In Chapter 8, Location Strategies, we talk about the Key Success Factors (KSFs) that firms need to achieve competitive advantage in selecting a location for their plants. It turns out that these KSFs are also the reason why some manufacturers are leaving California.
The Wall Street Journal (June 13, 2022) article, “Smithfield Foods, Citing High Costs of Operating in California, to Close Pork Plant,” explains why the largest pork processor in the U.S., is closing an 1,800-person plant in California and shrinking the size of its hog herd in the region. Smithfield says “the cost of doing business in the state wasn’t worth it,” citing higher taxes, utility costs and labor costs in the state compared with other areas where it operates.
The decision to close the plant comes as food suppliers are dealing with increased costs on items like livestock feed, transportation and packaging. Russia’s invasion of Ukraine, one of the world’s top grain-producing regions, has recently sent the price of livestock feed higher.
In California, the cost of utilities is 3.5 times higher per head to produce pork compared with the 45 other U.S. plants Smithfield operates. “It’s increasingly challenging to operate efficiently there,” said the company. “We’re striving to keep costs down and keep food affordable.”
Smithfield also said part of the reason it closed the facility was the regulatory environment in the state. Specifically, a state law passed by voters in 2018 and backed by the Humane Society, called Proposition 12. It requires breeding pigs to be able to lie down and turn around in spaces in which they are housed, essentially outlawing pork produced using small gestation stalls in most circumstances.
Pork producers and suppliers have resisted, saying such moves would raise meat prices by causing farmers to spend millions of dollars changing their operations, create supply-chain chaos and risk their pigs’ health.
The supply of hogs in the U.S. also isn’t expected to grow soon as higher feed, labor and material costs have weighed on pig farmers, making it too expensive for them to expand. For processors, if the supply of hogs isn’t increasing, it makes sense to cut high-cost plants that might not even be running at capacity.
Classroom discussion questions:
- On the issue of hog comfort and safety (see the Ethical Dilemma in Chapter 7), what position do your students take?
- What KSFs in Chapter 8 (see Figure 8.1) are driving Smithfield to leave California?