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Carroll’s Foods, Inc.

Carrolls Foods, Inc.

2822 West Highway 24
Warsaw, North Carolina 28398
U.S.A.
Telephone: (910) 293-3434
Fax: (910) 293-3199
Web site:http://www.carrollsfoods.com

Wholly Owned Subsidiary of Smithfield Foods, Inc.
Founded:
1936
Employees: 2,500 (est.)
Sales: $500 million (1999 est.)
NAIC: 11221 Hog and Pig Farming; 11233 Turkey Production

Based in Warsaw, North Carolina, Carrolls Foods, Inc. has been a subsidiary of Smithfield Foods since 1999, following a long-term association with the Virginia-based meat packer. Carrolls is one of the largest hog producers in the world, sending nearly 3 million hogs to market each year. It operates its own farms, as well as partners with contract farmers to raise its animals in North Carolina and Virginia. In addition, Carrolls maintains joint ventures with hog producers in Brazil and Mexico. The company is also one of Americas largest producers of turkeys. It owns a 49 percent stake in Carolina Turkeys (a joint venture with Goldsboro Mills), one of the countrys largest processors of turkey, selling under the Carolina brand as well as private labels.

Carrolls Foods Emerges During the Depression Era

Carrolls Foods was founded by Otis S. Carroll, whose father owned a general store in a town named Turkey, a few miles from Warsaw. He accumulated land during the lean years of the Depression. In addition to leasing his land to tenant farmers, Carroll opened a grain mill in 1936 on a site outside of Warsaw where Carrolls Foods headquarters would one day be built. He also took advantage of excess feed to raise broiler chickens and hogs. Far from being a stereotypical farmer, Carroll was a risk-taker with a bent for enterprise. In 1967 he decided to bring in a younger associate to help with the mill and introduce some new ideas. He hired a 32-year-old feed salesman named Bill Prestage, who worked for Central Soya Inc. of Fort Wayne, Indiana, and would one day become a 50 percent partner. It was Prestage who convinced Carroll to raise turkeys for the entire year, rather than just for the holidays, and to drop chickens.

Prestage was also instrumental in the company developing new feed for its turkeys, pelletizing the mix to improve digestibility. The result was less waste and higher profits. While competitors required five pounds of feed to produce one pound of turkey, Carrolls only needed 3.3 pounds. With that edge, the company stopped selling its grain and by 1969 dedicated it all to the raising of its turkeys and hogs. The company also proved innovative in the production of hogs, applying some of the factory system techniques used in the raising of broilers and turkeys. The factory system had been applied to chickens for some twenty years. Because of red meat rationing during World War II, the demand for eggs and chicken had increased significantly. Battery cages arranged in rows and tiers became standard, as did the practice of using confinement sheds for broiler chickens. Moreover, poultry underwent vertical integration. Companies such as Tyson and Perdue began to acquire all sectors of production: breeder and commercial flocks, eggs, hatcheries, feed mills, medications, slaughter, processing, and delivery. Small farmers were also contracted to maintain the chickens. Carrolls Foods would be in the vanguard of businessmen who transferred these techniques to hog production.

Traditionally hogs had been reared in a mud pit with corn feed haphazardly spread across it. Not only did this arrangement limit the size of an operation, it made the animals susceptible to such diseases as cholera that could decimate an entire herd. Such would be the case in 1969 for Murphy Family Farms, a rival of Carrolls and future acquisition of Smithfield. In response to this crisis, Murphy turned to contract farming, moving piglets from one contractor to the next at particular stages when the animals would be likely to pick up diseases from older animals. Carrolls contribution to the new way of raising hogs was to create a controlled environment: buildings with a metal grating over a concrete floor and a lagoon in which wastes could be properly treated. Old-timers may have called them hog parlors, but these structures were a key element in creating a factory system. Aside from insuring the quality of the animals, it also provided Carrolls with other tangible benefits. By increasing the number of hogs it could raise, Carrolls enjoyed the economies of scale in its purchase of feed and vitamins, resulting in the company becoming one of the lowest-cost producers of pork as well as turkey.

Sonny Faison Joins Carrolls in 1974

Revenues of $2.8 million in 1968 grew to $16 million by 1974, at which point a pair of events occurred that changed the direction of Carrolls. The company was about to open its first 1,000-sow hog farm and was in the midst of constructing a new feed mill when grain prices skyrocketed because of a crop failure, putting the company in a precarious position. Rather than take a step back, Carroll and Prestage decided to make an even greater commitment to the hog business, increasing their investment by turning to a genetically pure breeding stock rather than a mixed lot of sows. Also in 1974 the company added a new member to the management team, Sonny Faison. He was a Wake Forest graduate who became an accountant and worked as a controller for a North Carolina furniture factory before joining Carrolls. Not only did Faison greatly improve the companys accounting systems, as a non-farmer he also came into the business with a fresh perspective. He recognized that because the company could not control its selling price, the key to prosperity was controlling costs by knowing precisely the breakdown of those costs. Computers now joined hog parlors as essential ingredients in the modern production of hogs.

