Perdue Farms is facing a decision about increasing production of organic chickens as consumer preferences shift. A team analyzed the situation and makes three recommendations: 1) Gradually increase organic production starting in the West region with highest income-sales correlation. 2) Hire an advertising firm for a $1.5 million marketing campaign to increase organic awareness. 3) Acquire a large organic feed producer for vertical integration, estimated at $5 billion, to gain synergies and revenue. The recommendations aim to realign production with consumer tastes favoring organic options.

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Annemarie Folan, Katina Gattuso, Victoria Gillern, Haley McCraven, & Alex Sivo
MECN 6200 - Group News Article Assignment
“Jim Perdue Talks about Change in Chickens - and the Market”
Introduction
For this assignment our team choose to analyze the recent Wall Street Journal news
article entitled “Jim Perdue Talks about Change in Chickens - and the Market”. In the article,
Mr. Perdue discussed the changing American health trends and their implications on the food
industry. Based on the facts presented in the article as well as knowledge and insight gained from
additional research, our team assembled the detailed analysis outlined below and has
recommended a path forward for Perdue.
We began the analysis with an overview of the U.S. poultry market, including historical
and economic information on the battle between traditional chicken vs. organic chicken -- what
has become a hotly contested topic and the main focus of our analysis. We then examined two
key economic elements impacting the market for traditional and organic chicken: consumer
tastes and price elasticity. Keeping those two economic elements in mind, we examined the three
possible “paths forward” facing Perdue and the consequences of each. Since there are many
variables that factor into the development of the “right” recommendation for Perdue, our team
decided to narrow the focus on only the following four data elements and how those impact our
recommendations:
● Consumer tastes
● Income
● Price
● Expectations of future price
Finally, supported with information from the income statement and 5-year projection
model, our team proposed three recommendations for Perdue that will ensure economic growth
for the company in the years to come.
Economic Environment and Economic Elements
Founded in 1920, Perdue Farms has remained a family-run, privately owned agricultural
products and services company. At the time of this article, Jim Perdue, a third generation
member of the Perdue family and his management team are faced with determining the right path
forward for the company with respect to the growing demand for organic chicken, while
balancing the increase in supply chain and operational costs.
Recently, Perdue and its competitors Cargill, Inc., Pilgrim's Pride Corporation, and Foster
Farms, have been experiencing slow sales growth in their traditional chicken segment, while at
the same time experiencing an increase in sales in their organic chicken (the latter of which
makes up a only a small portion of overall sales for the company.)
As noted in the Wall Street Journal article referenced earlier, a change in consumer
preference, in favor of organic instead of traditional chicken, is beginning to ripple through the

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poultry market. As a result of this shift in consumer preference, Jim and his team examined their
current product strategy and production methods and determined they would need to address the
change head-on with a business strategy that would realign their product with consumer tastes,
thus of setting the slow sales growth.
Three different paths forward facing Perdue
Jim and his management are faced with three different possible paths forward for the
company:
1. To continue producing and selling the same level of organic and traditional
chicken as in years past (in anticipation that the change in consumer tastes will be
a fad);
2. To stop producing organic chicken altogether and focus all production on
traditional chicken (in anticipation that there will always be a market for
traditional chicken);
3. Or, to increase their capabilities in producing organic chicken while decreasing
their production of traditional chicken (in anticipation that the changes in
consumer preferences are permeant and to remain competitive they will need to
change their production to focus more on organic).
Our team recommends Perdue move forward with option three: increase their organic
chicken production while decreasing their production of traditional chicken. Late in the analysis
out team will lay out subsequent recommendation that support this overall path forward. To
help build the case for our recommendations our team examined and interpreted sales data,
consumer trends, industry trends, changes in supply chain and changes in agriculture policy and
regulation. To help formulate our recommendations our team focused solely on interpreting the
data around four key elements: the consumer’s perception of the quality of the product, the
consumer’s level of income, the price of the organic chicken and the price of related goods.
Consumer’s perception of the quality of the product
According to research done by
the Organic Trade Association
(OTA), the last ten years have seen a
strong increase in the sale of organic
food sales. In 2015, the organic
industry saw a record of $4.2 billion
in sales, up from the $3.9 billion in
2014. (McNeil, 1) By 2020, sales of
natural and organic foods are
expected to represent nearly 14% of
total food sales (Watrous, 1). Organic
foods are shifting to becoming the
norm, rather than the exception. One
of key drivers to this increase in sales

