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NFL Lockout Will Paralyze Chicken Industry


"With the wholesale price of chicken wings going for about $1 a pound, it could cost the industry as much as $10 million a week."

With negotiations between 32 billionaires (NFL owners) and 1,700 millionaires (NFL players) at an impasse, the 2011 football season is a question mark -- but there may be less anxiety in the halls of ESPN (DIS), Fox Sports (NWS) and CBS (CBS) than in the boardrooms of chicken industry behemoths like Sanderson Farms (SAFM) and Pilgrim's Pride (PPC).

"It will be a major blow," Joe Sanderson Jr, CEO of Sanderson Farms, told ABC News. "If we don't have Sunday football, the demand will go down tremendously, and of course, if that happens, the price will go down."

Richard Lobb, a spokesman for the National Chicken Council, put a grim number on the situation.

"With the wholesale price of chicken wings going for about $1 a pound, it could cost the industry as much as $10 million a week," he said. "We really hope the NFL's players and owners go back to the bargaining table and get it settled."

This wouldn't be the first time the chicken business has stared adversity in the face and won. In 2009, the unthinkable happened: the unyielding popularity of wings caused them to become, for the first time ever, more expensive than skinless boneless breasts.

This led to a major overhaul that touched just about every outfit in the sector -- the introduction of the "boneless wing."

The Chicken Council's Lobb tells Minyanville that boneless wings "appeal to people who don't like bones in their food, or something of that nature."

They also appeal to restaurants like Buffalo Wild Wings (BWLD), Chili's Grill & Bar (EAT), and KFC (YUM) that enjoy the much higher profit margins by using chicken breasts instead of actual wings. Even Wendy's (WEN), which doesn't sell traditional chicken wings, can't resist the wide margin attached to a boneless one.

Backward as it may seem, the price of chicken breasts and the price of chicken wings -- which used to be literally thrown away or used to make soup -- have switched places. The average wholesale price of wings in 2009 was $1.47 a pound, up 39% from 2008 and the highest it has been, adjusted for inflation, since the mid-1970s. Ten years ago, wings were wholesaling for 68 cents a pound.

"Overall supply has been somewhat constrained as chicken production dropped due to the recession, which caused people to eat out less often," Lobb tells Minyanville. "You really want each part of the bird to carry its share of the burden, but a chicken only has two wings," further explaining the restaurant industry's foray into the boneless wing.

Chicken wings are made up of three distinct components -- the drumette, the flat, and the tip, referred to in the trade as the "flapper," which is either discarded, rendered, or sold to China, which "also has a taste for feet," Lobb says.

The drumette and the flat are the parts of the wing that appeal to the US consumer. And for reasons that Lobb cannot figure out, wing prices tend to fluctuate more than any other part of the bird.

It's those fluctuations that can make or break a year for chains with menus heavily reliant on wings.

Here's how it affects Buffalo Wild Wings -- a chain founded in 1982 by professional figure skater Jim Disbrow, who once toured with the show "Holiday on Ice":
We are working to counteract the volatility of chicken wing prices with the introduction of new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants. We are also exploring purchasing strategies to lessen the severity of cost increases and fluctuations, and are reviewing menu additions and other strategies that may decrease the percentage that chicken wings represent in terms of total restaurant sales.
If fact, it disclosed that a 10% increase in fresh chicken wing costs would have increased its cost of sales by approximately $3.8 million.

To combat the higher wing costs, Buffalo Wild Wings has been using boneless as a crutch, stating that "boneless wings sales have increased as a part of our menu mix, providing better margins and a corresponding lower cost of goods percentage."

Of course, boneless wings cannot shoulder the entire burden of rising wholesale wing prices, as reflected in Buffalo Wild Wings' cost of sales for 2009, which amounted to $147.7 million, compared to $113.3 million for the same period a year earlier.

After parsing the words of Buffalo Wild Wings, Houston money manager Ryan Krueger, who has a special focus on agricultural commodities, concludes that the company is "begging to hedge" their wing costs but can't.

"From what they say in that statement, they wish they could do it -- especially with margins of 8.6%," which are comparatively slim to an outfit like McDonald's (MCD), which boasts margins more than three times as high, he says. "A hedge is impossible, though -- there's no such thing as chicken wing futures."

(CLICK HERE for a fascinating look by Krueger at football-related guacamole consumption.)

Alas, the boneless wing may just be the ersatz "hedge" restaurateurs need. However, it doesn't pass the smell test with Ivano Toscani, owner of the Anchor Bar in Buffalo, New York, the birthplace of the buffalo wing.

"The wings have bones on it, you can't get away with it," Toscani said in an interview with NPR. "The other people they change, they do what they want to do, they want their own identity, they want to establish themself, God bless them, do you what you have to do. Here at the Anchor Bar, we will continue to use chicken wings, and chicken wings has bones, that's all."

Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
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