By Michele F. Mihaljevich

Indiana Correspondent

FREMONT, Neb. — Large grocery retailers will probably be watching when Costco Wholesale Corp. opens its own chicken processing facility in eastern Nebraska next year, according to a poultry specialist with the University of Nebraska-Lincoln.

The model the company will be using – it will control the birds from farm to store – is one other retailers may scrutinize to see if it would fit their needs, said Sheila Purdum, a professor of poultry nutrition at the university. Costco has said a primary purpose for the facility will be to produce its rotisserie chicken.

The company broke ground in Fremont in June 2017. Officials expect the facility to open next September.

“This is an economic model that will be looked at quite intensely by retailers with supply and quality questions,” she noted. “I don’t know if that’s the future of big food production or not. The primary benefit (to Costco) is a more stable supply in the size range of chickens they seek. This is going to allow them to have more control of the supply.”

Rotisserie chickens are generally smaller – about 5-6 pounds live weight – than birds used for chicken breasts (about 8-9 pounds live weight), Purdum explained.

Whether the Costco model could work for other commodities such as beef and pork remains to be seen, said Will Sawyer, lead animal protein economist for CoBank. “Never before has the U.S. seen a retailer integrate its meat supply to the farm level and take on direct exposure to the risk of animal husbandry, including feeding, animal welfare, harvesting, trade, disease and distribution,” he pointed out.

“If Costco’s foray into production and processing is successful, it could be the model for other food retailers and foodservice companies to vertically integrate into other protein sectors like beef and pork.”

The company’s plan isn’t unheard of in the retail industry, Sawyer said. Kroger, Walmart and Safeway own fluid milk, ice cream and cheese production facilities. Earlier this year, Walmart opened a milk processing plant in Fort Wayne, Ind.

“The key difference between these dairy investments and Costco’s chicken plant is that Costco’s integration reaches all the way to the farm, highlighting a new level of risk exposure Costco is taking on to protect an important product line,” he said.

Consider the risks

Retailers thinking about expanding into the animal protein supply chain would need to consider potential risks such as whole animal utilization and negative profitability in production, Sawyer pointed out.

“Many retailers and restaurants utilize only a small portion of the animal in their operation, and so would be required to distribute the remainder of the production to other channels, customers or exports,” he said. “Meat production on both the husbandry and harvesting sides of the supply chain can have very volatile and, at times, negative margins.”

Those retailers also need to think about food safety risk and the numerous supply chain links. “The chief concern of many protein consumers is food safety. Traditionally, retailers and foodservice companies have left this risk to be managed by their supply chain partners. Many sectors of animal protein production have numerous and seasonal links in the supply chain, which adds significant complication and volatility to earnings.

“Nonetheless, if successful, Costco’s leap into chicken production and processing will undoubtedly prompt questions across agricultural supply chains, and send food retail and foodservice companies back to the drawing board to rethink business models,” he added.

Costco has hired key employees with backgrounds in poultry to get the chicken facility up and running, said Jessica Kolterman, external affairs for Lincoln Premium Poultry. Lincoln will manage the operation for Costco.

“The first thing our team did was pull in a poultry expert,” she noted. “We then identified a complex manager and a live manager. We brought in poultry experts where we needed them; for example, the specifics on diet came from a poultry person.”

Costco is spending more than $400 million on the chicken complex, which includes a 400,000 square-foot processing facility, an 80,000 square-foot hatchery and a feed mill. When fully operational, the company plans to process more than 2 million birds weekly.

About 1,000 employees are expected to be hired at the complex, Kolterman said. The facility will supply 40 percent of Costco’s needs in the United States.

Costco will own all the assets – the land, equipment and buildings, she said. Lincoln is developing a network of farmers who will contract to grow chickens for the company.

“We own the birds,” she explained. “We’ll purchase breeding stock and it will go to a pullet farm for about 21 weeks. When they hit close to sexual maturity, they’ll be moved to a breeder site. The hens will lay eggs and the eggs will be collected and taken to the hatchery. Once hatched, the baby chicks will be taken to broiler farms where they’re grown for food.”

Lincoln plans to have contracts with about 100-125 farmers within a 60-mile radius of the facility, Kolterman said.

Meeting the demand

Costco officials began discussing the idea of growing their own chickens after looking at demand for poultry in their warehouses, she explained. “They started looking at the availability of a specific size of bird in the market. Demand for a specific size of bird was going up and in the market, availability was going down.

“They talked with experts. What would (a facility) look like, how would we do it? Costco knows their consumers very much value their $4.99 rotisserie chicken. That’s the main product will be making (in Fremont). We’ll also do some boneless breasts and thighs.”

Costco considered several factors in deciding on the Fremont location, including the availability of grain, workforce and growers interested in raising chickens, Kolterman said. The facility will need about 350,000 bushels of corn and about 3,000 tons of soybean meal weekly. The site’s proximity to the middle of the country was also a factor, she added.

“I am not aware of other retailers doing something like this,” she explained. “I think everyone in the industry is watching this project to see how it will play out. The industry is aware of it.”

The risks Costco will take aren’t any different from those taken on by other companies or producers today, said Kristen Hassebrook, executive director of the Alliance for the Future of Agriculture in Nebraska.

“I believe others will be watching,” she said. “There’s a desire for assurance in quality, quantity and where products come from. There are possibilities with eggs, dairy, pork and beef. This could serve as a model for any retail industry driven by assurance needs and by some sort of specialty component.”

Hassebrook said she’s not aware of any companies taking an approach similar to Costco. She said her organization hasn’t had any communication with other retailers about the process.