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can be attributed to the increase education, promotion and
access to these products from mainstream retailers and
popular media. (McNeil, 1) More and more, consumers are
demanding to know everything that impacts their food,
throughout the entire supply chain. Nowhere is this more
prevalent than in parent circles with young children.
Partners are inundated with research and data pointing to
the use of common faming pesticides and anti-biotics as the
reason behind such conditions as autism, ADHD and
asthma. Social and traditional media had provided a
“microphone’ to broadcast these findings, as well as the
consumer’s opinions on the research and data. As a result,
part of the increase in organic sales can also be attributed to
a fear factor of either exposing your child, family or self to potentially harmful additives in food
or the fear of “looking like a bad parent” for feeding your family non-organic food. Jenna
Blumenfeld, senior food editor and New Hope Natural Media, was reported saying,
“Increasingly more consumers are gaining identity not by what they wear or where they live, but
by what they eat or don’t eat.” This desire to be healthy as well as perception of health is driving
a consumers’ willingness to pay the increase in price for organic food.
Recent
research has indicated
a direct correlation
between consumer
awareness/perception
of organic food and
the sale of organic
food. As illustrated in
the graph below, as
the percentage of a
consumer's’ overall
awareness of organic
foods increases we
see a direct increase
in the sales of organic
foods.
This same correlation is also seen within the poultry market. According to a consumer
taste study performed in 2002 by the Department of Agricultural Economics at Kansas State
University, the lack of awareness around organic foods or a lack of understanding where it was
available for them were the two top reasons why consumers had not opted to purchase organic
chicken. Thus, as education, awareness and availability increase so too does the sale of organic
chicken.

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A consumer’s level of impact and its impact on organic chicken
After some initial
research on the topic, our
team found that overall,
consumers were generally
not price sensitive as it
related to the purchasing of
regular chicken versus
organic chicken. For these
consumers, the difference
in price seems to be worth
it even if the reasons are
intangible. To take this a
step further our team
explored the relationship
between a consumer’s
income level and their willingness to purchase organic food, specifically chicken, though an
analysis. We began by creating sales forecasts based solely on historical sales data, by region and
then projected into the future based on the historical information, as illustrated below.
These forecasting models demonstrated a continual increase in organic chicken sales in
each region. Additionally, we also examined regional U.S. income data over the last five years

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alongside the sales data of organic chicken from the U.S. Census of Agriculture. We found the
following:
Visually, this information supports our hypothesis that income and organic chicken sales
are positively correlated; however, we wanted to see how statistically correlated they actually
are. In order to do so, we performed regression analysis for each region where income was the
independent variable (x) and sales was the dependent variable (y). For the Northeast, we found a
correlation of .775, for the Midwest the correlation was .73, for the South it was .808, and for the
West it was .838. For complete regression analysis per region, please refer to Exhibit A. By
doing correlation and regression of sales and income we were able to find the regression
equations for each region:
NE Midwest South West
y=9,133.72x-
492,288,290
y=1,166.59x-
56,136,504
y=48,441x-
2,260,050,473
y=17,618x-
854,086,848
With these equations, we’re able to predict what the sales for each region will be based
on what the income is. They will also help us answer the question “Are organic chicken sales
dependent upon household income?”

