Costco Becomes First Retailer To Control Its Entire Chicken Supply Chain
A handful of companies — think Tyson and Perdue — all but control poultry production in the U.S. They’ll soon be joined by a retailer known more for selling rotisserie chickens: Costco, which is building a farm-to-table system based in Nebraska to supply itself.
It’s the first chain to go fully vertical into meat production (that is, keep it all in house), though Walmart has supplied some of its own milk and Kroger opened a milk processing plant in Colorado in 2014. And while building a system to stock its own stores is a way for Costco to better manage supply and costs, some believe it could give the company too much control over producers.
Costco sells approximately 60 million rotisserie chickens each year, according to Jessica Kolterman, a spokeswoman for Lincoln Premium Poultry, which is the company started by Costco to build and manage the project.
Consolidating the growing process in Nebraska (and some barns in Iowa) will supply about 40 percent of the rotisseries and chicken parts Costco needs, she said, adding: “that will roughly cover the western half of the United States, Alaska and Hawaii.”
Another reason for building their own supply is that other poultry companies are trending away from raising chickens to be sold whole and instead moving toward parts, said Will Sawyer, a meat industry economist for the Denver-based farm lender CoBank.
“The vast majority are processed into chicken breasts or leg quarters or thighs or they’re further processed into strips or nuggets,” Sawyer said. “That’s where the industry has gone over 50 years now.”
The larger chickens are good for parts, but they’re bigger than Costco wants for the rotisserie. The farms in Nebraska and Iowa will raise smaller chickens that fit the fixed price of $4.99 in the store. And basing that system in the Midwest will help control costs because there’s a plentiful supply of corn for chicken feed.
From the top down, Costco will control both supply and demand, which leaves some farmers concerned. Big chicken companies have been accused of fixing prices to overcharge customers and manipulating farm contracts to punish growers under contract.
“Costco comes in and, while they have a good corporate citizen reputation, it still is at the end of the day a poultry contract,” Nebraska Farmers Union president John Hansen said.
The center of Costco’s chicken-growing operation is currently under construction on the south side of the eastern Nebraska city of Fremont, population 26,000 or so. Cement trucks come and go as crews line up concrete walls and steel beams for a processing plant, hatchery and feed mill.
On top of that, around 100 new chicken farms in the area will be under contract to raise the birds. When it reaches full capacity, the plant will process more than 2 million chickens per week.
Costco will offer 15-year contracts to 100 to 125 prospective growers. And though the number of chickens will vary, a typical farm with four barns could house nearly 200,000 chickens at a time.
Critics have raised concerns over the potential odor and water contamination from the facilities. And there’s a financial risk involved, Hansen said. The farmers are responsible for financing and building the new chicken barns, which could cost $1 million or more. If Costco ever decides to cut production, farmers could be left with empty barns and massive debt.
“What do you do with a poultry barn that is for the most part a single use building if you don’t have birds?” he said.
Marshall Lutjens, a young farmer from Columbus, Nebraska, raised that very idea while at a recent open house for the first Costco chicken barns.
“The only other thing I thought about was (raising) hogs because there’s more companies,” he said.
There are really no other poultry companies around to sell to if something happens with Costco, but Lutjens felt optimistic.
“After today, I think I might be tipped,” Lutjens said. His girlfriend, Tatem Vance, encouraged him to “just say yes.”
Even though the contract requires a big investment up front, Lincoln Premium said more than enough farmers have shown interest in signing contracts. The farm economy is struggling in the area, and many grain farmers think turning to chickens is worth the risk in order to bring in new revenue.
Costco members seem ready to do their part to ease farmers’ minds. According to Sawyer at CoBank, rotisserie sales at Costco have grown by more than eight percent per year since 2010.
Fred Knapp of NET News in Nebraska contributed to this report.
Follow Grant on Twitter: @ggerlock
Editor's note: this story has been updated to point out that some of the chickens processed in this Costco facility will be sold as parts and others will be sold as rotisserie chickens.
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