Walmart wants to attract customers to its stores by offering high-quality steaks. It also wants to keep prices low.
So, for the first time, Walmart is working directly with cattle ranchers to create its own Angus beef supply chain.
The company announced in April that it will work with ranchers, a beef processor and a cattle-feeding company to supply steaks and roasts to 500 of its stores in the southeast. Walmart has not revealed a name for its new steak line, which will start hitting stores this fall.
During Walmart’s shareholder meeting last week, executives said entering the meat supply chain would enhance its credibility with customers on a key item in the grocery aisle.
“This became a really important priority for the company,” Scott Neal, Walmart’s senior vice president of meat, said in an interview with CNN Business. “Meat is center of the plate” and “drives the customer to the store,” he added.
Customers are demanding transparency in how their food is produced. Neal said: “Trust in our food system is becoming more important.” Working directly with cattle ranchers and feeders will give Walmart greater visibility into the meat supply chain.
Walmart is also seeking to control some beef production to gain an upper hand on suppliers. Owning its own beef supply could put Walmart in a stronger position when it negotiates prices with companies.
The beef industry has consolidated in recent years and Walmart (WMT) gets its beef mainly from Tyson Foods (TSN) and Cargill, according to Walmart (WMT) US chief Greg Foran.
“I think we all know the market dynamics of what happens when you generally operate in a duopoly. It’s not all that good for the customer,” Foran told analysts on Friday.
Walmart’s entrance into the industry poses a threat to Tyson, which depends on the company. Walmart is Tyson’s largest customer, accounting for more than 17% of the meat company’s sales, according to filings.
However, Tyson brushed off concerns that Walmart’s move will hurt its business.
“Our business is strong with Walmart, and they’ve been a great partner for many years,” Tyson CEO Noel White told analysts last month.
Walmart made a similar move with milk recently. The company built a milk processing plant in Indiana to supply milk to 500 stores.
“What drives a decision like that is if we start to see a consolidation in supply,” Foran said. Walmart’s milk suppliers’ prices had gone up, leading the company to explore other options.
Walmart does not want to supply every single one of its more than 4,700 stores with its own milk, but “it gives us some leverage” when negotiating contracts with its distributors, he added.
Other retailers are also taking control of their food supply chains to control costs.
Costco (COST) built a $300 million chicken plant in Nebraska that will soon produce roughly 100 million rotisserie chickens a year for its food courts and poultry aisles. Costco (COST) believes bringing poultry production in house will reduce its costs by 10 to 35 cents per bird.