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The price of organic chicken
Non-organic poultry prices have, for the most part, steadily increased over the last 20
years. Today, the price for a whole chicken is around $1.50 per pound. Several factors have
contributed to the rise of poultry prices including the overall increase in the demand for chicken.
This demand has largely been driven by both a decrease in supply and an increase in the price of
chicken’s main substitutes, pork and beef (Wong, 1).
Another critical factor driving up the price of poultry has been the price increase of its
inputs, specifically chicken feed (Donahue & Cunningham). Producers are having to increase
poultry prices significantly just to offset the high costs of feed.
Organic chicken, with a price about 80% ($2.69 per pound) higher than that of non-
organic chicken, has followed the same trend in price increases. The demand increase for organic
chicken has been especially significant over the last 10-15 years as consumers have become
more informed around the health concerns posed by the antibiotics and pesticides used in non-
organic chickens (Lipka). The increased awareness of the harmful antibiotics and pesticides
found in non-organic chickens, combined with the perception of the added benefits of organic
chicken, have led us to believe that consumers are more willing to pay a premium for organic
chicken and are therefore price insensitive.

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The price of related goods
The main
substitutes for
chicken, beef
(currently priced at
$3.98/lb) and pork
(currently priced at
$4.14/lb), have also
seen significant
price increases over
the last several
years. Unlike the
price increases for
chicken however,
the price hikes for
beef and pork can
be attributed to a
decrease in supply.
Waning domestic production coupled with strict import processes have been the main
contributors to the recent reduced supply (Wong). However, prices of both beef and pork have
already begun to decline, and will continue to decline over the next several years as favorable
pasture conditions, lower feed cost, and increased domestic productions are expected to once
again increase supply and eliminate the current shortage (USDA). Despite the expected decline
in beef/pork prices, we believe consumers will still choose chicken over these options based on
the fact that it is significantly cheaper and consumer tastes are changing in favor of chicken
(Beef Magazine).
Expectations of the future price of chicken
According to the USDA Economic Research Service, the price of poultry is expected to
rise between 2% and 3% in 2017 (USDA). We believe it is reasonable to expect this trend to
continue to grow at the same rate over the next five years as demand increases. This future price
increase applies to organic chicken as well. Demand for organic chicken seems to be outpacing
the demand for non-organic chicken as American consumers are trending towards organic
options in lieu of health concerns. Furthermore, the increasing cost of organic feed will also keep
the price of organic chicken high for the foreseeable future. This is especially relevant for
Perdue, who must source both domestically and internationally for their organic feed,
significantly increasing their input costs of raising organic chickens.
What we have concluded is that chicken, specifically organic chicken, is fast becoming a
premium good due to the steady demand increases. With a heightened knowledge of health
concerns of non-organic chicken, consumers are finding themselves more willing to pay a
premium for healthier, organic chicken. Demand for organic chicken shows no signs of slowing
down as organic sales are predicted to continue to increase 12% to 15% annually over the next
three years (Doering). Major substitutes such as pork and beef also seem unlikely to pose a threat
to the increasing demand for chicken based on the favorable shift of consumer tastes towards

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chicken. Since organic chicken prices have been on a steady climb over the past 15-20 years,
with no ill-effect towards demand, we believe that price is not a governing factor in determining
whether a consumer will choose organic over non-organic.
Recommendations
The following recommendations are built on the assumption that Jim and his team has
decided move forward with some form of an increase in the production of organic chicken while
reducing the production of traditional chicken. Based on the team’s research and analysis of the
four key elements of the consumer’s perception of the quality of the product, the consumer’s
level of income, the price of the organic chicken and the price of related goods, our team
developed three recommendations to better define and to support Perdue’s path forward.
Recommendation #1:
 Approach the increase in the production of organic chicken with a regional, small-scale roll
out.
o Since the highest correlation between income and chicken sales is in the West we
propose this as the starting location for the increased organic production.
o As detailed above, consumer are demanding more organic products and it was
determined that a slight increase in cost would not be a purchase deterrent, therefore,
greater expansion into the organic chicken market is a safe move for Perdue.
Recommendation #2:
 Hire an external advertising firm to develop a pro-organic marketing campaign.
o This campaign would help continue and increase the education and overall awareness of
organic foods among consumers in the market.
o The campaign would feature national advertisements over the course of a 6-month
period, using the following avenues: television, billboards, web-based banner ads, and
print magazine ads.
 The content will focus on the benefits of organic chicken and our commitment to
animal welfare. We want to connect with our consumers on an emotional level and
to do this we plan to showcase heartening visions of children and free-range
chickens in our advertisements to give it that farm-to-table, homey feel.
o Running in parallel (and as part of the overall marketing campaign), Perdue will launch
a social media campaign, leveraging the Instagram, Twitter, Facebook, and Snapchat
platforms to promote the brand and messaging.
 The social media plan would have the same objectives and feel as the traditional
advertisements but would allow us to reach consumers more quickly and
frequently.
o A key part of the social media campaign will be the “Perdue Organic Pledge”
movement. We’ll ask consumers to take videos of themselves and their families
pledging to eat organic meats and explain what organic means to them. Similarly, we
would ask farmers to take videos of their animals and pledge to raise free-range and
organic animals and what it means to them. They would post the video on various social
media platforms using #PerduePledge. The videos will be used on our main website and
our other social media pages.

