The Meat Racket: The Secret Takeover of America's Food Business

by Christopher Leonard

  People hated IBP for the simple reason that it was upending the beef industry. The change IBP represented was evident in the very location of the company’s first slaughterhouse, in Denison, Iowa. All the meatpackers built their big slaughterhouses in cities like Chicago, Detroit, and St. Louis. This is where the cattle stockyards and the labor force were based, so it only made sense that old-line beef packers like Swift and Armour would be rooted in urban areas.

  But a guy named Andy Anderson decided to change that in 1960. Poultry companies like Tyson had built big slaughterhouses in the middle of nowhere, in tiny towns like Springdale, Arkansas, and they reaped massive profits from doing so. Anderson thought he could gain a clear advantage building a beef company that followed suit. Unions weren’t as strong in small towns, so the labor force was cheaper. And remote places like Denison or Storm Lake, Iowa, didn’t have as many big companies, so workers were happy to have jobs. The unions never forgave IBP for slipping out the back door and taking thousands of good-paying slaughterhouse jobs with it. Union strikes, sit-ins, and violent protests defined life at IBP plants in Iowa and Illinois as the company grew. Don Tyson had the luxury of building his workforce from scratch in nonunionized southern states, but IBP had to do the ugly work of making unionized slaughterhouse workers realize that the meat industry had changed. Northern beef packers would have to live on southern poultry plant wages.

  There was another advantage to being located in rural areas that seems remarkably obvious in retrospect: All the cattle lived in the rural hinterlands. By building its plants right next to the ranches, IBP didn’t have to pay as much to ship the cattle to its front door. IBP made the cowboy obsolete, since the cowboy was nothing but a commercial artifact of the old meatpacking industry. The cowboy’s primary purpose was to herd cattle from distant pastures into the stockyards.

  Andy Anderson was able to redraw the meatpacking business in part because he was new to the industry2. He was a city boy, whose first job in the meat business was in an urban butcher shop, not a slaughterhouse. This last part helps explain perhaps the most important innovation behind IBP, the one that made the grocery store butchers loathe the company.

  Just like Tyson, IBP figured out that it could butcher meat more efficiently at its meat factories than butchers could do in their stores. IBP was the first company to popularize a product called “boxed beef.” Rather than ship whole carcasses to retail locations, like the other meatpackers, IBP cut up the cattle along a factory line. It bagged the parts in airtight packages and shipped them in boxes in refrigerated trucks. Boxes, needless to say, could be stacked in a truck a lot more neatly than carcasses. IBP didn’t ship the parts of a cow that butchers cut off and threw away. Boxed beef was the most efficient way to ship beef, and IBP had developed its own shipping network to do it, saving money every step of the way.

  Boxed beef drove butchers out of business and caused many of them to launch boycotts against IBP. But the boycotts were pointless. The American appetite for convenience made boxed beef a fixture in all the big retail chains during the 1960s and 1970s. Beef finally started to catch up with chicken as something that could be plucked off the shelf and cooked in a hurry. By 1975, 60 percent of U.S. beef was boxed beef. IBP did the same thing in the pork market, buying up hog slaughterhouses and refurbishing them to make boxed pork products.

  IBP became the chicken company of beef packers. And its primary reward for doing this was survival. From 1970 on, times were not good for the cattle business. American consumption of beef declined steadily. Beef was more expensive than chicken and people were avoiding red meat because they thought it was fattier and unhealthier. The total number of cattle raised in the United States declined and has fallen steadily ever since. Meatpackers went out of business, and the most inefficient went first.

  But IBP grew even as the industry shrank. It took market share from everyone else. Like Tyson, IBP was expansionist from the moment it started, buying up competitors whenever it could. The company started in 1960 and opened one plant. It owned four plants by 1964. The growth never slowed. IBP snapped up dozens of companies through the decades.

