Economic Analysis: How Challenging Times May Impact Retail Bacon Sales
Just a few weeks ago, foodservice operators were “all-in” on breakfast. Menus expanded to include all-day offerings and quick-service chains were competing for early-hour customers. According to NPD Group, quick-service traffic was up 4% for the week ending March 8, largely due to breakfast marketing. But COVID-19 has suddenly and drastically changed both foodservice and retail as more people eat at home. How will that change the breakfast wars for foodservice? And how should retailers adapt?
Some operators have already announced changes to their menus in response to a decline in traffic after Americans are staying home to reduce the spread of COVID-19. McDonald’s, for example, is pulling its all-day breakfast menu, as well as some of its less-popular items, to simplify its operations. Instead of advertising its new breakfast menu, Wendy’s is spending some of its marketing dollars on support for franchisees. Meanwhile, as consumers shift from breakfast on the go to breakfast at home, retailers are seeing increased consumer demand for breakfast items. As a result, the prices for common breakfast items, like eggs and orange juice, have spiked.
These changes are also likely to impact other popular breakfast ingredients, such as bacon. According to Datassential and Steiner Consulting statistics, foodservice operators used more than 1.9 billion pounds of bacon in 2018, which represented about two-thirds of all the pork belly output for the year.
Consumers are now eating at home more across all dayparts, and all categories of foodservice are moving to carry out and delivery models. So we took a look at how these changes are anticipated to impact bacon prices in the months ahead.
The Best Pork Belly Buying Opportunity in Decades
According to Datassential, about three-fourths of all the foodservice bacon demand comes from quick service restaurants (fast food), the bulk of which are chains with more than 250 stores. With more than 90 percent of Americans now under stay-at-home orders, fast food sales have seen significant declines. There is an opportunity, as well as an absolute need, for processors and retail operators to pivot. Markets are offering plenty of incentives for that to happen.
On March 31, USDA reported the value of the pork belly primal at $38/cwt — a level not seen since December 1998. And when adjusted for inflation, a $38 belly in 1998 is the equivalent of $60/cwt today. Pork belly prices traded under $30/cwt in the early 1980s but in inflation-adjusted terms, prices today are far lower.
In other words, the current wholesale pork belly market is offering the best featuring opportunity of our lifetimes.
The most recent data from the USDA Retail Price survey indicated that retail bacon features are still pricing bacon between $4.80 and $5.20 per pound. A regression model of the last 20 years would suggest that a belly price of around 38 cents would correspond to a retail feature price under $2 per pound. The feature opportunities are tremendous, even if the current low belly price does not last. If belly prices were to double from current levels, to 80-cent bellies for example, the corresponding retail price would still be around $3.50 per pound.
We estimate that derind pork belly production in Q2 will be a little over 900 million pounds. A 50% drop in foodservice demand would imply an excess 300 million pounds of derind bellies in Q2 alone.
We know bacon love is off the charts. Our Insight to Action data found about 60% of consumers say they love eating it. With the changes we’re seeing in bacon economics, we recommend retailers take advantage of this opportunity to pivot and meet consumers where they are now — consuming their meals around the breakfast table rather than in their cars and work desks.
Looking Beyond Bacon
As with bellies, pork trim is currently trading at an extremely attractive level. The latest price quoted for 42CL pork trim was under $20/cwt, 53% lower than the same period a year ago and the lowest price so far this year. The value of 72CL pork trim was last pegged at $53/cwt, 34% lower than the previous year. Trim supplies are expected to run about 6% higher than a year ago in Q2 and low prices for some pork cuts could result in even more pork trim available.
Packers may soon find that the price of some cuts is under the value of trim and thus divert product to the grinder. The most recent value of bone-in hams, for instance, was quoted at $37/cwt. Even when accounting for the removal of bone, the grinding value of hams is now under $50/cwt, which could result in significantly more supply available.
Bottom line: supplies of pork available for breakfast items are plentiful. Price points and margin opportunities are some of the best in decades. Retailers have a tremendous opportunity to meet consumers’ breakfast needs at a significantly reduced price.
How are your retail offerings changing, and how are you innovating to support your customers? Let us know. We’d love to hear from you and learn how we can continue to support you through this unprecedented time.
This analysis is provided by Steiner Consulting Group.