Pilgrim’s Pride Corporation

Pilgrim’s Pride Corporation

P.O. Box 93
Pittsburg, Texas 75686-0093
U.S.A.
(903) 856-7901
Fax: 903-856-7505

Public Company
Incorporated: 1963 as Pilgrim Feed Mills, Inc.
Employees: 10,700
Sales: $787 million
Stock Exchanges: New York
SICs: 2015 Poultry Slaughtering & Processing

Once a privately held business, Pilgrim’s Pride Corporation is the fifth largest chicken processor in the United States (behind Tyson, ConAgra, Gold Kist, and Perdue) and the second largest in Mexico. The company is approximately 65 percent owned by its founder, chief executive officer, and “celebrity” spokesperson, Lonnie A. (Bo) Pilgrim.

As a completely integrated operation, Pilgrim’s Pride superintends egg producing, contract growing, feed milling, animal rendering, and processing of its brand name foods for the retail, fast-food, food service, and food warehouse markets. Although its principal sales regions are the West, the Southwest, and Mexico, the company also sells selected chicken products to eastern European and Pacific Rim countries. Pilgrim’s Pride entered the prepared foods market in 1986 to offset violent swings in chicken prices and profits and now ranks as the country’s second largest supplier of prepared chicken products. Despite successes in these and other areas, increases in overall sales have slowed since 1989, and profits have steadily declined. By the end of fiscal 1992, the company was struggling under the weight of a $29.7 million loss, attributable to excess poultry production and sinking prices. The sudden naming of a new president at mid-year signalled the necessity for quickly stabilizing such volatility and effecting a turnaround, as did the entry of the Archer-Daniels-Midland Co., which now holds an 18 percent interest in Pilgrim’s Pride. The company saw its sales for the first quarter of fiscal year 1993 increase 12.8 percent over sales for the same quarter of fiscal year 1992

According to Toni Mack in Forbes, when Pilgrim was a boy “and wanted a Coke, his father, who ran the general store in the northeast Texas hamlet of Pine, would first make him sell six Cokes for a nickel apiece to the men working the nearby cotton gin.” Such was the early business training of the chicken magnate who, by his own admission, “started from nothing.” Because his father died abruptly from a heart attack, leaving the store in debt and the family with just $80, Bo was forced to labor from age 11 at several different jobs. At the age of 17, he and his brother Aubrey purchased a farm supply store in Pitts-burg, Texas, with money borrowed from a bank and a local dentist. The first capital investment was a used cotton gin, which the brothers converted into a feed grinder. From 1945 until 1966, the year of Aubrey’s death, the company—eventually incorporated as Pilgrim Feed Mills, Inc.—expanded into egg-hatching and broiler-processing. In 1968, Lonnie and Aubrey’s heirs reincorporated the business as Pilgrim Industries, Inc.

Well into the 1980s, sales increases for the company averaged 20 percent annually. This growth was largely due to Bo’s gutsy leadership and willingness to endure debt-to-equity ratios in excess of 4-to-l in order to stay ahead of the competition. Jessica Greenbaum, in an article in Forbes, quotes one of Pilgrim’s bankers as stating that Bo had “expanded as fast as he possibly could. The balance sheet couldn’t sustain anymore.” Pilgrim’s strategy apparently paid off, for between 1960 and 1984, the number of broiler producers in the country shrank by more than 80 percent to just 55. Almost a decade later, the number stands at 45.

Beginning in January 1983, Pilgrim began promoting his company and the Pilgrim’s Pride label through an award-winning television commercial, in which he appeared wearing a Pilgrim’s hat as he affably related the superiority of his product line. The ads helped raise the profile of the Texas-based company, which posted sales that year of $268 million and profits of $2.1 million. The following year, Pilgrim’s Pride had become the ninth largest chicken producer in the United States and the first to introduce fresh, whole, boneless chickens to the market. Yet, despite such advances, as well as a conscientious paring down of its debt, the business was perhaps as precarious during the mid-1980s as it had ever been. The reason for this, wrote Mack, was that “the company was almost entirely dependent on highly cyclical commodity chicken sales. Twice over the years, commodity chicken down-cycles had almost bankrupted Pilgrim’s Pride.” Pilgrim’s solution to this problem came in January 1986, when the company began operating a state-of-the-art “further processed” facility at Mt. Pleasant, Texas. In November of the same year, the company went public with a listing on the New York Stock Exchange; however, Bo maintained ownership and control by retaining 80 percent of the company’s shares.

Bo’s gamble on prepared chicken for the retail market proved just as risky as the commodity business, due to strong competition from Tyson and ConAgra as well as heightened advertising and promotional costs totaling as much as $6 to $8 million a year. 1988 marked a low point for the company when it posted an income loss of nearly $8 million on $506 million in sales. A switch to the accrual method of accounting, however, allowed the business to report a final profit of $1.7 million.

Two well-timed decisions enabled Pilgrim’s Pride to rebound dramatically in 1989. The first was Bo’s surrender of the retail market (now a minuscule percentage of corporate sales) and full-scale assault on the food service industry. Although Tyson remains the leader, Pilgrim’s Pride has been able to promote itself as a strong alternate through contracts with such frontrunners as Kentucky Fried Chicken, Kraft General Foods, and Wendy’s restaurants. The second well-timed decision was Pilgrim’s entry into the Mexican consumer market with the late 1987 acquisition of four fully integrated poultry operations serving the populous hub of Mexico City. The purchase price for the Mexican venture totaled $15.1 million. Largely because of these two moves, 1989 net sales shot up 30 percent, and net income rose above $20 million, for a profit-to-sales ratio of just over 3 percent. (Pilgrim’s long-term goal is to boost this latter figure to around 4 percent.) The only blemish for the company that year was Pilgrim’s involvement in a campaign contribution scandal with eight Texas lawmakers. Pilgrim’s CEO was forced to defend himself before a grand jury, but he was not indicted and was able to return to the business of keeping the company in the black.

