Mini Case #3
Smithfield Foods, Inc.
Smithfield Food, Inc. engages in the production and marketing of fresh meat and packaged meat products. The company is involved in the production of hog and other various fresh pork, beef, poultry and packaged meat products. Smithfield offers its products to supermarket chains, wholesale distributors, the foodservice industry, export markets, and other further processors. The company was founded in 1961 and is headquartered in Smithfield, Virginia. Smithfield Foods has followed a vertically integrated business model. Through various acquisitions, Smithfield has become the largest pork processor and hog producer. Smithfield’s vertical integration strategy has created strengths and weaknesses for the company. Through vertical integration Smithfield has had greater control over its value chain. The ownership of the farms has allowed them to control the quality of the meat to coincide with customer demands. Being able to make changes at the farm level has created a competitive advantage for Smithfield allowing them to address customer concerns such as animal living conditions and antibiotic use. Vertical integration has also created business risk for Smithfield Foods. The inherent risk has created concerns for investors and put pressure on Smithfield’s share price. Analysts believe that Smithfield should break up their business into separate entities. The volatility in commodity prices, namely corn, has created profit risk for Smithfield Foods and has led to uncertainties in profit growth. Smithfield is insulated from hog commodity prices, but corn makes up 65% of the cost of raising hogs. Corn prices have risen nearly 60% since 2007 because of increasing populations and demand from the ethanol industry. Analysts have avoided investment in Smithfield due to risks from their vertical integration strategy. The