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DecisionNext Blog

Further Processors should watch Netflix

Published by Janette Barnard January 16, 2018

If you are one of the 104 million paid Netflix subscribers, perhaps you’ve watched one of their original series and noticed a lot more original content this year. (The Crown, anyone?)

Now that Netflix has the eyeballs of roughly one-third of the United States, they are doubling down on creating new content and announced recently that they’ll spend up to $8 billion in 2018 on original content creation.

That’s notable because the company should finish up 2017 with about $12 billion in revenue.

So why is Netflix budgeting two-thirds of 2018 revenues on content creation? And why are we talking about it in a meat blog?

Because Netflix was once simply a distributor for the entertainment companies who created content. Now they are a competitor, in a big way and going after the high value potential of original content.

This is just one example of how the entire media/entertainment space has seen companies moving out of their traditional corners and across the value chain.

Sound familiar?

Look around the food industry and you’ll see Costco moving into poultry processing, Walmart entering the milk processing business, and pork packers expanding their further processing capacity.

Whether entertainment or meat industry, companies are migrating up and down the supply chain in search of margin expansion.

Margin expansion is what’s keeping executives up at night.

And further processing by definition is a margin-expanding business. As the protein industry grows, further processing is an attractive investment for companies already in the value chain and for outside capital in the form of private equity.

Primary processors see further processing as a mechanism to capture more dollars per pound.  

Retailers see further processing as a way to insure supply and reduce input costs per pound.  

And private equity sees the space as a way to participate in a growing industry while minimizing risk.

Hence the boom. And a once sleepy space has now become wildly competitive. Remember the Tyson acquisiton of AdvancePierre for a 14x EBITDA mutliple? Or the Pilgrim’s vs Tyson bid battle for Hillshire a few years ago?

Not only is further processing where significant value is created in the meat supply chain but (on the whole) it’s a space with less risk than either end of the supply chain, either primary processing or foodservice/retail.

But in spite of less inherent risk, these companies tend to behave like risk minimizers more than profit maximizers. And as more institutional investment moves in along with more competition, there won’t be room to leave margin on the table anymore.

What can execs at further processors do to build an edge? How do further processors differentiate?

-       Create new purchasing strategies or optimize existing purchase strategies by taking a portfolio approach.

-       Maximizing revenue by upping your pricing savvy to understand price elasticities and how they impact your ability to set prices, independent of historical pricing practices.

-       Companies that primarily do tolling arrangements in order to eliminate market risk can take a broader view of the market and decouple purchasing from sales to drive margin expansion.

With all this shuffling as companies move up and down the value chain, further processors will need to reinvent themselves to compete in a more crowded environment with increasingly sophisticated competitors. This creates an ideal opportunity for data analytics plays to optimize both ends of the business model from purchasing to sales.

So yeah, further processors should watch Netflix. Watch what market and competitive forces come into play as an entire value chain rearranges. It’s likely to be as instructive as it is entertaining.

This article was originally published on Meatingplace.

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