products to enter the market included Jennie-O spiced and marinated turkey fillets, Hormel Always Tender fresh pork, microwave bacon, turkey pepperoni, turkey chili, and fat-free hot dogs.

Like Hormel, Smithfield Foods was an independent company, but on a smaller scale. It initially produced only pork products and spent a fraction of the more than $70 million on advertising that Hormel spent. It became the world's largest hog producer and fresh pork processor, with sales of $11.2 billion in 2009 and 48,000 employees. The name recognition of Smithfield canned hams enabled it to diversify into production of hot dogs, bacon, sausages, and lunch meats from its main pork-packing operations. Smithfield continued to expand its operations nationally and internationally. In 1999, it bought Tyson Foods' pork operations for $80 million, and in 2003, it acquired Cumberland Gap and Farmland Foods.

Tyson Foods, perhaps best known for its chicken products, also made other processed and packaged meats. The firm purchased IBP, one of the United States' largest pork processors and beef packers, in 2001 for $3.2 billion. By 2009, Tyson had overall sales of $26.7 billion with 117,000 employees.

America and the World

In addition to feeling the effects of the global economic recession, producers of processed meat products were dealing with the negative effects of trade bans related to the H1NI (swine flu) virus in the late 2000s. The processed pork industry in particular was expected to be positively affected by China's agreement in 2010 to reinstate U.S. pork imports, which had been strictly limited due to H1NI trade restrictions.

Trade disruption following the November 2003 case of BSE cost beef cattle producers more than $175 per head in 2004, and export values plummeted that year to $605 million. However, international trade rebounded slightly to $976 million the next year as nations lifted their ban on U.S. meat, and by 2006, the value reached $1.63 billion. By 2009, beef and beef variety meat exports were valued at approximately $3.0 billion, according to the National Cattlemen's Beef Association. The top export market was Mexico, followed by Canada, Japan, Taiwan, and Hong Kong.

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