Odd Lots Podcast Summary: Beak Capitalism, Part 1: Chickflation

Released on November 15, 2024 by Bloomberg’s Odd Lots, hosted by Joe Weisenthal and Tracy Alloway, this episode delves into the intricate dynamics of the chicken industry in the United States. Titled "Beak Capitalism, Part 1: Chickflation," the episode explores how the soaring prices of chicken products reflect broader economic trends, supply chain challenges, and consumer behavior. Below is a detailed summary capturing the key discussions, insights, and conclusions from the episode.

1. The Chicken Sandwich Wars: A Catalyst for Change

The episode opens with a retrospective on the infamous chicken sandwich wars that erupted in 2019, highlighting the intense competition among fast-food giants to capture the burgeoning chicken sandwich market.

• Launch and Impact of Popeyes' Chicken Sandwich:

  • Justin McElroy narrates the launch of Popeyes' chicken sandwich on August 12, 2019, describing it as "a humble fried chicken breast with pickles and mayo on a brioche bun priced at a very reasonable $3.99" (01:05).
  • The sandwich quickly became a phenomenon, sparking long lines and nationwide frenzy. McElroy humorously remarks, "If you didn't jump on that Popeyes chicken sandwich craze, you're too late" (01:07).

• Competitive Response:

  • Tracy Alloway explains how other chains like Taco Bell and Chick-fil-A responded by introducing their own versions of chicken sandwiches, intensifying the competition (02:00).
  • The frenzy led to unprecedented scenarios, including lawsuits and physical altercations over limited stock, emphasizing the depth of consumer passion (02:36).

• Long-Term Implications:

  • Justin McElroy asserts that while the headline wars have subsided, the impact persists with chicken products becoming more prevalent across menus nationwide (02:36).

2. Chickflation: Rising Prices Amidst Growing Demand

The discussion transitions to the persistent rise in chicken prices, a phenomenon the hosts term "Chickflation," and its implications on both consumers and the broader economy.

• Consumption Trends:

  • Tracy Alloway highlights that despite a 25% increase in chicken prices over the past decade, America's consumption continues to rise, with the average American consuming "116 pounds of chicken in 2023" (03:51).
  • This surge contrasts with stagnating beef consumption, positioning chicken as the most consumed meat in the U.S. (03:51).

• Price Increases and Inflation:

  • The podcast underscores that fresh whole chicken prices have risen from approximately $1.60 per pound a decade ago to nearly $2.00 today, outpacing broader inflation rates (03:51).
  • Justin McElroy connects this trend to macroeconomic factors, including a 207% surge in wholesale egg prices between 2022 and 2023, partially attributed to bird flu outbreaks (04:23).

3. Wingstop's Strategic Maneuvering in the Chicken Market

A significant portion of the episode is dedicated to exploring how Wingstop navigated the chicken sandwich wars and subsequent market conditions.

• CEO Michael Skipworth's Insights:

  • Michael Skipworth, Wingstop CEO, discusses the company's foray into the chicken sandwich market in 2022, introducing a dozen different flavors to diversify offerings (08:56).
  • His approach led to immediate success, with products selling out within a week, indicating strong demand and effective forecasting (09:11).

• Supply Chain Strategies:

  • Skipworth elaborates on how increasing the use of breast meat in products like chicken sandwiches and boneless wings allows Wingstop to better negotiate with poultry suppliers and stabilize their supply chain (10:13).
  • He highlights the volatility of chicken wings as a commodity, noting that fluctuations in wing prices can result in up to a "10 percentage point swing in our food cost" (10:38).

• Market Volatility:

  • Joe Weisenthal explains that the volatility in chicken wing prices stems from their status as a "fall-off product," comprising only 6-8% of the chicken, with supply primarily driven by breast meat demand (10:38).
  • The episode cites a significant price spike post-pandemic, where wing prices soared to $3.21 per pound, highlighting the fragility of supply chains (12:31).

4. The Surge in Chicken Wings: A Multifaceted Crisis

The episode delves deeper into the factors contributing to the dramatic rise in chicken wing prices, framing it as a microcosm of larger economic challenges.

• Supply Chain Disruptions:

  • Justin McElroy outlines how the pandemic-induced labor shortages, coupled with rising shipping and packaging costs, contributed to a 70% increase in chicken wing prices from 2021 to 2022 (14:03).

• Consumer Behavior and Demand:

  • The pandemic significantly boosted demand for takeout foods like chicken wings, as consumers sought convenient and tasty food options during isolation (14:21).
  • Restaurants responded by raising prices, and some even began labeling wings at "market price," drawing parallels to luxury items like lobster (14:47).

