Costco eyes expanding business with Pilgrim's Pride

(Reuters) - Costco Wholesale Corp COST.O plans to expand business with chicken supplier Pilgrim's Pride Corp PPC.O even after building its own poultry processing plant in Nebraska, a senior executive at the retailer told Reuters.

A sign is pictured outside a Costco Wholesale store in Los Angeles, California March 6, 2013. REUTERS/Mario Anzuoni

Shares of Pilgrim’s Pride have fallen more than 5 percent since April 14 when a development council in Nebraska unveiled plans for the Costco plant, reflecting investor concerns that it could eat into the supply from a Pilgrim’s Pride plant in Alabama.

Jeff Lyons, a senior vice president at Costco, said the retailer expected to expand business with Pilgrim’s Pride at the Alabama facility. He said Costco’s need for chicken overall should increase markedly in the coming years assuming even a “moderate” annual unit growth rate of 5 to 8 percent.

“We’ve got a long-term deal with Pilgrim’s that we will continue to extend because they are helping us achieve our goals,” he said in an interview on Monday. “It will continue and it will expand. We are working on projects with them right now.”

The facility, if built in Nebraska’s Dodge County, would create 1,100 jobs and bring $180 million to the region, the Greater Fremont Development Council said in its April 14 release.

Lyons said Nebraska was ideal due to the proximity of grain producers, from which it would procure 300,000 bushels of corn and thousands of tons of soybean meal each week. He said the facility, when fully operational in 2019, would produce 1.6 million birds a week, accounting for a third of its fresh chicken needs.

Costco currently has three conventional suppliers of chicken and four for organic birds, Lyons said. He described Foster Farms, another conventional supplier, as a “good partner” and said Costco was “working on something with them right now for the future but it’s not done.” He did not name the third supplier.

When asked whether Costco could one day drop a supplier, Lyons said it was possible, but that “it just depends how it plays out.” He said in the case one was dropped it could pick up business from Costco in another area.

Lyons said Costco was building the plant in part because chicken producers were focusing increasingly on larger birds, and it needed to secure supply for middle-sized birds that provide the right level of tenderness and other qualities for its rotisserie chickens and other products. The plant would also give its buyers industry experience that would help in negotiations, he said.

He said he was also looking at a possible deal for “another species,” but declined to elaborate on whether it was related to beef, pork or something else.

“Another species, a different animal. Not chickens.”

Reporting by Nathan Layne in Chicago; Editing by Matthew Lewis