Smithfield Foods, Inc. History

Company History:

Smithfield Foods, Inc. is the largest pork processor in the eastern United States. In addition to North Carolina, the company operates production facilities in Virginia, Maryland, and Wisconsin. Its line of hams, hot dogs, bacon, sausage, and deli and luncheon meats is marketed wholesale, under private labels, and under such brand-name labels as Smithfield, Esskay, Gwaltney, Luter's, Jamestown, and Patrick Cudahy. Known as a leader in vertically integrated pork processing since 1987, Smithfield has strived to counter severe fluctuations in hog prices as well as high transportation costs by reducing its reliance on Midwest hog producers. The company's joint hog-producing venture with Carroll's Foods is instrumental in fulfilling this goal. Other southeastern U.S. suppliers, including giant Murphy Farms, have helped the company trim costs in the notoriously thin-margin, cyclical industry.

Many would agree that Smithfield's competitive edge is synonymous with the leadership of chief executive officer Joseph W. Luter III. After reclaiming in 1975 what was his own company, Luter has ushered Smithfield into the high-tech age by acquiring companies, forging partnerships, reducing overhead, and instituting capital improvements to boost efficiency. More importantly, he has elevated Smithfield to the elite ranks of those Fortune 500 companies offering the highest total returns to investors.

Since colonial times the small town of Smithfield, Virginia, has been known for its quality hams. Even today, under Virginia law, a ham may only be marketed as a "genuine Smithfield" if it has cured for six months within the confines of the town. One such marketer, family-owned Gwaltney Packing, was the employer of Luter's father and grandfather during the 1930s. In 1936 these two decided to establish their own ham business and succeeded in raising $10,000 from local investors. They opened across the street from Gwaltney and built their small private company into a multimillion dollar concern.

When Luter's father died suddenly of a heart attack in 1962, Luter, near graduation from college, shelved his plans to attend law school and returned to oversee the business. Seven years later the company, with annual revenues of $35 million, had attracted the interest of Washington, D.C.-based Liberty Equities, a small conglomerate. Luter sold the family company for $20 million but was retained as manager. After being summarily dismissed by the new owners six months later, Luter promptly launched a second career in real estate development.

The packing plant, now operating as Smithfield Foods, Inc., fattened itself through non-pork acquisitions and unnecessary staff expansion. By the mid-1970s Smithfield was floundering along with Liberty Equities and Luter saw an opportunity to repurchase the company at a fraction of its worth. Because of actions taken by the Securities and Exchange Commission, Liberty had essentially reduced itself to Smithfield Foods, a failing $100 million pork-processing and fish wholesale business, further hampered by a nonproductive chain of 27 seafood restaurants. Price inflation throughout the food industry, as well as poor management, had severely affected the company, whose debt had risen to $17 million while net worth had plummeted to $1 million. Creditors were demanding a management change and Luter agreed to a salary and stock options package that encouraged turnaround. As one analyst in a 1988 Financial World article claimed, "Essentially, Joe Luter got the company back for ten cents on the dollar."

Luter quickly reduced Smithfield's debt by selling the nonpork operations. He achieved profitability within seven months by slashing nearly $2 million in overhead through the elimination of middle managers and via sharp reductions in data processing costs. Thus streamlined and firmly back in the meat business, Smithfield began to expand through acquisition. In 1978 it purchased a plant in Kinston, North Carolina. In 1981 Smithfield snatched up Gwaltney (at 35 cents on the dollar) for $34 million. Luter derived special satisfaction from this acquisition because not only had Gwaltney been a longtime competitor, it had also succumbed to the trappings of conglomerate spending under ITT Corp. Luter continued to seek out and buy at bargain rates other underperforming pork companies throughout the 1980s. These included Hancock's Country Hams, Patrick Cudahy Incorporated, and Schluderberg-Kurdle Co. (renamed Esskay, Inc.). By 1988 annual revenues had skyrocketed to $864 million, well within striking range of the billion dollar mark.

