Cage-Free Eggs May Be Golden Goose for Retail Profits

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Cage-Free Eggs May Be Golden Goose for Retail Profits

Monday, March 28, 2016 - 11:40am

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U.S. retailers adopting cage-free eggs sooner rather than later could gain a profit advantage over competitors.

Retailers, including Albertsons Cos., Kroger Co. and CVS Health Corp., announced plans this month to convert to 100 percent cage-free eggs in the next decade, amid a push from consumers and shareholders at U.S. firms.

The change likely won't hurt profits for retailers. U.S. egg sales totaled $7.3 billion last year, according to Nielsen, and that figure could rise if more retailers make the switch to cage-free eggs.

Consumers usually pay more than twice as much on average for cage-free eggs, $3.42 a dozen, versus conventional eggs, which cost an average $1.31 to $1.45 per dozen, according to the U.S. Department of Agriculture. But cage-free eggs only cost about 15 cents more to produce than conventional eggs for farmers, according toDaniel Sumner, director of the Agricultural Issues Center at University of California — meaning major profits may be ahead for the supply side.

"We have reached the tipping point and any companies — be they retailers, basic services or egg producers — that are still fighting this wave are going to be left behind," said Maisie Ganzler, chief strategy and brand officer at café and catering service company Bon Appetit Management Company.

Even so, it will take years for most retailers to make the necessary changes to their supply chains. While it can take 12 months to build housing for conventional egg-laying hens, it can take ten years to do so for cage free hens. Farmers often need to rebuild existing infrastructure or wait for new hens to hatch.

More than 60 percent of restaurants and about 90 percent of retailers who recently announced their move to cage-free eggs said it will take them at least five years to completely change their supply-chain, according to data from advocacy group Cage Free Future.

With a growing number of companies signing on to go cage-free, retailers are looking for new ways to differentiate themselves. Not having cage-free eggs by 2025 like competitors could be a major disadvantage, but having them first — well, that could be a golden goose.  

At least, that's what Ahold USA, parent of Giant and Stop & Shop supermarkets, is hoping. While many large grocers plan to shift to cage-free eggs by 2025, Ahold plans to do so by 2022 to get a three-year leg-up on competitors.

"Animal welfare is an issue that we care about greatly," spokesman Chris Brand said in an interview. "We want our customers to understand that we are leading in this case."

Implementing cage-free eggs gradually will "ensure price stability and keep prices as competitive as possible," said Brian Dowling, a spokesman for grocery store chain Albertsons, which plans to convert to 100 percent cage-free eggs by 2025. Consumers responded well to an expansion of the grocer's egg options in recent years, he said.

Whole Foods Market Inc. has sold only cage-free eggs since 2005 — which it says makes it the first grocery store to do so — and was able to switch its supply chain then in one year. "Working with a relatively small group of suppliers and supporting them through the transition to cage-free eggs helped," Joe Dickson, the company's global quality standards coordinator, said in an interview.  

The deluge of cage-free egg commitments in recent months could position the U.S. to leapfrog over Europe, which currently has a much larger cage-free market than the US,Josh Balk, senior director of Food Policy at the Humane Society of the United States, said in an e-mail. In the U.S. about 14 percent of egg sales are cage-free or free-range, according to Nielsen. In the U.K., however, 47 percent of egg sales last year came from free-range hens, according to the British Egg Information Service. (Editor's Note: The terms are not quite equivalent; see related terminology cheat sheet on this page.)

In the U.S., both consumers and shareholders have been the ones pushing restaurants, airlines, manufacturers and grocers to move to cage-free eggs.

"Consumer demand has been a significant driver," said Patrick Lenow, spokesman for DineEquity, Inc., parent-company of IHOP and Applebee's, which uses about two percent cage-free eggs today, but plans to go 100 percent cage-free by 2025. It is hard to estimate the pricing impact at restaurants because eggs are an ingredient in a meal and not sold separately, he said.  

A shareholder proposal at Kraft Foods Inc. last year received more than 30 percent support, the highest-ever for a cage-free proposal at Fortune 250 companies, according to data. Kraft, whose board recommended shareholders vote against the proposal, said at the time that it already purchases two million cage-free eggs a year and is actively exploring more options.

Kraft shareholders won't need to bring up the proposal again, however, as Kraft merged with H.J. Heinz Company in July and the combined company, Kraft Heinz Co.,announced March 1 that it will transition to using 100 percent cage-free eggs in all North American operations by 2025. A spokesman for the company declined to comment beyond the company's statement announcing the sourcing pledge.

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