  But even by 1980, the beef industry was hardly chickenized. The four biggest companies controlled only about 25 percent of the total market. Those companies still competed aggressively against each other to deliver the best product at the lowest price. And there was still an open, competitive cash market where virtually all cattle were sold.

  IBP would change all that in about fifteen years. And the revolution would start in a remote little place called Garden City, Kansas. Garden City would become home to IBP’s experiment in building the next generation of cattle production, one that rested on contracts rather than markets.

  * * *

  There wasn’t a slaughterhouse in existence like the one IBP built outside Garden City in the early 1980s. It was a beef factory that could kill over five thousand cows a day, one every eleven seconds or so over two eight-hour shifts. The plant produced millions of pounds of boxed beef that could be shipped to retailers and restaurants from Seattle to Florida. By making its slaughterhouse so big, IBP spent less to slaughter each cow compared with the existing meatpackers, giving the company a critical cost advantage.

  But like Tyson before it, IBP realized that one of the biggest obstacles to running a meat factory was getting a dependable supply of animals. If fewer than five thousand cattle arrived every day at the plant, it meant downtime on the factory line that translated into wasted money and slimmer profit margins.

  There had been scattered experiments around the country to vertically integrate cow production, just as Tyson had vertically integrated chicken and hog farming. But these efforts were all stopped short by two of the cow’s internal organs: the rumen and the uterus.

  The rumen is part of the cow’s four-chambered stomach, and it allows the cow to do something most mammals can’t: digest the cellulose in grass. Young calves live off a diet of grass and their mother’s milk for a period of at least several months. Calves can’t eat corn or other grains. The stubborn rumen ensures that cattle need acres of pasture on which to graze when they are young, requiring lots of land and lots of money.

  The more daunting challenge is the uterus. Cows have only one baby at a time. They don’t have litters of ten, like a pig, and they don’t lay a battery of eggs like a chicken. The formula is depressing for a factory farm man: one cow, one calf. And it takes about one year for a cow to have each of those calves.

  Taken together, these pieces of the cow’s biology mean that a factory cow farm is a tremendous waste of money. It would require feeding a confined mother cow grass for a whole year, just to produce one calf, which would then also have to be confined for several months and fed grass and milk. And grass, unlike corn or soybeans, isn’t subsidized.

  Senior executives inside IBP realized that raising cattle was a waste of money. So at Garden City, IBP employed a new way to procure a steady stream of cows. It was called the “formula contract.”

  The formula contract created a way for IBP to lock in a steady supply of cattle without having to go out on the open market and haggle for them, as meatpackers always had. Instead, IBP signed contracts with a rancher or feedlot, agreeing to buy a set number of cattle at a set date.3 The price for those cattle, when they were delivered, was based on a formula rather than a competitive bid.

  IBP created a formula price that allowed the company to start controlling its cattle supply in a way that mimicked Tyson’s methods for controlling its chicken supply. IBP couldn’t simply dictate what kind of animals it slaughtered, the way Tyson did, but it could use contracts to exert influence over the ranches.

  IBP’s formula contained a series of discounts and premiums that rewarded some qualities in the cow while punishing others. These discounts were crude levels that IBP used to shape the kind of cattle ranchers raised. Early on, for example, IBP controlled the size of the cows ranchers delivered by discounting those that were too big and those that we
re too small. The formula acted as a market incentive all its own, slowly bending the characteristics of the cattle herd to IBP’s specifications. It was still a long way from the exacting control Tyson had over its chicken flocks, but the formulas would evolve over the decades.

  Once IBP secured its cattle supply, it began a chain of acquisitions that ended the highly competitive beef industry. IBP’s big plants drove smaller producers out of business. The few surviving meatpackers, like IBP, bought their competitors to survive. During the mid-1990s alone, IBP is estimated to have spent $1.5 billion buying other firms.

  By 1995, IBP wasn’t just Tyson’s mirror image in the beef business. It was much bigger and more profitable than Tyson. IBP had large slaughterhouses scattered through the Great Plains and the Midwest, and it earned profits of $321 million in 1999, with total sales of $14.1 billion. Tyson, by contrast, earned profits of $230 million with total sales of $7.4 billion.