In 1987, in a particularly prescient move, Luter launched a 50-50 partnership with Carroll's Foods, the country's fifth largest pork producer. Strategically located in North Carolina--within single-day transportation to half the U.S. population--Smithfield-Carroll's has helped the company lessen its dependence on Midwest hog farmers, the traditional source for the pork-packing industry. Coupled with hogs supplied by East Coast giant Murphy Farms, the partnership-generated pigs helped to account for 50 percent of Smithfield's annual requirements. In addition to saving on high transportation costs, Luter also benefitted from lower weight loss during shipment, thereby enhancing his product line's quality and marketability.

According to Sharon Reier, "what is remarkable about Luter's resurrection of Smithfield is that he did it in an industry plagued by plant overcapacity and a flat consumption pattern in pork product over the past ten years, and dominated by large, well-heeled conglomerates that could subsidize poor margins in meat-packing operations with profits from other divisions." Of course, even Luter's Midas touch has little control over four-year cycles in hog prices, which directly affect the company's profitability. When prices are high, more pigs are raised and the eventual oversupply results in falling prices and undersupply--a true, high-risk commodity business. As a consequence of this predictable cycle, net income for Smithfield totaled $7 million in 1990 but rose sharply to nearly $29 million in 1991. Net income for 1992 began cycling downward again to $21 million. Smithfield, necessarily, takes a long-term view of earnings performance through compound growth rates. In the 1991 letter to shareholders it explained that "an analysis of the Company's performance over the last 16 years provides some enlightening results. When the 16 years are divided into four, four-year segments, the Company's earnings fall into a consistent and predictable growth pattern.... The Company's sales, net income and net income per share have shown compound growth rates of 14 percent, 31 percent, and 33 percent, respectively, over the last 16 years." One distinct advantage of these cycles, both for the company and for investors, is that Smithfield stock prices have also followed a dip-and-rise pattern. With his extra profits, Luter has capitalized on downswings to buy back some 50 percent of the company's shares during the same 16-year period and has increased his individual stake to approximately 20 percent, according to a 1992 Forbes article.

To keep Smithfield on the cutting edge, Luter has concentrated on his niche markets, avoided high advertising budgets, and relegated more than half of his production to nonbranded commodity pork sales for the supermarket and food-service industries. Most promising for the future is Luter's quest for the genetically perfect pig: lean, hardy, and easy-to-process. An exclusive contract between Smithfield-Carroll's and National Pig Development Co. (NPD), a family-owned British firm, may prove to be the answer. The first generations of NPD's transplanted stock are being raised at the North Carolina facility. In July 1992, according to David Ress, "Mr. Luter ran some tests on a 265-pound hog ... comparing it with an especially lean American hog culled from the best of Smithfield's current stock. The American pig had an inch of fat on its back. The British pig had less than half that, Mr. Luter said. The raw, or 'green' ham from the American pig yielded 52 percent lean meat after boning and after the fat was trimmed. The British pig's yield was 62 percent." Development and marketing of the pigs is expected to continue, particularly through Smithfield's formation of Brown's of Carolina and its centerpiece, a state-of-the-art slaughtering plant located in Bladen County, North Carolina, which opened for production in September 1992.

The phasing out of a dated Baltimore facility the same month, the late 1992 acquisition of a John Morrell plant in Wilson, North Carolina, and the company's search for a plant situated to serve the West Coast all bode well for Smithfield. An analyst cited in Rita Koselka's Forbes article "expects Smithfield's earnings to double over the next four years, although not in a straight line." While other, larger meat-packers are struggling, Smithfield remains supremely poised and may yet corner the market for high quality hog-marketing.

Principal Subsidiaries: Brown's of Carolina, Inc. (86%); Esskay, Inc.; Gwaltney of Smithfield, Ltd.; Patrick Cudahy Incorporated (80%); The Smithfield Packing Company, Incorporated.

Source: International Directory of Company Histories, Vol. 7. St. James Press, 1993.

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