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 The goal of the strategy is to create a buzz around the organic movement and the
Perdue brand.
o Additionally, complete campaign will help drive consumers to learn more about the
brand and its other organic products.
 To fund this campaign we recommend that Perdue increase organic marketing
expenditures to $1.5 million in 2017, and $1 million each year thereafter in order to
increase organic awareness and thus organic share of sales.
 For the impact of this acquisition on Perdue’s financial statements, please see
Financials for Recommendations exhibit.
Recommendation #3:
 Acquire a large organic feed producer (assets, employees and copyrights to brand).
o By doing so, Perdue won’t have to invest in new facilities or equipment or talent,
however, they will likely need to take on debt to finance the acquisition. Since organic
chicken production is on an upward trajectory, it’s strategic for Perdue to house multiple
steps of the production process so that they’re less dependent on separate companies and
can be more self-sufficient. This vertical integration will not only allow Perdue to realize
economies of scale by creating synergies, but also will offer an added revenue stream
from an already established business.
 Furthermore, handling the organic chicken feed components garnered from other
companies isn’t new to Perdue. Their R&D division already works with the raw,
organic materials that they get from their feed producers in order to fully develop the
feed for their chickens so they’re familiar with the different components that they’re
looking for in a superior, organic feed.
o Pending success of acquiring an organic feed producer they can consider further
acquisitions in the future. To determine the amount Perdue could realistically spend on
this type of acquisition, we examined a similar acquisition of Smithfield Foods, a top 20
domestic feed supply company by the Shuanghui Group just a few years ago for $7.2
billion.
 The Shuanghui group is a Chinese pork producer with similar assets and yearly
revenue as Perdue, so we believe it is reasonable to assume Perdue could spend
around $5 billion to acquire a similar feed supplier.
 Doing so will immediately add an estimated $10-15 billion in additional revenue and
increase profit margin by 5% over the next several years.
 For the impact of this acquisition on Perdue’s financial statements, please see
Financials for Recommendations exhibit.

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Exhibits
Exhibit A:
Northeast Regression
West Regression

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Midwest Regression
South Regression

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DeNavas-Walt, C., Proctor, B., & Smith, J. “Income, Poverty, and Health Insurance
Coverage in the United States: 2013”. Census.gov. Issued September 2014.
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"Organic Market Overview." USDA ERS - Organic Market Overview. USD.Gov, 19 Oct. 2016.
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Donahue, M., and DL Cunningham. "Effects of Grain and Oilseed Prices on the Costs of US
Poultry Production." Effects of Grain and Oilseed Prices on the Costs of US Poultry

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Production. Oxford Journals, 18 Feb. 2009. Web. 15 Dec. 2016.
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Beef Producer | Dec 23, 2014. "Consumers Say They Will Choose Chicken over Beef." Beef
Magazine. Penton AG, 23 Dec. 2014. Web. 15 Dec. 2016.
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