• Psychological and Economic Impacts:

  • Sam Rines, a macro strategist with WisdomTree, discusses the concept of "price over volume," where companies prioritize maintaining profit margins by increasing prices rather than sustaining sales volumes during crises (15:23).
  • Isabella Weber, an economist at the University of Massachusetts Amherst, echoes this sentiment, noting that inelastic demand for essentials like chicken leads consumers to absorb price hikes without significant reductions in consumption (25:05).

5. Navigating the Egg Market Amidst Avian Flu

The conversation shifts to the egg industry, another critical segment affected by supply chain shocks and health crises.

• Interview with Glenn Hickman:

  • Glenn Hickman, president of Hickman's Egg Ranch in Arizona, provides an insider's perspective on the egg market's structure and the impact of avian flu (28:59).
  • He explains how egg prices are determined by a national index, which reflects the balance of supply and demand, and how outbreaks necessitate the culling of flocks, severely restricting supply (32:38).

• Market Dynamics and Concentration:

  • Hickman highlights the concentration within the egg industry, where a small number of producers control the majority of the market, allowing large retailers like Walmart and Kroger to exert significant influence over prices (30:51; 36:12).
  • This concentration exacerbates the impact of supply disruptions, as fewer producers mean less flexibility to respond to crises (36:12).

• Impact of Avian Flu:

  • The episode details how avian flu outbreaks led to the loss of over 100 million birds in the U.S., further pushing egg prices by reducing supply (31:40).
  • Hickman emphasizes the critical role egg producers play in meeting consumer demand, noting the challenges of scaling production quickly to counteract losses (31:59).

6. Broader Economic Insights: Inflation and Consumer Behavior

Experts featured in the episode provide a macroeconomic analysis of how the chicken and egg industries reflect wider economic trends, particularly inflation.

• Overlapping Emergencies and Inflation:

  • Isabella Weber discusses how overlapping crises—such as climate change, geopolitical tensions, and pandemics—create a compounded effect on supply chains and economic stability (24:07).
  • These emergencies legitimize price increases in the eyes of consumers, reducing price sensitivity and allowing companies to maintain higher prices even as input costs fluctuate (25:23).

• Price Elasticity in Essentials:

  • The episode explores the concept that essentials like chicken and eggs have inherently low price elasticity, meaning consumers will continue purchasing them despite price hikes (27:24).
  • This inelastic demand is further reinforced in inflationary environments, where consumers may allocate more of their budget to essentials, leaving less for discretionary spending (28:38).

• Economic Strategies:

  • Companies adopt "price over volume" strategies to preserve profit margins, prioritizing price increases over attempting to sustain sales volumes during periods of high input costs (15:37; 25:39).
  • This approach influences long-term pricing trends, as seen with Wingstop maintaining higher menu prices even as chicken wing prices stabilize or decrease (17:59; 18:11).

7. Conclusion: The Intersection of Food and Economics

Tracy Alloway wraps up the episode by synthesizing the discussions, emphasizing how the chicken and egg industries serve as lenses through which to understand broader economic principles and consumer behavior.

• Key Takeaways:

  • The enduring popularity of chicken ensures sustained demand, making it a resilient component of the American diet despite price fluctuations.
  • Supply chain vulnerabilities, exacerbated by health crises and geopolitical events, significantly impact prices and market dynamics.
  • Consumer behavior towards essentials reveals insights into price elasticity and the effectiveness of pricing strategies during inflationary periods.

• Looking Ahead:

  • The episode tees up the next part of the series, "Beak Capitalism, Part 2: The Thunderdome," promising a deeper exploration into the business of poultry farming and the complexities of sustaining production amidst ongoing challenges.

Notable Quotes

• Justin McElroy: "Some people called it a masterpiece. Some others were just thrilled to see a delicious alternative to Chick Fil? A." (01:44)

• Michael Skipworth: "The only thing that was wrong is we didn't plan for that much volume, but we were able to take a step back, build up supply and relaunch again." (09:11)

• Isabella Weber: "Consumers think that these price increases legitimate or that these price increases make sense. They don't come out of thin air." (25:39)

• Glenn Hickman: "It's unfair that when politicians squawk, they use a dozen eggs as a benchmark for higher egg prices. We egg farmers are trying our dangest to produce the maximum amount of eggs to satisfy the demand." (31:59)

Beak Capitalism, Part 1: Chickflation offers a comprehensive examination of how the chicken industry's fluctuations mirror and influence the broader economic landscape. By dissecting supply chain challenges, pricing strategies, and consumer behavior, hosts Joe Weisenthal and Tracy Alloway provide listeners with a nuanced understanding of "Chickflation" and its implications for the future of American capitalism.

Stay tuned for Part 2, where the episode promises to delve into the complexities of poultry farming and the sustainability challenges facing the industry.