From 1987 to 1991, the company tripled the size of its Mexican operations, built a strong presence in frozen retail, established a dependable export business, and witnessed enormous increases in output for its further processed and prepared divisions. In addition, it entered into a number of joint marketing and advertising arrangements that kept down costs while increasing market share. All of this helped contribute to record sales of $786 million. Nevertheless, profits were down 21 percent and hovering at just 1.5 percent of revenues. Pilgrim’s was a well-integrated agribusiness, twentieth in domestic egg production, fifth in broiler sales, and blessed with a solid brand name and rising per capita consumption of its leading product. It had anticipated and responded to consumer demand with a wide array of new food products, including fresh tray packs, party packs, chicken patties, nuggets, strips, and ready-to-eat gourmet entrees and appetizers. Furthermore, the company owned dozens of modern breeder and grow-out farms; several feed mills and processing plants; and 19 distribution facilities in the Southwest and in Mexico. The explanation for Pilgrim’s slide was most likely twofold: the company had failed to distance itself enough from the cyclical price woes of plain processed chicken, and it had saddled itself with increasing debt.

In 1991, the company spent $34.4 million on improving the efficiency of its Mexican facilities and another $26.1 million on improving its domestic plants. The company entered 1992 hoping for the best and aiming at reaching sales of $1 billion by 1994, but while the year proved to be full of noteworthy events, few of them were good news for the company. In January a fire at the Mt. Pleasant plant left 21 injured following a full evacuation of some 1,200 employees. The cause of the fire was determined to be a loose hydraulic line near a burner. Fortunately, all injuries were minor. Then, in May, a debt restructuring was announced that would allow the company greater latitude in repaying its short-term obligations. The deal was completed in late June and served to extend Pilgrim’s loan maturities until May 1, 1993. However, in order to arrange the waivers, the company was forced to sell five million common shares to Archer-Daniels-Midland (ADM) at six dollars per share. As a result, Bo Pilgrim’s personal stake was effectively reduced from almost 80 percent to approximately 65 percent. A clause limiting ADM from acquiring more than a 20 percent interest and Pilgrim’s indemnification of ADM against losses for an undisclosed period of time were also part of the deal.

Despite such warning signals, several analysts were surprised by a management reorganization announced in August, which involved the replacement of William Voss, president since 1988. Voss’s successor, 11-year veteran Monty Henderson, was appointed to turn a declining earnings trend around. For the first nine months of fiscal 1992, ending June 27, the company sustained a net loss of $17.1 million. In the company’s final quarter, another huge drop was added to the bottom line, resulting in one of its worst years ever. According to a Wall Street Journal article published just after this last piece of news, Pilgrim’s year-long “financial funk” was in danger of worsening. Short-term debts still needed to be reduced and further loan negotiations seemed inevitable. In November the company announced that it would not pay its common stock dividend for the first quarter of fiscal 1993. In addition, it was reported that “Pilgrim’s Pride is seeking waivers of financial covenants in loan agreements with major secured lenders to whom it owes $65 million.” Discussions for extending the May 1993 deadline until October 1993 were in progress.

In a March 16, 1993, press release, Pilgrim’s Pride announced that it filed a registration statement with the U.S. Securities and Exchange Commission regarding its proposed public offering of $100 million of Senior Subordinated Notes due 2003. According to the press release, “The offering is part of a refinancing plan designed to consolidate indebtedness, extend the average maturity of Pilgrim’s Pride outstanding indebtedness and improve Pilgrim’s Pride’s operating and financial flexibility.”

Pilgrim’s Pride has pinned its hopes for a recovery on the areas where it has remained strongest: prepared foods for the foodservice industry and consumer sales to the Southwest and Mexico. Minimal increases in domestic chicken consumption should not deter the company, provided prices rebound and overproduction is avoided. Viewed in a historical context, the company’s current problems might only be a small downturn in an overall trend of rising revenue and profitability, for Pilgrim’s Pride still remains a major contender in chicken processing.

Principal Subsidiaries

Pilgrim’s Pride de Mexico; Texas Egg Limited.

Further Reading

Greenbaum, Jessica, “ ’sell ‘em or Smell ‘em’,” Forbes, July 16, 1984; Mack, Toni, “Pilgrim’s Progress,” Forbes, June 25, 1990; “History and Description: Pilgrim’s Pride Corporation,” Pittsburg, Texas, Pilgrim’s Pride, 1991; “Lonnie ‘Bo’ Pilgrim,” Pittsburg, Texas, Pilgrim’s Pride, 1991; “21 Hurt in Texas Plant Fire,” New York Times, January 9, 1992; “Pilgrim’s Pride Corp.: Archer-Daniels-Midland Co. Agrees to Buy an 18% Stake,” Wall Street Journal, May 13, 1992; “Pilgrim’s Pride Ousts President, Chooses Henderson for Post,” Wall Street Journal, August 10, 1992; Crispens, Jonna, “Pilgrim’s Pride Has New President,” Supermarket News, August 24, 1992; “Pilgrim’s Pride Says Refinancing Delays Threaten Loan Pacts,” Wall Street Journal, October 2, 1992; “Pilgrim’s Pride Omits Dividend on Common for Fiscal 1st Period,” Wall Street Journal, November 27, 1992; “Pilgrim’s Pride Corp.,” Wall Street Journal, January 13, 1993; Pilgrim’s Pride press release, March 16, 1993.

—Jay P. Pederson