Pilgrim’s Pride Deep Dive

Welcome to the 51st Pari Passu newsletter.

Happy Thanksgiving to all of you, our growth would not be possible without your interest and curiosity so we are very grateful for your support. To stay in theme, today we will learn more about Pilgrim's Pride.

Background

The story of Pilgrim's Pride is one of rapid growth, strategic expansion, and resilience through industry cycles. Founded in 1968 by Lonnie “Bo” Pilgrim, the company initially started as a retail feed, egg-hatching, and broiler-processing partnership held with his brother. Incorporated as Pilgrim Industries, Inc., the company experienced a significant rise through the decades, with average annual sales increases of 20 percent up through the 1980s. This impressive growth was supported mainly by large debt-to-equity ratios, often exceeding 4-to-1.

The 1980s were a transformative era for the broiler industry, marked by major consolidation. The number of broiler producers plummeted by 80 percent from 1960 to 1984, leaving only 45 producers by the end of the decade. During this time, Pilgrim’s Pride emerged as a significant player, becoming the ninth-largest U.S. chicken producer by 1984 and the first to offer whole, fresh, boneless chickens. This period also saw the launch of Pilgrim’s Pride’s iconic advertising campaign featuring Bo Pilgrim donning a Pilgrim’s hat, a distinctive branding move.

Despite these successes, Pilgrim’s Pride faced substantial instability. The company was almost entirely dependent on highly cyclical commodity chicken sales which had nearly led to bankruptcy on two occasions. In November 1986, Pilgrim’s Pride went public, although Bo Pilgrim retained control with 80 percent of the shares.

The company's expansion continued with its entry into the Mexican market in late 1987, acquiring four fully integrated poultry operations for $15mm. From 1987 to 1991, Pilgrim’s Pride significantly expanded its Mexican operations, established a strong presence in frozen retail, launched its export business, and saw significant increases in output for its further processed and prepared divisions. This expansion was complemented by joint marketing and advertising arrangements, enhancing its market share while keeping costs down.

The 1990s brought new challenges and opportunities. Pilgrim’s Pride underwent its first debt restructuring, which gave the company much-needed flexibility in repaying short-term obligations but reduced Bo Pilgrim’s share from 80 percent to 65 percent. Despite reporting net losses, canceling its common stock dividend, and facing lawsuits from the Texas Workers’ Compensation Commission and the Texas Natural Resource Conservation Commission, the company continued to expand, especially into Mexico during the late 1990s and early 2000s.

Business Model

Pilgrim’s Pride is one of the world’s largest poultry producers, with operations in the United States, the United Kingdom, Europe, and Mexico. The company’s business model is based on three main pillars: poultry production and processing, retail and food service sales, and export market.

Poultry production and processing: Pilgrim’s Pride operates a vertically integrated business model, which means that it controls every stage of the poultry supply chain, from egg production, contract growing, feed milling, and animal rendering, to processing of its brand-name foods. This allows the company to reduce costs, ensure quality, and optimize efficiency. The company produces a variety of poultry products, such as fresh chicken, prepared foods, turkey, and pork, under its brands, such as Pilgrim’s, Just Bare, and Pierce Chicken, as well as private labels for its customers.

Retail and food service sales: Pilgrim’s Pride sells its products to various channels, such as retail outlets, fast-food restaurants, food service distributors, and food warehouse clubs. The company has established long-term partnerships with key customers, such as Walmart, Costco, KFC, and McDonald’s, by providing them with customized solutions, and value-added services. The company also invests in expanding its branded and differentiated offerings, such as organic, antibiotic-free, and animal welfare-certified products, to meet the changing consumer preferences and demands.

Export market: Pilgrim’s Pride exports its products to more than 100 countries around the world, mainly in Asia, Europe, and Latin America. The company leverages its global and diversified portfolio to access new markets, mitigate risks, and capture opportunities. The company also benefits from favorable trade agreements, such as the United States-Mexico-Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which provide preferential access and lower tariffs for its products.

These are the main components of Pilgrim’s Pride’s business model, which enable the company to generate net sales of $4.4bn and operating income of $206.4mm in the third quarter of 2023.

Bankruptcy

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