Faison emerged as president of the company after Carroll died and his daughter, Joyce Carroll Mathews, inherited his share of the business. Prestage wanted to go it alone and offered to buy out Joyce. According to company lore, Prestage wrote down a price, supposedly $6 million, on a slip of paper, which he then presented to Joyce in an envelop. He would either buy her out at that price, or she could acquire his share of the business for the same amount. To his surprise, Joyce decided to pay the $6 million for complete control. Faison had apparently convinced her that he could effectively run the business for her. Prestage would eventually start his own turkey and pork producing company, Prestage Farms, while Faison continued Carrolls movement towards vertical integration in response to outside developments. At the time, the company sold most of its turkeys to one packer, Marval Poultry Co., but when Marval was acquired by turkey grower Rocco Enterprises in 1982, Carrolls was suddenly dependent on a rival, which could now squeeze it on price. In response, Carrolls joined forces with another North Carolina turkey grower, Goldsboro Milling Co., to create Carolina Turkey Co. and build a $50 million processing plant. The business would be successful, but because Carrolls gained a processing capability late in the game, it would require some time to grow the Carolina Turkey brand name.

Faison then tried to learn from the companys experience with turkeys to protect its position with pork. To get a jump on the other major North Carolina pork producers, Murphy Farms and Prestage Farms, in 1986 Carrolls entered into a hog producing deal with Smithfield Foods, agreeing to sell all of its hogs to the packer at market price. As part of the deal, Carrolls bought 13 percent of Smithfields stock, which in effect provided the company with some of the benefits of vertical integration. Historically, hog prices were subject to four-year cycles. When prices were low, Carrolls would now benefit through Smithfields increased processing profits. Moreover, Faison gained a seat on Smithfields board to help protect Carrolls interests.

Like Carrolls, Smithfield was established during the Depression. Joseph Luter and his son, Joseph Luter II, both worked for Gwaltney, a Smithfield, Virginia, pork packer, and decided to strike out on their own. They raised $10,000 to start Smithfield Packing Co. in 1936 and opened a plant across the street from their old employer. Joseph Luter III was originally uninterested in becoming involved in the family business, opting instead to pursue the law. While a senior at Wake Forest University, however, his father died. Upon graduation in 1962 he returned home to take the reins of Smithfield Packing. When a conglomerate bought the business for $20 million four years later, Luter stayed on as manager but was fired in six months. Nevertheless, he had become a rich, young man. He started up a Virginia ski resort, Bryce Mountain, and spent considerable time in New York. In December 1974 he learned that Smithfield was deep in debt and losing money. He told Forbes in a 1992 profile, For a company like this to lose money in December, its like Budweiser losing money in July. He decided to drop the ski lodge and reacquire the family business.

Company Perspectives:

Efficiency, consistency, and product quality, as well as the safety of our associates and animals are four of Carrolls primary goals. Our success in achieving these goals relies heavily on the integral working relationship of each department within our company. Therefore, communication, team work, dependability, leadership, and self-motivation are imperative qualities in our pork and poultry business.

With Smithfield stock trading at 50 cents a share, Luter made a deal with creditors to run the company for $50,000 a year with the option of buying 10 percent of the stock at $1 a share. Luter cut debt by unloading nonpork businesses and within a year returned the company to profitability. He then began to take advantage of the hog price cycle to acquire stock when the price of Smithfield shares was depressed because of high commodity prices. Under Luter, Smithfield acquired other brand name processors (including Gwaltney), whipping them into shape through cost-cutting measures. Although midwestern packers had long dominated the field, Smithfield, augmented by Gawltneys operations, was gaining the upper hand. Not only was it closer to the heavily populated East Coast, placing half of the U.S. population within a day of delivery, Smithfield was becoming less reliant on Midwest hogs. After signing the deal with Carrolls, it received a major share of its hogs from its partner. It also established its own pork producing operation in North Carolina, Browns of Carolina. Smithfield would enjoy an ongoing advantage as North Carolina made rapid strides in overtaking midwestern states in hog production. In 1986, North Carolina was the seventh largest pork producer, and by 1996 it would be second only behind Iowa. While North Carolina hog producers like Carrolls were able to ramp up production through expansion of the factory system, midwestern states passed anticorporate farming laws in an effort to protect family farms. Ironically, contract farming in North Carolina served as a way to retain family farms. Producers like Carrolls provided contract farmers with guaranteed income that allowed them to borrow sufficient capital in order to convert to hog production. Loans were then paid off in a matter of years and the farmers could look forward to a profitable future.

