Risk Factors in Marketing

Ray Price

Pig Improvement (Canada) Ltd., Box 266, Acme, AB, Canada, TOM OAO

Introduction

The world wide demand for pork has been well documented by many people. Producers, processors, and government agencies from all over the world have described the opportunities that exist for increased pork production. In this corner of the world we, of course, believe that we are the best area suited to capitalize on this new demand. There are many logical reasons for this view, but when competing with the world there are many factors that can affect the best laid plans - not all of them are logical.

First let's look at the basic facts.

• Pork has the largest share of the world's meat consumption (44%), with beef second (28%), and chicken third (24%). Source FAO
• Worldwide pork consumption grew by 24% between 1985 and 1992 while global population grew by 13%. Source USDA.
• Traditional pork exporting countries (e.g., Taiwan, Holland) have had problems which will necessitate at least temporary changes in the way importing countries purchase pork.
• New trade agreements have and will continue to reduce barriers to worldwide trade in pork.
• Growing economies creating higher per capita income in countries which consume large amounts of pork, combined with new production technologies will make pork more affordable for a large number of people.
• New transportation and distribution technologies have increased access to world markets.

The previous comments all point to a large opportunity for producers in North America to increase their production to supply a growing demand for pork. The next part of the paper addresses some of the risks which must be recognized in order to be successful in marketing pork.

Risk Factors

Risk factors can be broken into two groups: controllables and uncontrollables. Both types must be understood and rated for risk vs. return, not unlike any other investment decision.

Controllable

The Ability to Choose the Right Market. Markets the world over are becoming more demanding. Increasing effort is required to understand and target the correct market for a product. Even within countries there may be different markets of varying sizes which may be attractive to develop. In every market, price is important. There are markets where the cost of protein is the most important consideration. In these markets our usual "quality" of lean standard is unimportant relative to the "quantity" of lean. Other markets require unique specifications on size, fat cover, and colour of both lean and fat to receive the highest market premium. The ability to decide which market or markets are the best fit for the supplier's strengths is critical.

The Ability to Sustain. In any decision to market, the ability to sustain a position in the market is important. If the choice is to sell by providing the lowest cost in the market the supplier must be sure that his low cost advantage is sustainable. If it is not, the market will disappear as soon as the lower cost competitor arrives. By the same token, if the supplier can supply a high quality product to a customer, but the costs involved in producing the product are very high, the supplier will run the risk of the customer deciding that the premium to be paid is not worth the extra cost relative to a lower quality, but cheaper supplier. The ability to sustain a marketing effort through the costly start-up phases of the market, as well as in times of short term unprofitability, are also very important.

Dependence. This is a particular concern to smaller suppliers. Any time a customer starts to develop into a major part of the total business, a conscious decision should be made with regard to the risk of putting all the "pigs in one farrowing crate". The business risk in losing the customer must be weighed against the customer's dependence on the supplier's product. As soon as the customer's dependence starts reducing so will profit margins. If there is no plan for this problem, then the business may fail. On the other hand, if there is mutual interdependence then it may be the best and safest type of arrangement. MBA's may call it a synergistic alliance; we call it a good deal.

Losing Focus. Many times the best marketing efforts result in failure because of a lack of attention. As in every part of the business - understanding costs, weighing potential risks, developing a plan and implementing it are keys to success in marketing. It does not guarantee success, but losing focus will likely lead to failure.

Making the Wrong Decision. The most obvious risk factor. Despite hard work and best intentions it is common to make the wrong decision. It may be a result of an event beyond the suppliers control or it may have been something as simple as a pricing mistake. Either way, the key is to make sure that any mistake is small enough to be "a learning experience".

Uncontrollable

Political Decisions. This refers to logical and not so logical reasons for some of the problems which occur in marketing pork. Countervailing duties, tariffs, bogus health issues, and trade sanctions are a few of the types of barriers used to impede, increase the cost, or totally restrict product from entering countries.

Real Health Issues. Every producer/processor is susceptible to the impact of health issues. While they may not have been a contributing cause to the problem, each individual producer/processor is susceptible to a regional/national health problem that affects exports.

Exchange Rates. This factor is tied in quite closely with a countries economic and political stability. For someone who was relying heavily on the Mexican market 2.5 years ago, they would have learned a great deal about exchange rates and how they can affect marketing when the peso value dropped against other international currencies.

Our Story

The basis for our decision to start Trochu Meat Processors and Sunterra Market was a result of careful study, extensive research, and having too many brothers.

The key factors in our initial decision were quite simple. The biggest part of our decision had been made many years before when Pig Improvement (Canada) Ltd. was established: To be a leading participant in an industry in Canada that could compete on a cost and quality basis worldwide. To us, the extension into the pork business in a small way was natural. We felt it was important to understand the needs of the consumer directly. The best way to accomplish this was to have consumers purchasing our products every day at our own retail outlets, supplied by our own processing plant, from our own farms.

At this first stage we believed the factors outside our control were not a great risk. We were also confident in our ability to sustain any market condition as the size of the business was quite small relative to the rest of our business. We had no customers when we started, so over dependence was not an issue. We decided to split up responsibilities between three of the brothers so that each of us could focus on a separate business - PIC, Trochu Meats, and Sunterra Markets. The other two factors I listed above, we were not as sure of, but we judged that the risk did not out weigh the return. We expected the return to be mostly information for PIC, if not a direct economic return on the investment into processing and retail.

Since the initial stage the business has grown. Trochu Meats and Sunterra Markets still provide valuable information on PIC's pork in the domestic market, but now Trochu Meats has expanded to export pork products and provides direct feedback on the type of pork many different export markets require. Sunterra Markets now have four outlets which serve customers everything from muffins, to fresh meat, to hot lunches, to take home ready-to-eat meals. This enables us to get direct feedback on the latest trends such as "Home Meal Replacement" at the retail counter. It also gives us the ability to develop new products and understand both wholesale and retail meat pricing. Probably the most important feedback from both Sunterra's retail and Trochu's wholesale and export customers is what they believe constitutes value.

We have made some mistakes and all of them have been "learning experiences". Many of the risk factors come up from time to time and now that we are exporting a significant part of the production from our Trochu Meats plant we are more susceptible to "Factors outside our control" than when we started. So far, the rewards have substantially outweighed the risks, and we believe that our focus on quality and service in every area of our business will continue to be keys to our success.