  Still, IBP wasn’t a direct threat to Tyson because the companies competed in different markets. IBP dominated beef and pork production, while Tyson controlled the chicken market. But all that would change.

  * * *

  In late 2000, a group of IBP managers decided they wanted to take the company private by buying it from its public shareholders. The managers put together a bid with a private investment company and presented it to IBP’s board of directors.

  Smithfield heard about the deal and decided to make a bid of its own. IBP had become the nation’s second-biggest pork producer. If Smithfield bought IBP, it would be the indomitable leader of beef and pork production, boxing Tyson into the chicken business alone. It seemed inevitable that, one day, the company would buy Tyson as well. Only the biggest could survive.

  Johnny decided he wasn’t going to let that happen. Tyson Foods would buy IBP. The company would have to borrow billions to do it and it would need to pony up a huge portion of the company’s stock. Johnny would be mortgaging everything his father and his grandfather had built. It was the riskiest acquisition the company had ever contemplated. Everyone around him realized that when Johnny looked at IBP, he finally had his vision.

  Don Tyson thought the IBP acquisition was a bad idea. The company had been burned during the 1990s for straying outside the chicken industry and trying to buy its way into markets it couldn’t control and that didn’t fit with its primary strategy of vertical integration. Buying IBP would overshadow the chicken operations of Tyson Foods and saddle the company with cattle and pork businesses that Tyson executives poorly understood.

  The amount of debt Tyson took on to buy IBP would have repulsed Don Tyson’s father. The deal required too much leverage, and it would leave Tyson Foods vulnerable to the inevitable industry downturns.

  But Johnny Tyson pursued the deal regardless. History was within his grasp. He could be the CEO who oversaw his grandfather’s company when it became the biggest meat producer the world had ever known. In December 2000, Tyson Foods submitted a bid to buy IBP for $4.2 billion, while agreeing to take on an additional $1.4 billion in IBP’s debt.

  Gary Combs, an Arkansas real estate developer who was married to Johnny’s sister Carla, had never seen Don Tyson so angry with his son. Combs saw the anger boil over while he was in the lobby of a hospital where Carla was recovering from an illness. Don and Johnny both arrived to visit Carla Tyson, and when they met each other in the lobby Don exploded:

  — You’ve ruined us! We’ll lose the company over this. It’s going to destroy the company!

  But even Don Tyson’s disapproval could not stop his son. There was too much at stake for Johnny Tyson to bend to his father’s wishes.

  If consummated, Tyson’s merger with IBP would create an unprecedented level of concentrated power in the meat industry. One USDA estimate predicted that 5 percent of the average American’s grocery bill would go to one company, the new Tyson Foods. The era of big was about to be replaced by the era of titanic.

  * * *

  Lawyers for Tyson Foods were working feverishly to draw up the necessary contracts and paperwork to close the company’s acquisition of IBP. There wasn’t going to be any stiff resistance from federal antitrust regulators. The Bush administration gave the proposed merger its consent, largely on the grounds that it wouldn’t increase consolidation in any one meat segment. While Tyson was gaining unprecedented control over the production of U.S. beef, chicken, and pork, the company was not increasing the overall level of concentration within a specific industry. It appears there would have been more opposition if Tyson had purchased another regional chicken company, boosting its market share in poultry, rather than creating the world’s biggest meat producer.

  While federal regulators gave the deal their blessing, Don Tyson never did. He thought that Tyson Foods paid too high a price for IBP, and the returns would never justify the debt. After talking with his longtime attorney Jim Blair, Don Tyson pushed a plan to back out of the merger.