Carrolls and Smithfield Forge a Relationship in 1991

Carrolls and Smithfield signed a joint hog-production agreement in 1991 in an effort to bring a leaner hog to market, buying the North American license to a genetically new pig developed by the National Pig Development Co. of East Yorkshire, England. In total the partners spent approximately $15 million to buy the rights, fly in 2,000 sows, and build a specialty North Carolina facility to house them. It was estimated that the NPD pig featured half the back fat of other pigs and significantly leaner hams and bacon. Not only would the leaner pigs mean more sellable meat per animal, resulting in less costs associated with trimming, the product would be able to command a premium price. Because the leaner pork would have a different texture than consumers were accustomed to, Carrolls also bred the NPD pig with other varieties in order to gain some flexibility in finding a leaner pork that would appeal to consumers.

Although Carrolls deals with Smithfield gave it the benefits of vertical integration, it remained vulnerable to commodity price swings in a way that Smithfield was not. In 1998, hog prices plummeted, reaching lows not seen since 1971, down more than 60 percent over 1997 prices. Despite a 7 percent increase in U.S. consumption of pork and a 32 percent increase in exports, the market was glutted, caused by a convergence of factors. Not only did family farmers and larger concerns like Carrolls overproduce hogs, the Midwest also harvested a large, high quality corn crop. Because the corn prices were low, hogs producers held onto their stock longer, resulting in animals that were heavier than normal. Another major factor was the closing of some Midwest packers who had been losing money. The loss of production capacity meant that there were more hogs available than could be slaughtered. Moreover Canadian hogs increased the amount of hogs available to processing plants. While hogs farmers were in danger of going out of business, processors like Smithfield enjoyed robust profits, especially since strong consumer demand for pork products maintained prices at the grocery stores in spite of the low prices for hogs.

In February 1999, Smithfield announced that it would buy its strategic partner, Carrolls, Americas second largest hog producer, for $500 million. Carrolls would be run as an independent business with Faison staying on as its president and chief operating officer. Carrolls would therefore be insulated from further price swings, and Smithfield would become the worlds largest hog production and processing company. It would gain a number of advantages because of its increased size, including the ability to price its products six months out because its costs would be known. When the deal was finalized three months later, the deal would shrink considerably, with Smithfield paying $107 million in stock and assuming $231 million in debt. Although it was originally thought that Smithfield would sell off Carrolls turkey operations, it decided to also retain that business.

Smithfields dominance in the production of hogs grew even larger in 1999 when it acquired Murphy Family Farms of North Carolina, the countrys largest hog company. The company was founded by Wendell Murphy who graduated from North Carolina State in 1960 with a degree in agriculture. As Otis Carroll had done, Murphy became involved in hogs through the ownership of a mill, which he bought in 1962 after he and his wife scraped together $3,000 and his father, a tobacco farmer, guaranteed a $10,000 loan. He raised pigs on the side, using ground corn left over from the mill. By 1968 he devoted his business solely to the raising of hogs. As discussed earlier, a 1969 cholera epidemic that decimated his herd led him to focus on contract farming that allowed him to become the top U.S. hog producer. No matter how large the company had become, however, the depressed hog prices of the late 1990s was slowly driving Murphy out of business, just as it was the smallest hog farmer. Murphy had failed to develop its own packing operation and in order to maintain operations was forced to go deep into debt. The Smithfield deal included almost $290 million in stock and $170 million in debt assumption.

Carrolls, as well as Murphys, lost a bit more of its autonomy in 2001 when Smithfield consolidated all of its production units into a management company named Murphy-Brown LLC in order to realize cost savings in purchasing, transportation, logistics, and better utilization of its management talent. Nevertheless, the three children of Joyce Carroll Mathews, who inherited the business after their mothers death, benefitted from the stock they owned in giant Smithfield that was three times the size of its nearest rival and gaining worldwide stature.

Principal Divisions

Hog Production; Turkey Production.

Principal Competitors

ConAgra Foods; Hormel; Perdue; Prestage Farms.

Key Dates:

1936:
Otis S. Carroll opens a grain mill.
1967:
Bill Prestage joins company, which expands its turkey operations.
1974:
Sonny Faison joins company.
1982:
The company buys a 49 percent stake in Carolina Turkey Co. with Goldsboro Milling Co.
1983:
Prestage sells stake in the company to start his own business.
1986:
The company enters hog producing deal with Smithfield Foods.
1999:
Smithfield Foods acquires the company.

Further Reading

Dailey, David, Hog Heaven, Business North Carolina, April 1994, p. 30.

David, Gregory, Bionic Pigs? FW, November 8, 1994, p. 32.

Koselka, R., $OINK, $OINK, Forbes, February 3, 1992, p. 54.

Parker, Akweli, Norfolk, Va.-Based Smithfield Foods to Buy Hog Producer, Virginian-Pilot, February 26, 1999.

Rhee, Foon, Glut of Hogs Puts North Carolina Farms in Jeopardy, Charlotte Observer, December 23, 1998.

Roth, Daniel, The Ray Kroc of Pigsties, Forbes, October 13, 1997, p. 115.

Smithfield Gets Carrolls; Big Pork Producer Buys Rival, Morning Star (Wilmington, N.C.), February 26, 1999.

Ed Dinger

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