  Tyson found an excuse to drop its multibillion-dollar buyout offer when IBP announced that one of its small divisions would restate some earnings figures to the Securities and Exchange Commission. The amount of money at stake was laughably small compared to IBP’s total revenue, and it would hardly have made a dent in the company’s overall results. But Tyson argued that the issue was serious enough to warrant scrapping the merger altogether. IBP sued Tyson, saying the company could not back out of its offer. A court in Delaware agreed, and the merger went through.

  When the papers were finally signed, Johnny Tyson’s legacy was sealed. He had made his mark, and he was head of the biggest meat company the world had ever known.

  * * *

  As he took on the role of CEO at Tyson Foods, Johnny Tyson seemed to be obsessed with one overriding goal: improving the company’s image. He set about to redraw what people thought of the company and to burnish the Tyson name in the mind of every consumer. He wanted to transform the company from a commodity meat producer into a branded consumer company along the lines of Kraft Foods or Proctor and Gamble. Tyson was going to become a household name, and a fondly thought of brand.

  Operationally, the company changed very little. The headquarters of IBP, based in South Dakota, remained open for business. Some key IBP executives moved to Springdale to be closer to the new company’s headquarters, but they didn’t alter much of the way IBP did business. At the same time, Tyson’s poultry operations chugged ahead as they had before the merger was proposed. But things did change on the marketing end. Tyson was now able to offer big customers like Wal-Mart an unprecedented menu of products. One company could now offer all the beef, chicken, and pork products that a retailer would need.

  As the new Tyson Foods hummed steadily along, John Tyson began to overhaul the corporate leadership. He held meeting after meeting, telling his subordinates how the new firm would be reshaped into a consumer-friendly corporation. A devout Christian, Tyson began a program to place clergy members in the company’s slaughterhouses. The company hired marketing experts, formed a new strategy team and a human resources team. Johnny Tyson began to talk tirelessly about something he called “People Development,” which seemed to amount to making every one of the company’s 120,000 employees love the Tyson name and training a new generation of leaders.

  Many of the executives under Johnny Tyson were no-nonsense meat industry guys. The strategy of People Development didn’t resonate.

  “It was as confusing as that term can be,” a baffled executive said.

  Johnny Tyson was undeterred. And if people questioned him, he had a track record of big profits that made his wisdom as CEO seem beyond question. The company’s profits more than tripled between 2001 and 2004. As the profits grew, so did the corporate workforce. Tyson Foods ran out of space at its headquarters and began renting outside office space at several locations around Springdale.

  The company hired a woman named Faith Popcorn to help make the Tyson name cozy. The marketing team hired outside consultants and performed in-depth testing on focus g
roups.

  In the late summer of 2004, Johnny Tyson publicly unveiled the fruits of these efforts at an investors’ conference in New York. The company was launching an unprecedented advertising campaign built around the slogan “Powered by Tyson.” The company would run national television ads and sponsor gymnasts and NASCAR pit crews to promote the slogan. There was talk of hiring street performers in New York to “create buzz” about the brand and the new campaign. The Powered by Tyson campaign would cost more than $75 million in the first year alone.

  Dissension started to spread among those who reported to Johnny Tyson. The company was becoming too top heavy, in their eyes. The thought that Tyson would become the next Kraft Foods seemed ridiculous. Tyson’s meat was served anonymously in McNugget boxes, cafeterias, and butcher shops. Yet the company was about to spend hundreds of millions to bolster a brand name that would never be attached to those products.

  But Johnny Tyson didn’t listen. His path was clear. He had a reputation for dressing down colleagues who questioned him and exploding at those who made him angry.

  So his lieutenants took matters into their own hands.

  * * *

  Don Tyson was in England when he got a phone call from his old friend, the former Tyson Foods CEO, Leland Tollett.

  Tollett was the front man for an internal coup at Tyson Foods. A group of senior officials at the company had approached him and asked him to deliver a simple ultimatum to his old friend, Don. Tollett’s message was simple. A group of the most senior leaders at Tyson Foods was prepared to walk off the job unless Johnny Tyson was fired. The executives would stay only if he was given some kind of honorary title but was stripped of any line authority over operations.